NZ budget: toned down

THEY'RE like us, but different. New Zealand's 2012-13 budget cracks down on tax breaks for "baches", axes tax breaks for childcare and frozen subsidies, and hikes repayment rates for student loans to stick to its target to get the budget back in surplus by 2014-15.

In a budget criticised by commentators as dull and contractionary, Finance Minister Bill English also promises New Zealand its own Future Fund, financed by the sale of minority stakes in Air New Zealand and four electricity generators.

The budget is mostly normal. It raises more than $A1 billion from tax and revenue rises, and $A1.75 billion of spending cuts, and spends it in health and education, fixing the country's rail freight lines, and rebuilding Christchurch after the earthquake.

The bottom line ends up where it started, with net new spending of just $A20 million over four years, and a deficit edging down from $NZ8.4 billion ($A6.5 million) this year to a tiny surplus of $NZ197 million by 2014-15 all going well.

Last year's ambitious forecasts have been slashed to predict growth averaging 3 per cent over the next four years. Net debt is forecast to peak at 28.7 per cent of GDP in 2013-14, compared with a peak of 9 per cent forecast in Australia.

Next year's deficit is forecast as $NZ7.9 billion, with more than $NZ2 billion, 1 per cent of the country's GDP, being spent to rebuild Christchurch and other earthquake-damaged towns.

The tax rises primarily hit smokers and tax avoiders. Excise duties on cigarettes will rise 10 per cent above inflation for each of the next four years. And as in Australia, the government will be hiring more tax investigators to stamp down on avoiders.

But the budget also took on some sacred totems. New Zealanders renting out their holiday homes (or baches) will no longer be able to write off the full cost against tax. Tax credits for childcare, housekeepers and low-income earners will all be scrapped; Revenue Minister Peter Dunne said the threshold for the low-income-earner credit is so low that no full-time workers now qualify. And with the government under far less pressure than in Australia, the budget could tackle some long-term issues above all, Prime Minister John Key's crusade to tackle inherited welfare dependency, particularly high among Maori and Pacific Islanders.

The budget freezes subsidies for childcare centres in most of New Zealand and invests the money saved to set up new centres in disadvantaged areas, put $NZ1 million aside to provide "long-acting reversible contraception" to young women at risk, and pump more money into youth services and welfare-to-work.

The initiatives come out of two reports Mr Key commissioned into why New Zealand has the OECD's highest rate of youth suicide, and so much inherited welfare dependency. Both reports told him that early intervention to keep young people out of trouble is far more successful and cost-effective than anything you try to do once they're in it.

You can't imagine Julia Gillard or Tony Abbott giving these issues priority over those that chime with focus groups. But Mr Key who grew up on a welfare housing estate in Christchurch before making millions as a foreign exchange trader set himself three targets to meet:

98 per cent of young Kiwis to be in early childhood education by 2018 (up from 94.7 per cent now).

85 per cent to successfully complete school by 2017 (up from 68 per cent now).

Reduce the proportion of prisoners reoffending by 25 per cent by 2017.

"We firmly believe that people who can work, should work," Mr Key said.

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New Zealand proposes joint emissions scheme

NEW Zealand Prime Minister John Key has flagged that permits for greenhouse gas emissions could be traded across the Tasman to cut the cost of reducing emissions highlighting differences between Australian and New Zealand conservatives.

Mr Key, who introduced emissions trading in New Zealand last year, yesterday became the first New Zealand Prime Minister to address the Australian Parliament. But he found himself jammed between Prime Minister Julia Gillard and fellow conservative leader Tony Abbott on the issue dominating politics here.

While declining to take sides, he was enthusiastic about New Zealand's scheme, and joined with Ms Gillard in setting up a group to work out how the two countries might link their emissions trading schemes.

"What I can tell you about the emissions trading scheme is that it's worked," Mr Key said.

"In the time that we've had it in place, all applications for new electricity generation have been in renewables, as opposed to 50/50 coming from thermal energy. Secondly, we've now had a period of afforestation . . . as opposed to a substantial period of deforestation. So those price signals are working in the marketplace.

"Generally speaking, the feedback we're getting from business and the NGO sector is that they are more positive now that the scheme is actually in place, because it gives them surety of investment."

Mr Abbott hit back subtly when welcoming Mr Key to Parliament. While praising him for "dramatically watering down the ETS that you inherited from Labor", he added: "In this country, your sister party will go further and do better. Should we inherit any carbon tax, we won't just reduce it, we will rescind it."

Earlier, Mr Key said his government would rebuild earthquake-shattered Christchurch, even though one in three buildings in the CBD, and more than 10,000 houses, would have to be demolished, leaving New Zealand with a bill equal to 8 to 9 per cent of its GDP.

"It's an enormous cost, but it's also an opportunity," he said. "We are no more earthquake-prone than San Francisco. Christchurch was subject to a one-in-2500-year quake, and most of the modern buildings held up very well."

Mr Key said rebuilding would lift New Zealand's growth rate next year to 5 per cent.

He told Parliament that Australia and New Zealand were "family", and should collaborate even more closely. "We have no better friend and closer ally than Australia. We are stronger for each other."

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Early intervention crucial. Ask the NZ PM

AUSTRALIA'S former chief scientist, Penny Sackett, resigned in February after eight months without meeting her boss, Prime Minister Julia Gillard. Across the Tasman, her counterpart, Sir Peter Gluckman, has a far closer relationship with Prime Minister John Key and it has led to an engrossing report on something that matters.

Its title is very dry: Improving the Transition: Reducing Social and Psychological Morbidity During Adolescence. But its goal is to explain why so many teenagers, particularly boys, fall off the rails. It asks what peer-reviewed science has to tell us about how to make it easier for them to find their way through to adulthood undamaged.

It's an issue we don't talk about. But anyone who has been to too many funerals of teenagers knows how important it is, and how many families it touches. Its reach ranges from teenage depression and suicide to drug addiction and alcohol abuse, violence and bullying, obesity and other health problems, sexual abuse, criminal activity and failure to acquire the social, educational and technical skills needed to get through life successfully.

Policy on these fronts is failing, and the cost is high. The report warns: "At least 20 per cent of young New Zealanders will exhibit behaviours and emotions or have experiences that lead to long-term consequences affecting the rest of their lives."

Together with a second report commissioned by the Key government on how to move people from welfare to work, it is challenging. Both reports cut across everyone's prejudices: the first because of its peer-reviewed evaluations of what works and what doesn't, and the second because it advocates a "tough love" approach focused on getting people off welfare and into jobs and spending more on them to save in the long term.

Their findings are complex but one message rings out strongly: prevention is better than cure, in cost and success rates. Early intervention to head off problems saves money in the long term. We need more programs that invest now to help create families that work, and in which people work.

The message has fallen on sympathetic ears. John Key, who in Canberra yesterday became the first New Zealand prime minister to address Federal Parliament, is an unusual man. He grew up in welfare housing in Christchurch after his father died, leaving his mother penniless. An Austrian-Jewish refugee, she fought her way back into the workforce, sent young John to university and then watched in admiration as he became a successful foreign exchange trader in Auckland, London, Singapore and Sydney.

By the age of 40, Key had made his fortune and decided to enter politics. He quickly became shadow finance minister, then National (Liberal) Party leader, then prime minister. He leads a middle-of-the-road coalition government that has proved very popular.

Key has never forgotten where he came from. His first speech in Parliament warned that New Zealand had developed an "underclass" of unemployed families, particularly among the Maori and Pacific Islander minorities. He is determined to reverse that. "In New Zealand now we are getting a third and fourth generation of families on welfare," Key told me yesterday.

In 2009, the OECD reported that New Zealand had the highest rates among Western societies of youth suicide and other measures of youth alienation. Key asked his chief scientist to investigate why.

Originally a paediatrician, Sir Peter is a global leader in research on the development of the brain. He recruited New Zealand's best and brightest to review the scientific literature in their fields, and report on what it tells us about why young people become alienated and what programs work to prevent or cure this.

The results are impossible to summarise in a column: the report is at www.pmcsa.org.nz. It tells us that while adolescence now starts earlier than ever 50 per cent of NZ girls have their first period at primary school new research shows the brain does not fully mature until the mid-20s, and the last skills to mature are those to do with judgment, risk assessment and self-control.

Poor judgment and self-control is the central problem of troubled teens, and depression is far more widespread than we realise. While there is no single solution, Sir Peter warns, "the research shows the best way of advancing self-control and protecting the young person in their transition to adulthood lies in focusing on the preschool years (and creating) quality early-childhood environments and education".

The welfare working group report (on the web at ips.ac.nz) similarly finds that the best way to stop unemployed young people becoming unemployable is to intervene early. It says the welfare system needs to be targeted at getting people back into work, and to be given more funding to fix the problems that make them unemployable, whether it is lack of technical skills, illiteracy, alcohol abuse, obesity, poor personal skills, whatever.

Key's ministers are considering both reports, but he agrees that early intervention is the way to go. "It will cost the government more, but in the long term it will produce much better outcomes. Without that, I don't think there is a long-term solution," he says.

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NZ opts to cut family benefits

NEW Zealand's centre-right government will follow Australia in cutting family benefits, amid a range of spending cuts to pay for rebuilding Christchurch and returning the budget to surplus.

In a budget remarkably similar to that presented last week by the Gillard government, NZ Finance Minister Bill English pledged yesterday to spend $NZ5.5 billion ($A4.1 billion) to rebuild Christchurch from the devastation of its two earthquakes.

Yet he also brought forward his pledge to end the budget deficit to 2014-15, two years later than Australia plans to get there.

Mr English said NZ's deficit in 2010-11 would blow out to $NZ16.7 billion or 8.4 per cent of its GDP, partly due to the earthquakes, but halve in 2011-12, and the budget would be in surplus by 2015.

But that goal rests on optimistic forecasts of three years of strong growth, and big spending cuts in five areas:

Better-off families will lose family benefits or have them cut, while families with older teenagers will get higher benefits reforms almost identical to those planned by Labor here.

The huge subsidy to NZ's superannuation scheme, KiwiSaver, will be halved, with employers and workers each required to lift their contributions from 2 per cent of wages to 3 per cent.

New Zealanders living overseas will have to start repaying their HECS-style student loans after a year away (instead of three years).

Minority stakes will be sold off in electricity generators Mighty River Power, Genesis Energy, Meridian Energy and Solid Energy, as well as Air New Zealand.

As in Australia (and Victoria), the government has chosen invisible spending cuts by giving departments less money to do their jobs and leaving them to decide what to cut.

And as in Australia, Mr English said NZ would use most of the money for new spending in health, education and rolling out broadband and transport infrastructure.

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New Zealand's more relaxed take on deficit

THE New Zealand government has raised its GST rate to 15 per cent and slashed the top tax rate to 33 per cent in an attempt to reduce the flow of skilled New Zealanders to Australia.

Finance Minister Bill English, of the centre-right National coalition, announced the changes yesterday in a budget with a more relaxed attitude than Australia's, raising the deficit and anticipating no return to surplus until 2015-16.

The company tax rate will fall from 30 per cent to 28 per cent, as proposed in Australia. But property investors will lose tax breaks for depreciation and the right to use investment losses to qualify for means-tested benefits.

Mr English said cutting income taxes and raising taxes on consumption and property speculation will "drive the NZ economy forward, moving away from debt and speculation while increasing investment and exports".

His budget acted on most findings of NZ's tax review, but not proposals for a capital gains tax and tougher rules against negative gearing. The budget forecasts steady growth of 3 per cent for the next four years. The deficit would peak at $A7 billion (4.2 per cent of GDP) next year, then slowly shrink away.

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NZ budget charts small, pragmatic steps towards a surplus by 2015-16

THE New Zealand budget handed down yesterday is a fascinating contrast to the debate in Australia: on tax reform, and on getting the budget back in the black.

New Zealand has a right-of-centre government, as Tony Abbott hopes Australia soon will. New Zealand has also just had an independent tax review, as Kevin Rudd and Wayne Swan have.

But there the similarities end. The Henry review proposed an ambitious reform agenda, of which very little will be implemented. New Zealand's tax review was more modest but yesterday's budget committed to implementing most of it in some form.

In Australia, Labor has adopted an austere fiscal policy to put the budget back in the black by 2012-13 and limit net debt to 6 per cent of GDP which the Coalition says is too much. But the Coalition's Kiwi allies have a far more relaxed approach. They will increase their deficit next year as we cut ours. They will leave it to 2015-16 to return to surplus, and aim to limit net debt to 26 per cent of GDP.

After 25 years in which Australia has been the pragmatic sister, are we seeing a role reversal?

New Zealand's Prime Minister, John Key, is pragmatic above all. A boy from a Christchurch housing estate, he rose to make millions as a London foreign exchange trader. Then, at 40, he came home to enter politics. Within six years he was Prime Minister, skilfully heading an improbable coalition of his National Party and three small allies.

Bill English, his Finance Minister, is a commonsense conservative from the Southland who gave up sheep farming for economics, then politics. In their lifetimes they have seen New Zealand slide down the economic rankings, partly due to six years of too much ideology, followed by 17 years of too much caution.

The diagnosis English gives of New Zealand's problems is the same as was given a decade ago by his Labor predecessor, Michael Cullen: too little research, innovation and exports, too little saving, too much debt and property speculation and too much emigration of its best and brightest, above all to Australia.

"New Zealand's largest single vulnerability is now its large and growing net external liabilities," English said yesterday. "New Zealand owes the world $NZ168 billion ($A135 billion), or around 90 per cent of its GDP." (Australia owes 61 per cent).

"The government is committed to policies that will reduce our vulnerabilities by tilting our economy away from debt and consumption towards savings, investment and exports."

Yesterday's tax changes are meant to drive that. They will:

Cut all income tax rates to a four-tier scale: 10.5 per cent (low incomes), 17.5 (low-middle), 30 (upper-middle) and 33 per cent (upper, although cutting in at just $A57,000).

Lift the GST rate from 12.5 per cent to 15 per cent. Low-income households will be compensated by a rise in pensions and benefits to match the 2 per cent lift in inflation.

Cut the company tax rate from 30 per cent to 28 per cent.

End tax breaks for depreciation of rental housing, and stop investors using their losses to qualify for means-tested benefits.

Invest $A260 million in new science, research and technology programs, $A1.2 billion on new rail and other infrastructure, and $A1.1 billion in education.

But Key and English rejected more radical proposals from their tax review, headed by Victoria University (Wellington) economist Bob Buckle: a capital gains tax (NZ still has none), including on the family home, and tough moves against negative gearing, by taxing landlords on an imputed rate of return.

Are yesterday's tax changes the catalyst that will change New Zealand's culture from speculation to innovation? Or just the latest in the series of minor reforms we saw from the Bolger and Clark governments, leaving the culture unchanged? Surely the latter.

On the budget, unlike their Australian counterparts, Key and English are in no hurry to return to surplus. Next year the underlying deficit will rise to 4.2 per cent of GDP (as against 2.9 per cent here), then gradually decline into surplus by 2015-16, by which time NZ's net public debt would have risen to 26.5 per cent of its GDP.

That's hardly Greek or US levels, but by then Australia's net debt would be almost zero. You can't change the culture this way.

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