Newsroom Pro's Budget 2017 Special Edition

Steven Joyce didn't throw the whole kitchen sink at his first Budget. Photo: Lynn Grieveson

Our Budget 2017 special edition email looked at some of the detail in Steven Joyce's first Budget.

1. A small kitchen sink

Steven Joyce’s first Budget and National’s last before the election could have delivered a much bigger boost to low income families and infrastructure spending – if they had really wanted to throw the whole kitchen sink at electorate.

In the end, Joyce and the Budget’s true guardian, Bill English, opted for a package of compassionately conservative spending with the emphasis on the conservative as much as the compassionate. It was only a small kitchen sink, and aimed mostly at poorer working families with big rent bills.

That pivot into territory usually reserved for a centre-left Government repeats the Budget day moves of the Key Government, but there wasn’t too much that was surprising or big. The family incomes package does deliver over $50 a week extra for the lowest income families with children who live in expensive rentals in Auckland, but middle income New Zealand won’t receive nearly as much, and much lower in percentage terms.

Joyce and English could have done much, much more if they had been desperate for re-election, and they could have done it without overloading the Government with debt or spooking New Zealand’s creditors.

The dividends of stronger economic and population growth are now pouring into the Government’s coffers and its net debt position is improving rapidly. The economy will be $23.9 billion bigger in five years than was expected as recently as December.

Budget 2017 forecast the surplus will rise from $1.6 billion in the current 2016/17 year to $7.2 billion by 2020/21, even after the $2 billion a year family incomes package and an increase in the operating allowance for other spending of an extra $10 billion over the next four years.

2. Another go in 2020?

Even Joyce pointed out in his lock-up presentation that the fall in net debt to under 20 percent of GDP by 2020/21 would give any Government in power then to do more to ramp up operating spending or capital spending, and still reach the Government’s net debt target of 10-15 percent of GDP by 2025.

Instead, Joyce emphasised the need to get debt down in case of another natural disaster and rejected suggestions the Government had delivered a lolly scramble in this Budget.

Joyce was right about that.

The Budget’s measures of fiscal stimulus, which cut through the noise of the growing economy to say how much extra spending is being pumped into the economy, show there’s actually been a tightening for 2016/17 (0.9 percent of GDP), and only a very small loosening in 2018 (0.3 percent of GDP) and 2019 (0.4 percent of GDP) relative to the half year forecasts. It is only in 2020 (1.4 percent) and 2021 (1.2 percent) when the stimulus increases more substantially.

Joyce told the news conference he hoped after September 23 to get another chance to revisit the capital spending plans and another chance to address tax rates from 2020 when he thinks fiscal conditions will allow.

Meanwhile, National will have to convince a restive Auckland electorate that it has done enough with its infrastructure spending to deserve re-election for an unprecedented fourth term in the post-MMP era.

Some Aucklanders may not agree, given a housing short of 40,000 and climbing, escalating travel times, overcrowded hospitals and schools, and decades more of waiting for a train to the airport.

Joyce and English could have used more of that economic dividend to do that, but chose not to. Perhaps it shows their confidence they can win without it.

Or it may have been the biggest political misjudgement in this National Government's life, by ending it.

3. Renting poor do well

As expected, the centrepiece of this year’s Budget is a family package.

Newsroom's Shane Cowlishaw has taken a good long look at where the money will be spent. It was an announcement that again cemented National firmly towards the centre.

An extra $2 billion per year will be spent on a Family Incomes Package, made up of boosts to both Working For Families and the Accommodation Supplement, plus a rise in the bottom two income tax thresholds.

It follows the 2015 Budget, which saw benefits rise beyond inflation for the first time in 30 years.

Even students weren’t forgotten this time, with the Accommodation Benefit rising by 50 percent in Auckland, Wellington, and Christchurch. It receives a more modest boost in Dunedin, Hamilton, and Palmerston North.

During these announcements, officials love to throw averages about and this was no exemption.

In total, it’s expected 1.34 million families will be better off by an average of $26 per week. More than a block of cheese, but less than a tank of gas.

Of course, there are always those that miss out when complicated changes are introduced.
Some families will be worse off and $2.2m has been set aside to help those disadvantaged by more than $3 per week.

4. A supplemented supplement

It has been signposted for some time, and frankly was becoming an embarrassment.

Calls for a boost to the Accommodation Supplement, a benefit based on rents in 2003, have been getting louder as the costs of housing spiked across the country.

Official data showed that in Auckland, median rents have risen 56 percent since 2005, while the national median has jumped 60 percent.

In the Budget the Government responded, making a boost to the Accommodation Supplement the core of its package to assist the most vulnerable.

Those eligible for the supplement, especially those living in the main centres, will have significantly more money to help with housing.

For example, a family of three or more living in Area 1 (which includes Auckland, Tauranga and Queenstown) will receive up to $305 per week, an extra $80, depending on their income.

Those living in the three other areas will receive less of an increase, ranging from $5 to $55 per week. An extra $1.23b will be spent on the supplement over the next four years, with Finance Minister Steven Joyce saying about 20,000 households were expected to be lifted out of severe housing stress.

5. Will it boost rents?

One fear that has been raised about increasing the supplement is that it will give a green light to landlords to ramp up rents if their tenants are suddenly flush with extra cash.

Joyce admitted this was a risk and said a “close-eye” would be kept on how the market responded.

With housing shaping up as perhaps the main election issue, the Government had little choice but to boost spending in the area or pay for it at the polls.

6. Threshold cuts too

Tax rate cuts were not part of the Budget, but workers will still have more money in their pockets.

The two lowest tax brackets will be raised, with the $14,000 threshold moving to $22,000 and the $48,000 threshold increasing to $52,000.

This will mean anyone earning more than $22,000 a year will pay just under $11 less tax a week, and those earning more than $52,000 will pay just over $20 less.

The aim of the former is to encourage those on benefits into work, while the latter is designed to encourage people to work, and earn, more.

While this is good news for families, single workers claiming the Independent Earner Tax Credit will no longer be able to.

The Government has scrapped the credit, worth up to $10 per week, saying it had not proven popular and only 32 percent of those eligible claimed it.

Again, the threshold changes were not unexpected. With the average wage having risen to $58,900, the Government has signalled it wants to update and modernise the tax system, especially around marginal tax rates which can discourage people from working.

7. But not all sugar

National has come a long way from labelling Working For Families “communism by stealth” when it first came to power.

The series of tax credits will be boosted with extra funds targeted at families earning the least, an area where Joyce said the Government had decided there was the most need.

Working For Families is made up of four tax credits: the family tax credit, the in-work tax credit, the minimum family tax credit, and the parental tax credit.

It will be the family tax credit that is increased, with the same blanket rate introduced for all children regardless of age.

Currently eligible families receive an annual credit of $5303 for an eldest child aged between 16-18 and $4822 for one under 15. This will be switched to the higher rate for all.

Subsequent children also received varying credits depending on age, but these will be moved to the higher rate of $4745 for all.

It is estimated this will mean extra cash for about 310,000 families, with those with an eldest child under 16 receiving an extra $9.25 per week and up to $26.81 for any subsequent children.

For the upcoming financial year spending on Working for Families will be $2.4b. By 2021 it is estimated to rise to $2.63b, a jump from the $2.46b estimated at last year’s Budget.

While this is good news for most families, those earning more will take an extra hit on the amount they earn.
The Government announced it would accelerate plans to increase the abatement rate and lower the abatement threshold.

Essentially, abatement is the rate at which welfare payments fall as income rises.

So, for every dollar earned over the threshold, tax rates start jumping.

Currently, the abatement rate is 22.5 percent and the threshold $36,350. This will be increased to 25 percent, and $35,000, a threshold that was expected to be reached by 2025.

There was little choice but to move these figures, as they are mandated to do so each time Working For Families is adjusted for inflation, but the rapid rise was unexpected.

8. A pressured population

With a rising population comes rising demand on public services – and as the Government knows, a rising bill.

Sam Sachdeva reports the strains caused by record migration were one of the themes in the Budget, particularly in spending for the core areas of health and education.

In his Budget speech, Finance Minister Steven Joyce described investment in public services for a growing country as “the Government’s biggest single fiscal priority”.

Joyce boasted of record levels of investment in health, with an extra $3.9 billion in funding spread over four years. However, that headline figure is somewhat inflated, given the inclusion of $1.54b to increase the wages of care and disability support workers, following a landmark pay equity settlement which the Government initially fought but has now embraced.

District health boards will receive an extra $1.76b to help them cover pressures from inflation, wages and a rapidly growing population. The funding boost comes as DHBs have been fighting to save more than $200m in required “efficiencies”.

9. Mental health pressure

Mental health services are also given particular attention – unsurprisingly, given reports of increasing demand that is putting strain on the system and leading to long wait times for those in need.

A $100m contingency fund has been set up for mental health as part of the social investment programme, with the Government saying it will “target innovative new proposals to tackle mental health issues” – exactly what those may be is unclear.

There’s also $4.1m for the Ministry of Social Development to trial integrated employment and mental health services, $11.6m for the Department of Corrections to improve its management of prisoners at risk of self-harm, and $8m for a fund to reduce suicide and self-harm among young Maori.

Health Minister Jonathan Coleman has also touted an extra $100m for DHBs to support local mental health services, although that figure is included within their overall budget increase rather than ring-fenced off.

At a time when mental health issues are increasingly making their way into mainstream conversation, the Government is clearly hoping it can inoculate the issue before it negatively sways voters’ opinions during the election campaign.

Health isn’t the only area of high public interest to be targeted by the Government.

10. Pressure on education

The education system has received a $1.5b boost, including $1.1b of new operating funding and $392.4m of capital funding.

Schools’ operational grant funding has been increased by $60.5m, or 1.3 per cent, after what some criticised as a freeze in last year’s Budget.

Primary and secondary schools, along with early childhood education centres, are getting an extra $767m of operational funding to deal with increasing student numbers, in a week where a Ministry of Education report revealed concerns about the growing number of schools nearing full capacity in Auckland and elsewhere.

That also explains the extra $456.5m investment in school properties ($392.4m in capital and $64.1m in operating funding) to build six new schools, expand two others, and build a number of special units and new classrooms.

The bulk of that money, $277.6m, is going into Auckland, with Education Minister Nikki Kaye saying the extra funding will increase the total number of new student places in the city to more than 21,000 by 2021.

Separately, $31.9m has been set aside to buy land for new schools as demand grows - along with New Zealand’s population.

11. A special needs Budget

Newsroom's Lynn Grieveson reports it may be Steven Joyce’s first Budget, but the increased spending it includes on support and services for children with special needs is directly related to Bill English’s social investment approach.

In his pre-Budget speech earlier this month to Business NZ, English announced $34.7 million in new funding to pay for specialist services for an extra 1,000 children with behaviour problems, as well as $6m for children with communication challenges.

The funding will pay for specialist education staff including educational psychologists to work with children aged 8 and under who have behavioural challenges. The “Reducing Barriers to Oral Language” funding will pay for speech and language therapists to work at early education centres in low socio-economic areas, using a new “internationally evidenced” oral language programme targeted at 3 and 4 year olds.

Everyone benefits, and all the children in a class learn better, when the children with special needs are supported, English said in his speech.

Today’s Budget also includes $15.5m to pay for more teacher aides.

At current pay rates that will fund teacher aides for an extra 625 students a year, on the basis of each child receiving five hours of dedicated support each week.

The Government says this means it will have “fulfilled its pledge to roll out in-class support to 4,000 students” by 2019. However, pressure is growing for a pay bump for poorly-paid school support staff, including aides, following the Government’s pay equity agreement with care and disability support workers.

Another $4.2m will be spent extending a support programme for parents and teachers of children with autism.

The “Incredible Years” programme seeks to help autistic children aged 2 to 5 years with socialisation and emotional regulation. The Government says the programme, delivered by trained staff, has been successful at improving children’s social skills and behaviour and decreasing parents’ anxiety.

The oral language, behavioural challenges and autism programmes all rely on specialist, trained staff and reflect the move to targeting spending at the early years of children most at need.

Reflecting this approach, the Government is also funding 11 new special education satellite units at schools around the country. These units, based at mainstream schools, are satellites of special education schools, providing specialist education for children with moderate to severe disabilities.

A further $35.49 m over four years is budgeted for early children education services and Kohanga reo with children “at greater risk of educational underachievement due to disadvantage”, and, reflecting the surge in migration, $9.36 m over the next two years is budgeted for funding schools to provide specialised support to the growing number of children with English as a second language.

We'll have more reaction and detail in tomorrow's email.