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Budget 2007 Home Page Budget Policy Statement 2007

Budget 2007

Budget 2007 will deliver on our policy goals in key areas

Through Budget 2007 we intend to progress our overarching goals by targeting new policy spending in priority areas.

Among other initiatives, the business tax package will be announced in Budget 2007 and will be implemented from 1 April 2008. The business tax package will significantly contribute to our goals in economic transformation. The package will continue and complement a number of significant tax changes over the term of the Government, such as tax relief to low- and middle-income families in Budgets 2004 and 2006, and the business package of tax measures in Budget 2005.

Economic transformation

New Zealand is a small nation, far from major international markets. This can present challenges. The International Monetary Fund (IMF) has suggested that up to half of the historic gap between our growth rate and the Organisation for Economic Cooperation and Development (OECD) average can be attributed to these factors alone. We need to build on our strengths and uniqueness, respond to new opportunities and continue to carve out a special New Zealand approach that will propel economic transformation.

We will continue to assess the effectiveness of existing programmes and continue to shift the focus of programmes to more explicitly support international connections, innovation and investment. The business tax package that will be announced in Budget 2007 will include reforms to our business tax and international tax settings to create better incentives for productivity gains, to improve competitiveness with Australia and to support business investment. The review of business tax is in line with our agreement with United Future and New Zealand First.

We will continue developing policy prescriptions that respond to our geography, economic specialisations, institutions and culture. We are actively pursuing an agenda to drive our economic transformation by focusing our efforts around five key areas. These are: growing globally competitive firms; world-class infrastructure; innovative and productive workplaces underpinned by high standards in education, skills and research; environmental sustainability; and an internationally competitive city – Auckland.

Families – young and old

We will continue to reinforce the foundations needed for a successful modern economy by providing world-class education, healthcare and social services. The health package for Budget 2007 will be $750 million per annum, which is over a third of our total new operating spending.

New Zealand’s transformation must continue to be based on opportunity and security for all. We will continue developing initiatives that contribute to better lifestyles and safer communities for all New Zealanders. For example, next April’s annual adjustment to the rate of New Zealand Superannuation will ensure that the married couple superannuation rate is no less than 66% of the net average ordinary-time weekly wage. This is in line with our agreement with New Zealand First.

Additionally, Budget 2007 will consider the consequences of business tax reform for personal taxes. The size and shape of any measures will depend on the fiscal and macroeconomic headroom available.

National identity

Advancing our priorities will require an inclusive, forward-looking approach, focused on meeting the aspirations, and developing the abilities, of all New Zealanders. This includes: maintaining the quality of our environment, including a focus on measures to meet the challenge of global climate change; building our sense of national identity, confidence and creativity; and promoting the social solidarity that will always be critical to underpin our country’s success.

We will continue celebrating our arts, culture and heritage, encouraging participation and achievement in sport and working towards ensuring New Zealand is well set up to be a world leader in sustainability. Among other initiatives, Budget 2007 will include investment in official development assistance and the latest instalment in the defence funding package.

The operating allowances for Budget 2007 and Budget 2008 …

As mentioned above, the business tax package will be implemented from 1 April 2008. The three-month costs of the package that fall in the 2007/08 year will be set against Budget 2007, and we will increase the Budget 2007 allowance from the $1.9 billion per annum signalled in the 2006 FSR to accommodate these costs. The full-year costs of the package from 2008/09 will be charged against Budget 2008. This means that spending growth in other areas in Budget 2008 will need to be slower than in previous years.

The Treasury’s updated fiscal and economic forecasts indicate that we will have around $1 billion of extra headroom per year available for Budget 2008 on top of the $2 billion allowance that was set in the 2006 FSR. Tax revenue was higher than forecast in the year to 30 June 2006, and tax revenue forecasts have been revised upwards through the forecast period. We will use this extra headroom to counterbalance the cost of business tax package by increasing the Budget 2008 allowance. We hope that more headroom than this will eventuate.

The capital allowance for Budget 2007 will remain at $858 million, as signalled in the 2006 FSR.

Decisions on the business tax package will be taken in the New Year leading up to Budget 2007. We will review our allowances for Budget 2008 and 2009 in the 2007 FSR and will confirm the size of Budget 2008 in the 2008 BPS.

In summary, the HYEFU, released today, incorporates an allowance for new operating spending in Budget 2007 of $1.9 billion per annum plus the three-month costs of the business tax package that fall in 2007/08. The operating allowance for Budget 2008 is increased from $2.0 billion to $3.0 billion to accommodate the business tax package. Budget 2009 remains at $2.0 billion per annum, as signalled in the 2006 FSR.

… are consistent with our long-term fiscal objectives

The increased allowance for new operating spending in Budget 2008, when combined with the improved short-term fiscal and economic position, will see the Government running a slightly higher operating balance across the forecast horizon. This is sufficient to meet the requirements for contributions to the NZS Fund and to ensure consistency with our published long-term objectives. Without increasing the allowance, it is projected that we would have likely over-reached our debt objective.

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