Better Targeting of Government Programmes
Mr Speaker,
The Budget forecasts show that, while Government spending will increase, it will do so more slowly than projected previously.
Core Crown spending is forecast to rise from $73 billion in 2011/12 to $77.1 billion in 2014/15.
The Budget identifies $5.2 billion of savings over five years that will be redirected to frontline public services and to reducing the Government's deficit.
New operating spending of around $4 billion over that period is tightly prioritised to health and education, which together receive three-quarters of total new spending.
The net result is a saving of $1.2 billion in operating spending over five years from those parts of the Budget funded by new spending allowances.
Mr Speaker,
Part of the adjustment involves examining programmes where costs have expanded rapidly, in ways that weren't anticipated, and without commensurate value to the community or taxpayers.
KiwiSaver, Working for Families, student loans and ACC are all examples where cost escalation has occurred.
The Government is committed to all of these programmes. With modest adjustments, they will emerge more effective, better targeted to those who really need them, and aligned with what the economy can afford.
Mr Speaker,
The Government has looked closely at KiwiSaver.
KiwiSaver is now well established. It has nearly 1.7 million members, and is gaining about 20,000 new members a month. KiwiSaver funds provide a pool of long-term capital which can be invested with relative certainty.
KiwiSaver balances are currently around $7.9 billion. Of this, about $3.5 billion has been directly contributed by the Government, and the balance by individuals and their employers.
In 2010/11 alone, the Government is contributing $1.2 billion.
At present, KiwiSaver's contribution to national savings is ambiguous. It helps individuals to save for their retirement.
But it means the Government is borrowing, mostly from foreigners, to contribute to private savings.
This does not lift national savings.
A better approach is to have New Zealanders actually saving for their future.
To achieve this, the Budget makes the following changes.
The default and minimum rate of member contributions will increase from 2 per cent to 3 per cent from 1 April 2013. Employees will retain the option to opt out.
The rate of employer contributions will also increase from 2 per cent to 3 per cent from 1 April 2013.
The Member Tax Credit will be reduced to 50 cents per dollar of individual contribution, with the cap halved to $521 per year from the year ending 30 June 2012. This change will be reflected in payments to KiwiSaver accounts from the second half of 2012.
The exemption from the Employer Superannuation Contribution Tax will be scrapped from 1 April 2012. This exemption is regressive, in that those on higher incomes receive larger subsidies.
Existing Kick-Start payments will remain unchanged.
The combined impact will be to see KiwiSaver inflows largely unchanged, but funded more by private savings and less from the Government. The fiscal saving to the Crown will be $2.6 billion over the next four years.
KiwiSaver remains an attractive, subsidised investment. The Government is planning to contribute $650 million next year and $2.5 billion over the next four years.
These changes put KiwiSaver funds on a sound footing. On current projections, KiwiSaver funds will total around $25 billion by 2015, and nearly $60 billion in 10 years' time.
KiwiSaver funds are well placed to participate in the Mixed Ownership Model, which I will come to shortly.
Where State-owned Enterprises raise outside equity, New Zealand investors will be at the front of the queue to invest. We expect KiwiSaver funds to become substantial long-term holders of these investments.
The decisions to lift default contribution rates, to keep KiwiSaver membership voluntary and to remove the Employer Superannuation Contribution Tax exemption were all recommendations of the Savings Working Group.
Mr Speaker,
This Budget makes changes to Working for Families to better target assistance toward lower-income families, and to put the scheme on a more sustainable footing.
Working for Families will remain essentially in its current form. The changes consist of small adjustments to the abatement threshold and abatement rate, and a gradual alignment of the over-16 rate with the 13-to-15-year-old rate.
These changes will be phased in over four steps as Family Tax Credit rates are adjusted for inflation. This is a very gradual transition which is expected, given current inflation forecasts, to take eight years.
Lower-income families and beneficiaries will be largely unaffected by these changes, and the majority will actually get an increase in their Working for Families payments after 1 April next year.
A number of families higher up the Working for Families scale, however, will receive a little less than they currently do now, or will no longer qualify. In most cases, the impacts will be small.
To put this in context, total Working for Families payments have almost doubled over the past five years, and are forecast to cost about $10.7 billion over the next four years. These changes represent about a 4 per cent trimming of the scheme.
Mr Speaker,
The Budget also makes changes to the student loans scheme.
Once again, the scheme will continue in essentially its current form.
This year, the Crown will lend almost $1.6 billion to assist students, up 50 per cent over the past five years. There are currently more than $12 billion of loans outstanding.
However, at present, for every dollar lent out the Government receives only around 55 cents back in 2011 dollar terms.
Budget 2011 tightens the lending criteria so that the scheme is better focused on those who really need assistance.
The measures tighten borrowing conditions for those aged over 55, for part-time students and for those already overdue or in default. There are a number of additional changes.
The estimated operating and capital savings over four years are $447 million. The Crown still expects to lend students a further $6.5 billion over the next four years.
Mr Speaker,
The public sector has a wider role to play in lifting productivity and national saving.
Over the past two years the Government has signalled the need for the sector to become more efficient, and has been mindful of the large increases in most budgets that have occurred in recent years.
In its first two Budgets, the Government successfully reprioritised $3.8 billion of spending into higher-priority areas.
In Budget 2011, $980 million of efficiency savings will be sought from the public sector over three years, starting from 1 July 2012.
The Government will require agencies to fund the cost of KiwiSaver, and some State sector retirement schemes for their employees. This will generate savings of $650 million. At present these contributions are centrally funded and not visible to public sector employers.
A further $330 million in back office savings will be sought from 31 core government agencies.
The savings are part of the ongoing improvement that the Government expects, and are consistent with the adjustment the households and businesses have had to make in recent years.
Mr Speaker,
One area where the benefits of cost reductions are already apparent is ACC.
Over the past two years, ACC has successfully controlled its previously run-away costs, and delivered better results from existing spending.
One immediate benefit is that the Government will need to contribute $638 million less to the non-earners' account over the next four years than previously projected.
ACC members in other accounts will also benefit, with future levies also trending lower as a result of the cost savings within the scheme.
