Your tax and spending priorities
As you are aware, the operating and capital allowances for Budget 2009 are largely taken up by the previous government's formal precommitments and other informal agreements. We think that there is scope to reconsider a number of precommitments signalled for Budget 2009, particularly in the areas of defence, innovation and health. This could be done through deferring, scaling back or declining some of these pressures prior to Budget 2009.
You have signalled a number of initiatives that you would like to progress, including:
- tax changes
- increase in infrastructure spending (including broadband, schools etc).
You have identified savings through changes to KiwiSaver and abolishing Labour's tax precommitments and the R&D tax credit (Section 6 provides our advice on these areas). And you have signalled that you are prepared to increase the gross debt target by 2% of GDP to fund extra infrastructure.
The forecasts have shifted since your tax package announcement. Given this and our advice that some medium-term consolidation is desirable, you might like to consider additional savings that do not have impact on aggregate demand in the short term. If you are unable to find ways of reducing expenditure, an alternative option would be to reconsider the size or timing of your tax package. We would like an opportunity to discuss these choices with you.
Additional savings options could be ‘across the board', relying on Chief Executives to identify the expenditure they see as least value to meet mandated levels of savings. Or they could be focused on specific initiatives which Ministers see as low value or as able to be replaced by more effective policy responses. These approaches have a number of advantages and disadvantage, which we can discuss with you if you are interested in these ideas. Any significant savings will require difficult decisions to be made. We have identified specific initiatives where potential savings from ceasing lower value components amount to over $2.5 billion per year. We have identified extra savings ideas that you might be interested in and suggest firstly using some of them to strengthen your balance sheet (consolidation) and secondly to offset further tax cuts (in addition to those already announced).
It is possible to offset or partially offset the distributional effects of a number of short-term savings, spending and taxation decisions, if that is an objective for you. This is because many areas of current low value-for-money spending involve transfers to middle and high-income earners. Removing or reducing these transfers would be offset by the positive impact of lowering the top tax rate on higher income earners (which is where we think tax strategy needs to move in the medium term, see the section below for further discussion). The targeting of savings at areas of low value spend also ensures that the impact of such savings on wider distributional outcomes is limited.
In some areas (in particular, education, innovation, infrastructure) we would recommend that current low value programmes are replaced by higher value, targeted initiatives within the same sector. This would limit the headroom available for tax cuts, but would also limit distributional impacts and in some cases improve distributional outcomes by better targeting spending.
To implement tax changes for 1 April 2009, legislation would need to be lodged before Christmas. We recommend that additional growth-focused and savings initiatives are best handled through Budget 2009. This provides the time to develop an effective process and to benefit from departmental input.
Sections below provide our advice on KiwiSaver, education, innovation, infrastructure, tax and how to achieve value for money (VFM) in the public sector. We can provide further advice, including on expenditure savings options if you are interested.
