New Zealand central bank gets new powers
New Zealand is tweaking the central model it once held up to the rest of the world as an example for others to follow.
Finance Minister Bill English said has signed a new memorandum of understanding with Reserve Bank governor Graeme Wheeler this week which gives Mr Wheeler four new powers.
The central bank can in future require banks to hold more capital on their balance sheets. This power can be used to help stop a credit boom.
It can also require banks to hold additional capital against loans in specific sectors if risks emerge in those sectors.
Banks can also be required to adjust ratios of where they get funds from and may be asked to apply loan-to-value criteria when they lend money to home buyers. This means home buyers may be limited in the amount they can borrow compared to the value of the property.
Mr English told journalists that they would have to ask the central bank if it was going to use these new powers.
The New Zealand central banking model was held up as an example for others to follow in the 1980s when it was believed that intervention did not work and the only goal of monetary policy should be keeping inflation under control.
Financial upheaval in many countries has forced central banks to intervene to save banks and restore confidence in banking systems.
Mr English said the New Zealand banking system had avoided the upheaval that engulfed other countries but the government had agreed that the central bank needed more powers to reduce New Zealand’s vulnerability to boom-bust cycles.
Policy decisions by the central bank will continue to be made independently of the government.
High NZ dollar, moderate growth forecast
There will be no relief for exporters from a high New Zealand dollar for years but the overall economy will notch up annual growth of between two and three per cent.
The government has weighed the impact of a drought that will knock 0.7 per cent off growth in 2013 against the ramping up of a $40 billion Christchurch rebuild to produce a moderate set of growth forecasts in the budget.
It identifies the hot Auckland housing market as a “future threat” to the economy and addresses it by giving the Reserve Bank new powers, including the ability to limit the amount of a home loan compared to the value of a house.
“The housing market, particularly in Auckland, is a risk to the wider economy,” Finance Minister Bill English said.
The budget forecasts growth at an annual pace of 2.5 per cent over the five years to March 2017.
The drivers of growth are the Canterbury rebuild, a high terms of trade, low interest rates and less risk averse households and firms.
The constraining forces are a high exchange rate and the recent drought.
“Our currency is probably overvalued,” Mr English said.
The budget documents show the kiwi dollar’s trade-weighted index peaking at 77 in 2014 but remaining at 76.1 in 2015. It falls to 69.2 in 2017.
Interest rates will increase from record lows in the middle of 2014 as inflation rises to the middle of the central bank’s one to three per cent target band in the March 2014 year.
The current account deficit is forecast to rise to 6.5 per cent of GDP by March 2017 from five per cent in December 2012.
Mr English recalled that the government came into office with an economy in recession, and was rocked by the global financial crisis and one of the most expensive natural disasters in history when Christchurch was struck by earthquakes.
But he confirmed the government is on course to post a small budget surplus in 2014/15 as it faces a bid to win a third term in office and said the focus is moving to reducing government debt.
Govt tackles housing, home ownership
Helping low-income families buy homes and making housing more affordable are key features of the New Zealand government’s fifth budget.
Finance Minister Bill English has told parliament a pilot scheme will be launched offering low and no interest loans to people who can’t access credit from banks.
And to ease the affordable housing crisis he has introduced legislation that will free up more land for building in special, fast-track areas.
“Housing can be made more affordable by focusing on the key areas that actually make a difference,” Mr English said.
After two zero budgets, the government is going to spend an extra $NZ900 million over the next 12 months.
Most of the allocations have already been announced, with most of the money going on health and education.
There is more money for welfare reform but the government’s response to the children’s commissioner’s report on child poverty isn’t in the budget.
Mr English says it will be announced in a few weeks.
He has confirmed a $NZ100 million extension to the home insulation program and $NZ35 million to help extended family members care for children.
Mr English is continuing the careful, controlled financial management that has marked his previous four budgets.
He has confirmed the government will achieve its target of a surplus in 2014/15, although it will be a meagre $NZ75 million.
A key economic focus of the budget is a $NZ200 million boost for science, innovation and research over the next four years.
New grants for start-up businesses will be available and funding for the National Science Challenges is being expanded.
Prime Minister John Key says New Zealand is doing a lot better than most other developed countries.
“Budget 2013 has been prepared with a fresh sense of optimism,” he said.
NZ’s ratings unchanged by budget
The major international rating agencies have given Finance Minister Bill English the all-clear for his fifth budget, which sticks to reaching an operational surplus in the 2014/15 year.
Fitch Ratings, Moody’s Investors Service and Standard & Poor’s all said their respective sovereign ratings for New Zealand were unaffected by the budget, and were generally in line with expectations.
The latest Treasury forecasts are for an operating surplus of $75 million in 2014-2015, in line with the estimate in December’s Half Year Economic and Fiscal Update.
Net debt is forecast to be $57.9 billion, or 27.1 per cent of gross domestic product in the year ending June 30, before reaching a peak in 2015 at 28.7 per cent.
S&P said the government’s fiscal balance was “a little improved” compared to its last forecast with smaller deficits than previously anticipated, leading to a lower net debt as a proportion of the economy. That was consistent with S&P’s AA foreign currency rating with a stable outlook.
Fitch said it was encouraged by the government’s commitment to fiscal consolidation, and said the budget wouldn’t alter its AA rating assigned to New Zealand.
Likewise, Moody’s said the “deficit trajectory is not very different from that which the government previously projected” and was supportive of an Aaa government bond rating.
Fitch and S&P both cut New Zealand’s credit rating one notch in 2011 after the Canterbury earthquakes punched a hole in the government’s balance sheet, and as the nation retained a high level of private debt.
Moody’s kept New Zealand’s Aaa rating, with a stable outlook, though it measures sovereign creditworthiness differently to its peers.
New tax breaks for tech start-ups
Loss-making start-up companies which invest heavily in research and development will be targeted for tax breaks.
A new scheme announced in the budget is intended to allow “small, R&D-intensive start-ups” to claim tax losses on research and development spending.
Eligibility criteria don’t yet exist and will be defined in an issues paper next month, followed by public consultation.
The move accompanies a raft of more minor tax benefits for businesses, to allow deductibility against income of so-called “black hole” expenses such as the costs of annual meetings, stock exchange listing, resource consent applications, and patent applications that don’t create a depreciable asset.
Other new tax measures in the budget include extensions to the thin capitalisation rules, which try to stop foreign investors loading New Zealand companies with debt to reduce their taxable income, and a $6.65 million boost in funding for the Inland Revenue Department to target property investors.
The property tax move is expected to raise around $45 million in additional revenue annually, with efforts already undertaken under new funding arrangements since July 2010 already yielding an extra $110 million.
An IRD issues paper released on Thursday proposes “to clarify the date of acquisition of land as it affects people who acquire land specifically to resell it and who are generally taxed”.
The thin cap rules will be extended to cover a wider range of foreign investors, instead of applying only to those where one non-resident owns 50 per cent or more of a New Zealand company, but the changes are expected to raise only an extra $20 million a year.
Revenue Minister Peter Dunne said small technology-intensive start-ups “tend to endure long periods in tax loss as a result of high-risk, up-front investment. The hit they take on R&D can be a real disincentive to undertaking it”.
However, Thomas Pippos, chief executive at accounting firm Deloitte, warned to expect a carefully bounded scheme that would apply only to very small companies.
“It’s a grant by another name,” Mr Pippos said.