Fiscal policy short of expectations

Budget 2011 can be characterised as “cautious and safe,” with most announcements generally pointing in the right direction of reducing Government expenditure and debt.

However it lacked signposts towards future reforms and other than the extensions to the mixed ownership model, more could have been done to produce structural change.

The Budget is heavily dependent on the Treasury’s predictions for growth being realised.

We welcome efficiencies in the public service, as these will help address the imbalance between the public and private sector contributions to the economy. But only a third of the announced $980 million savings will come from efficiency improvements, with the bulk of the savings will be generated by the removal of central funding for KiwiSaver and other Government Superannuation Schemes.

KiwiSaver’s reduced tax credits, larger member and employer contribution and an end to the tax-free status of employer contributions will represent greater costs to employers.

However, employers are likely to recognise that the moves will help secure KiwiSaver’s viability. They will have a reasonable amount of time before introduction to take account and plan accordingly.

Saving Government expenditure of $2.5 billion over four years will be a reasonable payoff from the changes.

Slightly better targeting of ‘Working for Families,’ reducing outgoings by about 4% is a move in the right direction, although given its current role in diminishing incentives to work and produce, more reductions and more targeting would have been desirable.

Student loans, the other major area of expenditure where significant change is called for, brought disappointment.

Reversing the interest free status of student loans would have brought a much larger shift to financial health and would have helped bring better incentives in study choices and completion rates.

Increased funding for training and employment assistance are positive but not game breaking. Given the importance of skills development to productivity improvements there is concern that the Budget has produced no coordinated plan for skills development.

More needs to be done to increase the clarity of pathways through the education and skills system and to respond to the urgent need to raise the literacy, language and numeracy skills of the workforce.

Phil O’Reilly is Chief Executive of Business New Zealand based in Wellington.

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