Economy needs a big confidence injection
‘‘SPEND, HOPE, pray’’ could be the key takeout from both the New Zealand and Australian Budgets.
Both countries are struggling to reach that elusive surplus, both are relying heavily on tax-bracket creep to increase their revenue and both have no long-term answer to an over-dependence on mining (for Australia) and dairy (for New Zealand.)
Both are engaging in selfcongratulatory talk about what they are achieving, while reinvesting only crumbs in areas where substantial investment is actually needed. The Australian Budget’s reliance on boosting small business, bashing big corporates and political platitudes should provide a resounding warning to New Zealand.
The harsh reality is that much of the economic success of both Australia and New Zealand relies on heavy lifting from forces outside their sphere of influence, and growth depends more on factors such as the improving the economic conditions of our major trading partners.
Australia has created a A$5 billion lolly scramble by lowering the corporate tax rate for businesses with a turnover of less than $2 million to 28.5 from 30 per cent. On top of this, assets purchased for less than $20,000 can be 100 per cent written off for tax purposes. So the business logic is you spend $1 and, after tax, this costs you 71.5 cents. This will kick start the economy because the Treasurer says the Budget is about empowering Australians to invest their own money, and about enabling them to see the glass as half full, rather than half empty.
Or, as one commentator put it, ‘‘We owe, we owe, so off to spend we go’’. Despite the sarcasm, we know confidence has a huge role to play in a successful economy so this could well be the muchneeded confidence booster. Even if it does not work, the immediate write-off rules expire after two years, so they can be likened to a sugar rush, despite the promise that they will create a lasting change to the Australian economy.
While New Zealand faces the reality of not achieving its own promised surplus and the equally harsh reality of the economic impact of a downturn in the dairy sector, we have other challenges that are similar to Australia’s.
Australia has 96 per cent (2,000,000) of its businesses with a turnover of less than $2 million a year; New Zealand defines small businesses as those with fewer than 20 employees (97 per cent of our businesses.) We should not discount these businesses as they contribute around 28 per cent of New Zealand’s gross domestic product and are, at present, creating around 41 per cent of the employment growth.
The other common feature between Australia and New Zealand is the reliance on bracket creep to generate additional government revenue. New Zealand cannot be complacent as the tax take creeps up.
Jo Doolan is a partner at EY.