Kia ora.

My name is Daniel Webster.

This is Small Firm, Big Impact.

We're in very tight, constrained fiscal times, and is the government spreading its spending too thinly?

Should it tighten its focus and spend more on fewer initiatives?

These are tough questions.

The other thing that came out of the budget today is changes to Inland Revenue funding.

So they will again receive additional funding for compliance and debt collection activities.

This episode, I've taken over Gillian Bowen's seat in the hosting chair to bring you a discussion from New Zealand as we analyse the 2025 budget.

Our experts have been combing through the detail.

Fresh out of the lockup, and over the next 15 minutes or so, we'll take Chartered accountants through what they need to know.

I'm joined by Peter Vial, New Zealand country head for CA ANZ, and John Cuthbertson, our Tax and Financial Services Leader.

Peter and John, welcome to Small Firm, Big Impact.

Kia ora Dan.

Welcome.

Dan, thank you.

Um, let's kick this off with some first reactions.

Peter.

What what's your top line thoughts?

I guess my top line thoughts, Dan, is that the government's been true to its promise and advance of the budget, that there'd be no lolly scramble.

The Minister of Finance was absolutely clear about that.

And, you know, we're living in fiscally constrained times.

So no lolly scramble.

Uh, she said no rainbows and unicorns.

And she was right.

She delivered a tight, lean budget that does include a big boost for business, but I guess it might help if I just cover off a couple of the macroeconomic, uh, situations first.

So from a macroeconomic perspective, um, the government is forecasting a return to surplus in 2028, 2029, but that surplus in that year is paper thin, wafer thin.

Uh, it'll be a surplus of about $200 million on current expectations.

Uh, in terms of real GDP growth, uh, that looks like it's to go up, uh, to 2.9% in the coming year and then 3% and stabilize around that level from 2026.

Uh, in terms of employment or unemployment, the government, uh, is more interested in telling us about employment.

So it says that there'll be 240,000 more people in jobs by the end of the four year forecast period.

And then the other biggie inflation, uh, that's forecast to remain steady and within the Reserve Bank's target range over the four year budget period.

So stable inflation, uh, and then the final one which people are most interested in is net core crown debt that will peak at 46% of GDP and then go downwards from there.

So, you know, the macroeconomic, uh, situation is not rosy.

Um, but there are some positive signs in there that the economy is recovering.

Uh, but the biggest, the biggest, uh, item, the biggest development was this investment boost initiative, uh, that, uh, Dan, I suggest you, uh, asked John about all the detail of that.

Right.

Yeah.

John.

So investment boost, uh, what were your thoughts on that?

Yeah.

Well, it certainly set up Dan as the centrepiece, uh, initiative for this year's budget.

And it's got a predicted cost over the forecast period out to 2029 of some 6.6 billion.

So by far the biggest thing that they were looking at in that respect.

Look, it's very similar in a way to something we've been asking for for some time.

And that was, um, chartered accountants calling for an acceleration to accelerated depreciation allowance for new plant and equipment.

Um, to be an incentive for capital investment and and the improvement of productivity.

So what they've done, uh, is actually a little bit better than that.

They've come out with what's, in essence, an upfront investment boost, what they call a tax incentive.

Um, and that gives an immediate deduction to business of 20% for any new assets purchased.

And it's very wide in its coverage.

So you get an upfront 20% deduction.

And then on top of that the remaining 80% of the asset value you get to depreciate at the normal rates.

Uh, so so that's actually very good.

Uh, and I think when you put those two together in the first year, you get a significant deduction, both the 20% boost plus the standard annual depreciation rate in that year.

Uh, for the year of purchase.

Um, again, it's estimated to cost the government on average about $1.7 billion per annum.

So quite small.

The good news is this starts from budget day today.

So any new assets purchased on or after 22nd May.

Um, this they will be eligible.

Uh, and this includes, um New Zealand, new or new assets in New Zealand, uh plus any imported assets and they can be new or second hand.

Uh the incentive is not capped.

So again, that's another piece of good news.

It's intended to cover, uh, investment in machinery, tools, equipment, technology, vehicles, industrial buildings and even includes commercial buildings while they still can't be depreciated.

So there's some irony there how that will work.

And then other capital assets, um, what the incentive doesn't apply to.

So it won't apply to land residential buildings assets previously used in New Zealand, i.e.

second hand assets held as trading stock.

Fixed life intangible assets and assets that you can fully expense under another regime.

Right.

So it sounds yeah reasonably broad and what it covers and something exciting for businesses in New Zealand.

Um, look, it's fair to say KiwiSaver is New Zealand's biggest savings schemes.

Were there any changes there?

Peter.

Yeah, Daniel there's quite a suite of changes to KiwiSaver and there was quite a lot of speculation before Budget day that KiwiSaver would be one of the areas of focus for the government.

So what's come through, uh, are some quite significant changes.

So the first is to increase the default contribution rate from 3% to 4% over a three year period.

So initially it will be phased in.

So there'll be an increase from 3 to 3.5% from 1st April 2026.

And then that will go up to 4% from 1st April 2028.

So that increased contribution rate will apply to both employer and employee contributions.

So this is a good thing.

Kiwis, um, aren't saving enough and increasing the contribution rate, uh, in principle is a good thing.

Uh, the government has, of course, been looking for money to fund various other initiatives, and it's found some in KiwiSaver.

So people will know that currently, Kiwi savers are entitled to a government contribution of a maximum of $520 a year.

When the scheme started many years ago, it was a 1042, which was roughly $20 a week.

Um, it then dropped back a few years ago to 520, and now the government is going to halve that again to roughly $260.

That will be the maximum contribution that the government will make each year.

And that equates to $0.25 for each dollar a KiwiSaver member contributes up to 1042.

Um, so that is going to save the government $2.5 million, $2.5 billion, um, which is quite a sizeable chunk of change that has then been able to reprioritise for other, other expenditure.

Um, it's also made some other changes to KiwiSaver.

So, uh, it's expanded the scheme and its application to 16 and 17 year olds.

They've been able to be, uh, part of the scheme, but they haven't received government or employer contributions.

So the government will, uh, expand it to those, uh, younger people at 16 and 17.

It's also going to remove the, um, annual contribution that I talked about.

The annual contribution currently of $520 will be will will be removed for any KiwiSaver whose income exceeds $180,000.

So that's the threshold at which our top marginal rate kicks in.

I guess no one will really have an issue with that.

Those people are on, uh, significantly higher incomes and, uh, probably most of them will be happy to, to forfeit the government contribution.

Um, I guess one important thing to think about with these KiwiSaver changes is, though, is effectively there is a shift from government contribution to employer contribution.

So employers will have to match the default contribution or whatever contribution, the default contribution rate for employees.

And so that's moving from 3% to 4% with that phase in at 3.5.

And then for so employers will have the additional cost of that extra 1%.

Um, some of them will be um, frustrated or even annoyed about that.

It's where the government is cutting back its contribution.

But is, um, requiring employers to contribute more?

It won't apply, uh, or won't affect all employers because some employers already take a total REM approach, a total remuneration approach in their, um, calculation of KiwiSaver contributions.

So for those employers, uh, where effectively the employee is funding the employer contribution, there won't be a change.

But for any employer not following that approach, they will have to up their contributions by that 1%.

And that's an additional cost on business.

Um, but overall, look, the reforms are were probably to be expected.

Um, and they're, they're good or most of them are good.

Uh, but will they really make a difference to our collective retirement savings?

Uh, we're still a very long way from replicating the Australian savings culture and and levels of savings that Australians can make for their retirement.

We're a long, long way off that.

Uh, but this will help increase the total volume of savings.

Great.

Thanks, Peter.

John, we asked for a few different things in the lead up to this budget around tax.

Were there any other notable changes that you saw come out today?

Yes, Daniel, I think what we're seeing is the government recognises that we've got a significant infrastructure deficit, and it's looking at ways of enabling that deficit to be met by virtue of the private sector.

And so there's a couple of setting changes on the way.

Not all the details are out yet, but certainly for foreign investment into infrastructure in New Zealand.

We've got changes to the fund capitalisation settings for infrastructure.

Um, and what they'll do is they will um, they will modify those limitations to enable higher debt levels for eligible infrastructure projects in New Zealand.

So that in essence, uh, if you qualify, you'll get the full, um, interest deduction, which is a very positive move.

On the flip side, um, there is work going to be undertaken around KiwiSaver, uh, pies and what they can invest in.

Uh, currently they have limits on what they can invest in.

But, uh, the intention is to open that up to a wider range of New Zealand businesses, assets and infrastructure.

So again, that is positive.

Uh, the other interesting thing that's come out, literally a day or two ahead of the budget was the announcement that our Digital services tax bill, which has been languishing not even with its first reading in Parliament, um, has been discharged and by that withdrawn.

And so what that means is it's removed us, the country, as a potential target in terms of, uh, retaliation by the US.

I think that's quite a sensitive issue at the moment.

And so we would see that as, uh, certainly very sensible.

It's also worth noting that the OECD multilateral solution is also in disarray, as the United States has withdrawn from that project and has taken issue with the intended 15% minimum tax that would be imposed on large multinational companies.

And the other thing, Daniel, that came out of the budget today is, uh, changes to Inland Revenue funding.

So they will again receive additional funding for compliance and debt collection activities.

And that's going to be 35 million per year.

Uh, they will also continue funding of 27 million a year, which was time limited and due to expire in June this year.

And what they're looking at is a target return on investment of $4 to one, um, initially and then up to $8 for the 27 year and beyond.

Right.

Thanks, John.

There are quite a few tax changes there that is very interesting.

Um, Peter, there's always winners and losers in any budget.

Were there any particular sectors there that you saw, you know, being in either of those camps?

Yeah.

You're right Dan, there are winners and losers.

And one of the obvious winners is the film and television industry.

Um, so they've been given a $577 million boost over the budget period of four years.

Um, so to top up the existing, um, quite significant international screen production rebate, this is to help, uh, Film and television productions compete with all the incentives that are the industry receives overseas.

So there is some logic in that.

Um, and so obviously the government is comfortable with the return on, on its investment that it'll get from that big investment in that sector.

Um, there's no obvious reason to doubt that.

Uh, but it will be a good I think it would be a good idea to do a robust review, uh, of of that investment, uh, every couple of years to ensure that it is delivering the return on investment, uh, and stimulating that part of the economy, uh, to the, to the level that the government expects, um, in terms of losers, uh, may be wrong to call these sectors losers, but it was interesting that I noted that there was, um, no obvious additional funding for the regions or the primary sector.

So the government's view is, I think that, uh, incentives like the investment boost that John's talked about, the accelerated depreciation that will apply across the country It will benefit businesses right across the country, including in the rural and regional sectors.

And there are other initiatives that will do the same, but there's nothing specific called out really for regional and rural areas.

Um, interesting given the primary sector is the backbone of, of of the economy.

Um, the Minister of finance in the lockup was asked, uh, about reduced investment and initiatives for Maori.

And um, she responded by referencing again the across the board investment, uh, that will benefit everyone, including Maori.

Um, and a similar response was made by the Minister of Housing and Infrastructure when he was asked about, for example, investment in housing for Maori.

So their view is very firmly that these these investments are across the population, across the economy.

And, uh, so that's sort of meant them dialing back on specific investments and Maori initiatives.

Um, the big well, the biggest thing to me that's missing is any, um, consideration of our retirement savings other than the KiwiSaver savings scheme.

So we've had successive governments for many years have ruled out changes to our national superannuation system so they won't look at the age of entitlement, they won't look at means testing.

We have a very obvious problem ahead of us with an ageing demographic.

And yet this government, like all governments before it, is comfortable to leave those settings as as they are, which I think is, in my personal view, is shortsighted.

I think that that, um, hoary old chestnut or whatever you like to call it, uh, needs to be looked at, uh, at some stage.

So, uh, in terms of, I guess other areas though, too, we've got we were looking for investment in health and there is health is a is a really critical sector.

Um, it's a real concern for many Kiwis.

And, um, there is a reasonably significant amount of capital expenditure in the health sector and some opex.

Uh, I think the opex has increased increases about 7% on the on last year.

Um, to some degree, you have, uh, health as a as a bottomless pit, I suppose.

But, um, you know, uh, these are big numbers that are being allocated to health, but are they really going to, um, make the differences that Kiwis expect them to do?

And I think we would have liked some more innovative measures, particularly around primary health and the GP population.

We have a problem that, uh, a large percentage of our GP's will retire in the next ten years or so and we just don't have the pipeline of GPS.

So we need some innovative, um, even radical ideas to, uh, get more GPS into the system, and particularly in rural and regional areas.

So, uh, but healthier, big boost, big boost for defence, uh, which um, helicopters and all sorts.

Big I think 1 billion of capital expenditure this year, 1.6 billion next year, plus some opex, um, law and order, more money for prisons, um, and uh, for, for, for the criminal justice system.

and obviously the one I haven't omitted to mention and shouldn't have.

Is quite a significant investment in education in both OpEx and CapEx for new school buildings and so on.

So those are the kind of traditional things you'd expect to see.

And they are there.

Uh, and, um, I guess, but my overall comment would be, you know what?

Uh, you know, a really good question to ask is, uh, is the government spreading this expenditure?

We're in very tight, constrained fiscal, um, times.

And as the government spending, uh, spreading its spending too thinly, uh, should it tighten its focus and spend more on fewer initiatives?

These are tough questions, but it comes down to the quality of the spending in each case.

So each investment needs to deliver meaningful and measurable outcomes.

And I think to help that, we need to have really robust, uh, reporting and post-implementation reviews of different investments.

Uh, that should be part of the standard plan.

Um, and then we'll be able to.

Time will tell.

And though that reporting and reviewing will tell us whether the right trade offs have been made by this government and budget 2025.

Right.

Thank you very much, Peter.

I can tell the you know, the budget is all fresh in your mind having just come out of it.

So that's all we've got time for, gents.

Um, Gill will be back next episode with more great Small Firm, Big Impact content.

I know she would want me to plug the budget 2025 page on the CA ANZ website.

So all our analysis, everything Peter and John have talked about, um, is on the website and I'll make sure we put a link in the episode notes.

And of course, uh, follow the pod in your favourite podcast app.

Thank you Peter and John for being my experts today on Small Firm, Big Impact.

Thank you Daniel.

Our pleasure.

Bye bye.