Thomas Pippos: Sensible, not transformational

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Long-term deficits are not sustainable. Photo / File
Long-term deficits are not sustainable. Photo / File

Bill English should finally get to deliver his first Budget surplus in 2014 for the ensuing year. There's even an outside chance he might be able to bring that forward a year given the expected steep fall in the operating deficit during 2013 and 2014.

The euphoria of that moment will inevitably pass because returning to surplus is just a necessary rite of passage to move on initiatives including the proposed deleveraging.

The importance of returning to surplus is brought into stark reality when regard is paid to the pattern of surpluses and deficits over the past few years.

The rising deficits since 2009 show how fast things can spiral out of control - and the benefits of starting with low public debt.

Read all of nzherald.co.nz's Budget coverage here.

Long-term deficits are just not sustainable. Europe is an example of the consequences of living beyond one's means.

The first real hurdle of the current approach will be the election in 2014.

Opinions on the fiscal and social stewardship of the Government will come to the fore.

Seeking a third term in an MMP environment that has given National few natural coalition partners adds more colour to the challenge and will be top of mind. So it is not surprising that the date we are expected back in surplus coincides with an election year.

Paying down our net core Crown debt from current levels, forecast to be 30 per cent of GDP in 2012-13, to, say, less than 10 per cent of GDP from about 2024 involves playing the long game over a number of election cycles.

Difficult questions such as our ageing population, our private-sector savings and the student loan mountain remain unanswered.

Could the Government be more interventionist in its plan and any plan post-surplus? Yes, but again the Budget leaves this largely unanswered. This allows fertile ground for opposition parties to stake a claim for alternate reform.

In terms of what a government can influence, from a revenue-gathering perspective, the Budget "surprises" were relatively muted.

Changes to taxing mixed-use assets and the livestock rules were well foreshadowed. Modernising certain tax credit rules was not.

In aggregate, additional revenue of more than $400 million is expected over the next four years.

In many respects the lack of a real surprise was a relief.

History has shown big Budget tax surprises carry a considerable risk of collateral damage. A recent example was the exclusion of depreciation from all buildings.

In terms of the tax mix, the status quo prevails, noting the corporate rate is competitive, the reduced highest marginal tax rate sets the right signal, and GST continues to be by far the most efficient way to gather revenue - particularly when the economy starts to expand.

The broad-base debate is still alive but dormant in this Budget. Mechanisms that could be adopted to continue to erode the capital boundary were not evident, with taxing capital gains still off the table.

Residential property investment no longer carries the same tax status it used to and despite resurgence in interest in this sector no further changes are planned.

Were the above measures fiscally neutral as previously heralded? This is a call no one can make right now as the staggered introduction of the reforms means there will be a delayed fiscal effect, leaving the door open for claims of fiscal mismanagement.

Nirvana, this Budget is not. It just doesn't exist. Europe shows how far from Nirvana you can go by seeking to defy gravity.

Bearing in mind Europe's woes, the lingering effects of the global financial crisis and the impact of the Canterbury earthquakes, Budget 2012 looks sensible and low-risk, but not transformational.

Thomas Pippos is chief executive at Deloitte.

- NZ Herald

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