On the 18th May 2023, Finance Minister Grant Roberston released the 2023 Budget for the New Zealand Government. To help cut through the noise and see what benefits, if any, the budget holds in store for small business, the team at MBP have reviewed the budget, commentary and analysis to highlight the key insights for kiwi business.
Setting the Scene for Budget 2023
Finance Minister Grant Robertson has promised to focus on fiscal sustainability in Budget 2023, and beyond, but this doesn’t mean paying down debt. New Zealand’s net government debt is $72.8 billion heading into the budget, or 19.1% of gross domestic product, by the end of March. This is up dramatically from 9.3% in 2019, but still relatively low by global standards.
In Budget 2023, the government has to cover the cost of the cyclone rebuild for the eastern north island, while contending with a falling tax take. Treasury’s financial statements showed tax revenue was $2.3 billion lower than forecast in the nine months ended March 2023. Why? Well lower economic activity from the fears of recession means less GST and less business profits to tax. Inflation does help to prop up tax revenue in nominal terms, but doesn’t significantly increase Government spending power as it comes with higher costs for the government on the other side of the ledger.
So will this be a budget for business? Not directly, but there are societal flow-on effects that will support business in the medium to long-term.
So what does Budget 2023 hold for business?
- Expansion of childcare support, allowing two-year olds to receive 20 hours of free ECE, allowing parents to have confidence to get back to work without burdening the household budget.
- Apprentice Boost extended to see more skilled workers trained, bring the total to over 30,000 throughout the programme.
- Fuel Tax and Road User Charges set to increase. This will add further costs to fueling the trucks that keep our supply chains running and so will put pressure on margins.
- The National Resilience Plan will look to make us more resilient to adverse weather events, allowing you to get back to business faster after a weather bomb.
- The gaming industry is set to receive a 20% rebate on qualifying spending (to keep pace with similar bribes from Australia).
- Unemployment will go up, inflation will come down and money will stay expensive for a while yet.
Expansion of Childcare Support
While on the face of it, this might not seem like a business benefit, it really is. The lowering of the age of eligibility from three to two year olds will allow working parents to better balance a return to work with their household budgets. This means that parents will have to stress less about meeting child care costs to go back to work. This will see more parents returning to work earlier, relieving some of the pressures for businesses at a time when there are severe shortages of workers available.
There is, of course, a bit of a supply shortage in the ECE market though. Many providers have staff shortages and limited or no spaces for six to twelve months ahead. So it may be prudent to start getting your kids penciled in now to make sure you can take advantage of the free hours next year when a space for them finally opens up.
Apprentice Boost Extended
The Apprentice Boost scheme is being extended to the end of December 2024. The goal is to have supported around 30,000 apprentices to be up-skilled in key sectors of the economy by the end of the program. This is one of the last covid-era employment support programmes still running, due largely to its success. By reducing the financial burden on businesses looking to hire new trainees, it supported 16,000 people into new employment and skills training in just its first year.
Fuel Tax Set to Rise
The current Fuel Tax Subsidy and discount on Road User Charges will not be extended. This will see petrol rise 29c/litre (roughly 10%). The flow-on effect of this not only makes filling up the car more expensive, it will increase freight charges and therefore the cost of pretty much everything else along your business supply-chain. If you haven’t already considered this, you’ll need to make sure that from July 2023 you’re keeping an eye on your costs to ensure that your pricing is maintaining at your minimum viable level to keep your business profitable and afloat.
National Resilience Plan
On top of the $71 Billion already committed to infrastructure projects over the next five years, the government is committing in Budget 2023 to an extra $6 Billion to a National Resilience Plan. While its a bit light on details at the moment, the intention is to make sure our infrastructure is resilient in the face of potentially more frequent adverse weather events.
This means investments in telecommunications to ensure we stay connected, electricity to ensure the lights stay on and roading to ensure supply chains aren’t cut-off. All things that allow us to recover faster, get back to work and maintain the businesses and jobs the keep communities together.
Gaming Industry Rebate
In a tit-for-tat response to the industry subsidies available to the game development industry in Australia, the budget has rolled out a 20% rebate on qualifying spending to those developing games in New Zealand. This is targeted to retain these businesses and their talent in New Zealand as a future-proof export earner. However, as they’re developing and selling digital products, there’s no real tie to the local market if New Zealand fails to keep up in the international rebate bidding war. It will be interesting to see the effects of this overtime and the pathway towards a growing return on investment for the future of the New Zealand economy.
Unemployment set to Increase
The unemployment rate is forecast to increase from its current 3.4% to 5.3%.
The benefit of this to business is that there will be more people looking for work, a boost to businesses crying out for workers. However, the key thing to see go up is the labour force participation rate. This is the measure of the proportion of working age people actually choosing to work or look for work. Remember, the unemployment rate only considers those actively looking to work rather than on long-term benefit dependency. The labour force participation rate is currently around 72%.
Inflation to 3% by End of 2024
Inflation is forecast to hit the upper limit of its target range by then end of 2024.
This may be a little opimistic in light of the stimulatory effects of the cyclone recovery and especoially if the talk of no recession leads to greater consumer confidence to keep spending.
Treasury Forecasts Potentially No Recession
The fear of recession for the last few months has been a real anchor on some consumer spending. Treasury analysis accompanying the budget is now forecasting that the extra spending caused by the cyclone recovery will likely offset the economic downturn caused by rising interest rates and other pressures. This means that it is now more likely than the last few months that the economy will grow rather than shrink.
The flow-on effect of this announcement is likely to see both business and consumer confidence get a little boost. However, even with consumers willing to spend more (or at least the same) in your business, other economic pressures will still see margins pinched and profits likely to be squeezed for some time yet.
The Post-Budget Economic Outlook
At MBP, we’re always looking forward. However, forecasting has become a bit of an impossibility in the current period. None of us have ever lived through a post-pandemic, labor-restricted, geo-politically uncertain period before. As such, a lot of the forecasts we’d usually look to for some certainty on where we’re going and what the future holds have consistently been off the mark. So what can we reasonably expect?
Interest Rates will be Higher for Longer
With inflation sill high, a recession looking unlikely and people simply too stubborn to meaningfully change their spending habits, the Reserve Bank is likely to increase the Office Cash Rate (OCR) further in the coming months and lower it much slower over the coming years.
Fingers crossed that the middle of this year sees the peak in the OCR. The government will definitely not want to the OCR to still be going up come election time at the end of the year.
Unemployment will Rise
We’re definitely going to see a rise in unemployment, but just how much, is anyone guess. The official prediction is for 5.3%, however, economist Tony Alexander thinks its unlikely to get over 5% due to the demand for workers across the country and across sectors.
To date, a lot of employers have been hoarding their labor. This is where businesses that normally would have downsized their workforce have held on to workers, despite the cashflow pain. This is a lesson that many learned the hard way in 2020. They let go a lot of their workers when we went into lockdown, then have struggled for the last three years with labor shortages and much more expensive new hires. So the cashflow pain they feel hoarding workers is hedging against the potential pain of being unable to rehire them if they let them go. This hoarding will likely ease as migration sees a record recovery to positive gains monthly, meaning more people in the country looking for stable employment, giving employers more choice and depth in the labour pool.
Margins will Continue to be Pinched
So far, household spending has held up well, much to the Reserve Bank’s annoyance. This is good as it means that top-line revenue for business will hold steady or could see some growth. However, with cost pressures throughout supply chains still present, the fuel tax increasing and financing being more expensive, businesses will see their margins pinched for a while yet.
Make sure you’ve got the reporting in place to track how you’re actually going. You’ll need to monitor cashflow, margins and profitability for changes. Be prepared to respond to ensure you’re able to ride out the waves likely over the next couple of years.
Tax Revenue will Fall
The governments tax take is already falling and will continue to do so. The new 39% tax rate for Trusts is set to raise over $300 Million a year. However, overall direct income taxation is already down 12% and looks set to continue to drop. With pinched margins, businesses are less profitable and so pay less tax. They also have higher overheads, so larger GST tax credits and so pay less GST to the IRD. Net GST payments to IRD have already seen a 17% drop.
Figures from Tax Management New Zealand suggest that 7th May 2023 Provisional Income Tax payments were down 7-10% on 7th May 2022. This is a good indication of the impact of the current economic climate on small and medium businesses.
The government has had a bit of a sugar rush of tax inflows over the last few years. With closed borders, inflation and cash stimulus flowing through the economy, more people spent locally, holidayed locally and had government supported profit margins. All of this fueled record high GST and other tax revenues for the government. The current state is a bit of a return to ‘tax-as-usual’ following the sugar rush.
Where to from Here?
The key thing to do now is to budget, monitor and remain agile. If you haven’t already, bake in higher interest, freight and wage costs to your forecasts. Things will continue to change frequently so keep and eye on the numbers and remain flexible to shift with the economy and consumer demand.