Thursday 19th of May 2011

So this was a savings and investment Budget. Lots of attention has been focused on the KiwiSaver changes and quite rightly. It’s one of the most successful products the country has ever seen and has $8 billion of funds invested in it. The government is proposing to cut the member tax credit in half, which is what I predicted last week. What’s more worrying is that employers are the losers. They lose the tax-free status of their contributions and they will be forced to increase their contribution rate from April 2013. These changes aren’t going to be popular with the 1.7 million KiwiSaver members or with employers. I wonder whether the government has underestimated the backlash they will generate, especially from the business sector which is a core constituency group. What interests me is how several other changes will impact on investors. The government wants to partially privatise state assets; it wants to have an earthquake bond and it plans an inflation indexed bond. I have spoken to a number of people since the February 22 earthquake arguing that the government should have quickly put together a bond to help fund the rebuild of Christchurch. It is an excellent funding idea and if done earlier could well have been sold offshore, particularly to investors who were sympathetic to what happened in Christchurch. Index-linked bonds are useful too. There is a view emerging that there are growing risks of strong inflation growth coming. Deepening capital markets and getting more New Zealanders investing is a good thing. But what we really need to do is wean people off fixed interest investments and into growth assets. Unfortunately there is nothing in the Budget which does that. You could argue listing bits of state assets on the NZX falls into this category. The reality is the companies suggested aren’t really growth stories. They are income plays and reinforce the fixed interest addiction. One thing I was hoping for was a rearranging of PIE tax rates to slightly advantage PIE funds for all investors over other forms of investing. That hasn’t happened but is something which would have been worthwhile. Overall the Budget moves KiwiSaver more towards being a true workplace savings scheme. The next thing will be ever increasing compulsory contribution rates. It’s a plus that the government talked about resuming contributions to the NZ Superannuation Fund, but it missed the target in some areas. It will also, I predict, be a hard sell for the government.