Summary
- The Budget spends up large, mostly as expected. Despite the spending boost, the Government accounts are expected to improve due to higher tax revenues.
- The focus on higher investment in infrastructure and responses to climate change could make a difference to meeting future challenges. However, long-term commitment from future governments and quality implementation will be essential for the plans to be effective.
- Surprise cost-of-living payments to those earning wages and salaries under $70,000 will be much needed by some but will likely add to inflation pressures and cause the Reserve Bank of New Zealand (RBNZ) to maintain a higher Official Cash Rate for longer at the margin.
Key initiatives
The Budget delivered significant extra spending over coming years, which had already been signalled by the Government in the amounts it had pencilled in for new initiatives.
Health gets the largest dollop of funding in this Budget, receiving an extra $11.1 billion over the next four years. Much of that will go towards the restructuring of the health system, which involves disestablishing the District Health Boards (DHBs) and establishing a new central health agency.
Other significant health funding includes around $200 million for mental health services and $190 million for the central drug buying agency, Pharmac. There is also an extra $1.3 billion set aside for the building of new hospitals and other capital improvements.
The major surprise of the Budget is $814 million allocated to one-off cost of living payments given to all wage and salary earners receiving less than $70,000 per annum. This is alongside other spending to address cost of living pressures including extending half price public transport and the recent reduction in the fuel excise tax by a further two months.
Other areas to receive significant funding boosts include Climate Change, Maori and Pacific health, education, and cultural areas, business growth, and housing.
Outside of the amount set aside for new operational spending, the Government had already announced it is allocating an extra $4.5 billion to a Climate Emergency Response Fund (CERF), which will be funded from Emissions Trading Scheme (ETS) revenue.
Outlook
Economy: The Treasury has made material changes to its Budget economic forecasts. It sees a significant softening in economic growth over 2023 and 2024, with annual growth expected to fall close to zero in 2024. While the Treasury does not forecast a recession, given low quarterly growth rates anticipated, a recession is well within the bounds of possibility given uncertainties about the outlook.
The unemployment rate is expected to bottom out at 3 per cent in the second half of this year and then rise steadily to reach 4.8 per cent in early 2026.
Treasury sees annual inflation peaking at 6.7 per cent in the first half of this year and then easing down over the next four years to just over 2 per cent. However, inflation is expected to stay above 5 per cent for the rest of this year and remain above the Reserve Bank of New Zealand’s 1-3 per cent target range until at least the end of 2024.
Despite the Government’s big spending intentions, the Treasury estimates that overall spending and tax outcomes will mean improving budget balances, which it expects will be contractionary for the economy from 2023 onwards. This contractionary impact is mostly a result of the massive Wage Subsidy Scheme ending.
Government accounts
The Treasury expects the Government books to generally improve over the next four years with the operating balance to return to surplus in the June 2025 year. Thereafter, surpluses are expected to continue expanding. While real (inflation-adjusted) economic activity is expected to be quite soft over the next two years, the improvement in the accounts largely comes about because high inflation is expected to pull in extra tax revenue.
With the budget balance returning to surplus, net government debt peaks out at around 20 per cent of the economy in 2024 and fall to 15 per cent of the economy in 2026. Of course, this is the Government’s new measure of net debt, which is substantially lower than the old measure because of the inclusion of NZSF assets. Under the old measure, net debt peaks at just over 40 per cent of the economy in 2024.
Comment
The Government’s focus on boosting the response to climate change and New Zealand’s infrastructure deficit is welcome. The wider interpretation of the Government’s net debt position facilitates this. However, the quality of the spending will be a critical factor in its effectiveness in improving New Zealand’s future economic performance. For this to happen, there will also need to be improvements in longer-term commitments to investment plans and implementation of those plans.
The overall quantum of government spending was largely as expected, but the surprise addition of the cost-of- living payments means the composition of the spending is likely to be more inflationary than previously anticipated. The payments provide a direct injection to spending in the economy, which will likely put further upward pressure on prices and make it harder for the Reserve Bank of New Zealand (RBNZ) to tame runaway inflation. After the payments cease, it could also potentially make the situation more difficult for low to middle income households, especially as they will likely also face significantly higher interest rates.
Consequently, we expect the RBNZ’s Monetary Policy Committee to be swayed, at the margin, towards a higher Official Cash Rate (OCR) for longer than they might in the absence of the payments to wage and salary earners. This appears to be the expectation of financial market traders following the Budget announcement, with the New Zealand dollar and wholesale interest rates rising materially.
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