For the first time since Labour came to power, Grant Robertson will stick with spending no more than promised at the upcoming Budget, Marc Daalder reports
As inflation bites into Kiwis’ wallets and the Government’s polling, the upcoming Budget will see a new level of spending restraint.
At every Budget Finance Minister Grant Robertson has presided over, he has spent more than he promised he would at the previous one. This year is slated to break that trend, with new spending in Budget 2023 capped at $4.5 billion – the same level forecast in May this year.
“The Budget Policy Statement I have presented today confirms the Government will run a prudent fiscal policy and return spending to normal levels following the Covid emergency response,” he said on Wednesday.
“This position will support the direction of monetary policy to bring inflation down.”
New spending will be focused on “getting the basics right”, supporting families with cost-of-living pressures and creating a “high-wage, low-emissions economy”.
The Budget Policy Statement said the Government would take a conservative approach to funding new initiatives.
“Budget 2023 will accordingly require difficult trade-offs. The Government will be closely examining existing spending to identify opportunities to reprioritise spending towards higher-value initiatives,” it said.
“Over the past six months, more than $3 billion of unused spending – mainly from Covid-19 measures – has been returned, including $1.6 billion in October 2022. This has created space to fund emerging priorities like the fuel tax cut and half price public transport, while also keeping a lid on our low levels of public debt.”
Robertson and Transport Minister Michael Wood also announced the phase-out of those cuts to fuel tax and public transport fares. The measures were first introduced in March and April, in response to skyrocketing prices at the pump as a result of the Russian invasion of Ukraine and general inflationary pressure.
Currently due to expire at the end of January, both subsidies will be extended through the end of March. The fuel excise tax will be reintroduced in two phases, with half of it returning at the start of March and the full 25 cents back by the start of April.
Public transport fares will return to full levels at the start of April, except for Community Service Card holders who will receive the subsidy permanently as announced at Budget 2022.
“We have deliberately timed the full phase-out of this support to coincide with lifts to support for families, students and seniors that will happen on the first of April,” Robertson said.
Those lifts include the Family Tax Credit, Superannuation payments, benefits, student allowances and childcare support.
Road User Charges, for diesel users, will expire at the end of January as planned. Because RUC can be purchased in advance, the Government expects diesel users will buy enough kilometres to be able to enjoy the discount for some time after January.
Economic projections released by the Treasury show the economy will contract 0.8 percent in 2023 with three straight quarters of negative growth. Real household consumption will flatten and dip slightly over the next couple of years before recovering by 2026.
Unemployment will peak at 5.5 percent in the June 2024 quarter – up significantly from the current record low of 3.3 percent – before falling back towards 4 percent in the tail end of the decade.
Despite this, wage growth is expected to continue to outpace inflation. It will slow somewhat from current rates but still remain positive through the end of the forecast period.
The shallow recession is roughly in line with forecasts from the Reserve Bank’s Monetary Policy Statement, when it implemented a massive 0.75 percent increase to the Official Cash Rate at the end of November.
The major difference comes in the inflation estimates. While the Reserve Bank said inflation still has some way to go and will peak at 7.5 percent across the last quarter of 2022 and the first quarter of 2023, Treasury officials were more optimistic.
They expect inflation has already peaked at around 7.2 percent and is now gradually declining. It will fall back within the target range of 1 to 3 percent by the end of 2024.
Nationally, house prices will fall 20 percent from their peak by the end of 2023, before returning to previous highs in early 2027. That’s more than double the trough anticipated in the previous set of projections, from May.
In contrast to the grim economic outlook, Treasury figures offered a rosy picture of the Government’s books. Government spending is still slated to return to surplus in the year ending June 2025, as previously forecast, but the deficit in the intervening years will be smaller than expected.
Net Crown debt will peak at just over 21 percent of GDP by mid-2024, before returning towards pre-Covid levels.
While new operating spending hasn’t budged since the last Budget, the Government has introduced a significant new capital allowance.
Capital spending is governed by a multi-year allowance. After Budget 2022, the allowance had $5.1b left for the next three Budgets. Another $2.2b subsequently went to the purchase of Kiwibank.
That allowance will now be inflated by $9.1b to make a total of $12b, though the Government says it may struggle to spend all of this.
“We do acknowledge constraints in the economy will be a factor in determining the size of the capital investment package that we agree for Budget 2023,” Robertson conceded.
However, there was still a need for new infrastructure and ways to fund it.
“The infrastructure deficit that New Zealand faces hasn’t gone away,” he said.
The Climate Emergency Response Fund (CERF) has also been topped up with another year of revenue from the Emissions Trading Scheme and with new projections estimating more carbon cash from the coming years than expected, which combined make up $2.1b.
That takes it to $3.6b ahead of Budget 2023. The CERF funded most of the climate policies announced this year and is able to support any initiatives included in the Emissions Reduction Plan or National Adaptation Plan.