An ordinary Budget delivered in extraordinary times

History shows us that Budgets delivered in the second year of a government’s term are normally safer and reserved for setting up year three when there is an election on the line and the need to make some bigger, bolder promises.

This year’s Budget followed that pattern, however what makes it different is that it’s been delivered in extraordinary times. Minister Robertson is negotiating from a very challenging fiscal position, one that the country hasn’t seen itself in for a number of years. Debt-to-GDP is the highest it’s been in 30 years, there are supply chain issues driven by a once in 100-year pandemic, inflation is back, interest rates are rising, and some economic commentators are even talking about a recession.

The Minister delivered this year’s budget confidently, and when you compare New Zealand to the rest of the world, it’s easy to see why. We have weathered the covid storm from an economic perspective far better than most countries in the OECD, and while inflation here is 6.9%, it’s higher in places like America and the UK.

This year’s Budget saw lots of spending on work programmes, here’s a quick wrap of the key announcements and what they might mean for you. 

The good bits

Health was certainly the winner today, with $11.1billion allocated which included $1.3b for health capital investments that will see a number of hospitals upgraded. There was also a record ongoing annual funding boost announced that will see $1.8b in year one, and $1.3billion in year two.

Parts of this budget show us that the government is directly facing into the cost-of-living challenges – and this is a good thing. The cost-of-living payment, which will see $350 paid to those earning under $70,000 over three months, or the extensions to the public transport subsidy, show they want to help employers to meet wage growth challenges. While it’s hard to say what overall impact this will have because the cost-of-living payments will end up at just $27 per week, it should result in less turnover for employers as staff don’t feel as impacted by the rising cost of living. There are also some watch outs around this spending that we’ll tackle further down.  

The many funded work programmes announced, like the $73m on insulation and heating retrofits, or the $76m for training primary care specialists, should have a flow-on affect for businesses as the money invested in wages to drive these programmes filters through to the wider economy.

One surprise was the regulation of the grocery industry with the immediate prohibition of the use of land covenants by the supermarkets, which have for years used these to create barriers to competition. This should be seen as another way of addressing the cost-of-living crisis too and encouraging more competition.

The bits to watch out for

Every year there is no announcement on shifting tax brackets, hurts middle income earners a little bit more. A full-time earner on minimum wage earns around $44,000 a year, which is only $4,000 below the 30% tax threshold. Until recently that threshold was the second highest in the country, which should technically be reserved for the wealthy. As wage inflation creeps up, the government will do well out of tax revenue from middle and low-income earners, and this will be funding a lot of the projects announced today. We appreciate that this government has campaigned strongly against moving the tax thresholds, however every year that goes by creates a stronger argument for action.

The Emissions Reduction Plan (ERP) was great, but there could have been more around sustainability. A few weeks ago, we published this article, which highlighted our shopping list to truly meet our climate change action needs. While there were some good announcements today, if we review this wish list, we see a lot is missing, for example, the transport subsidy isn’t the same as spending on updating the public transport network.

The unknown is how the government’s ERP will impact ETS prices, which is important to those businesses that have been stock piling credits in anticipation of prices going up. You can read more on our view around that here.

The government will also have to be careful it hasn’t just kicked the cost-of-living crisis down the road.  The cost-of-living payments only run for three months, while the public transport subsidies also run out in two. If everything comes off at the same time, it could create a spike in living costs and inflation could come back strongly. According to today’s speech, inflation has reached its top. However, with the supply chain issues ongoing, as well as a number of government initiatives artificially reducing costs, we think that was an optimistic call to make. The Covid response fund was officially closed today, with around $3b yet to be spent. We wonder if Minister Robertson is planning to use that to help temper inflation over the coming months?