Liam Dann: Economy has 'headroom' to handle challenges

Finance Minister Grant Robertson during the Budget presentation. Photo / Mark Mitchell

OPINION:

"New Zealand's economic recovery continues, even as inflation and capacity constraints start to bite."

That's not me being overly optimistic about the country's outlook.

That's the first line of S&P Global Ratings' dispassionate take on Budget 2022.

"The stable outlook on our ratings on New Zealand is supported by our expectation that there is enough headroom within the current rating to address potential risks."

Did you hear that? We've got the headroom people!

It's good to step back and consider how economists see us from afar.

Because right now, I fear we are starting to lose perspective.

For many local commentators, Budget 2022 seemed just another opportunity to complain that the country is going to hell in a handbasket.

I get it. It's grim out there.

The weather has packed in. Everybody seems to be battling a cold. Or Covid. Or anxiety about whether they have Covid or a cold.

Stock markets are crashing, house prices are falling and the price of everything else is rising.

It's easy to let the gloom set in.

Recession risk is real but with record-low unemployment, we can handle a hard landing.

We can't afford to use a tough economic cycle as an excuse to ignore longer-term problems.

S&P Global Ratings is clear, the baseline for New Zealand is a solid economy.

They are confident we can weather the downturn we are about to go through without any change to our credit rating.

The big fiscal stuff is fine. We have plenty of other issues to worry about.

So it doesn't matter what the sovereign debt track does to Act leader David Seymour's blood pressure.

It doesn't matter how loud retired politicians shout about spending cuts and a return to austerity policies.

What matters is that international markets and ratings agencies have confidence in our outlook. And that we do.

The world will let us know very quickly if and when we have a problem. Until then, it really doesn't care that much about us.

New Zealand is middle of the OECD pack for economic woe.

If things get worse in coming months (and we can be pretty sure they will) it will be because our major trading partners - the US, China or Australia - are leading the way.

"Our ratings on New Zealand reflect the country's sound and stable institutional settings, such as monetary policy flexibility and economic wealth," writes S&P Global Ratings.

Of course, they see the potential problems.

The reason this country has only an AA+ rating and not a AAA rating with S&P is to do with "high household and agriculture sector debt, dependence on commodity income, and financial system stability, including elevated property prices".

Which is to say, it is because of the usual suspects, the problems that have plagued this country for generations.

Is this Government making policy choices that will solve these issues? That seems like fair game for political debate.

I'm not yet convinced it is.

But we need to avoid panic about the current economic cycle even as we prepare for it.

There were details I liked about Budget 2022.

There was a new business growth fund to support and help small and medium-sized enterprises to grow.

The $100 million scheme partners with banks to provide equity funding for small business expansion at a time when debt funding is tough to get.

I'd like to see more of this kind of innovative thinking and government partnership with business.

There was the extension to the $230 million extension to the apprenticeship boost scheme until the end of 2023 - to support an expected 38,000 apprentices.

And then there was a commitment to tackling long-term challenges in the health and education sectors.

On a per-capita basis, these sectors were badly neglected through the decade preceding the pandemic.

Spending big to play catch-up now won't deliver Labour much political capital.

But it is vital they should be congratulated for a commitment to doing it anyway.

As voters, we have a bad habit of saying we want political policy with longer-term horizons then invariably failing to vote that way.

There were details in the Budget I didn't like as much.

I'm reluctant to begrudge people the $350 payment to deal with the rising cost of living, but sadly this kind of stimulus will just add inflation pressure.

The two-month extensions to fuel-tax cuts and public transport subsidies are expensive Band-aids on a problem that may be with us for much longer.

Whichever way you look at it, the Government is in a political bind on inflation.

As National leader Christopher Luxon hammered home in his response, the finer points of this Budget are likely to be lost on an electorate that feels it's going backwards.

Opposition leader Christopher Luxon speaks at the National Party Post Budget Breakfast at Eden Park. Photo / Jed Bradley

Luxon wasn't subtle in his critique of the Budget.

His speech was delivered in such broad strokes that it would have been interchangeable with the attack lines of Australian Labor leader Anthony Albanese or UK Labour leader Keir Starmer.

Inflation sucks and it's the Government's fault ... was the general gist.

It's simplistic, largely unfair but it is working all over the world.

That's politics. Let's not confuse political rhetoric with reality.

New Zealand isn't going broke. It's not sliding into Third-World status.

New Zealand is going through this big post-pandemic cycle with everyone else in the world and it is better placed than most to emerge relatively unscathed.