“It’s a very tough trade-off,” says economist Christina Leung, describing the Budget juggling act that faces Finance Minister Grant Robertson and his Labour colleagues.
“They will face pressure to help Kiwis with the rising cost of living,” says the principal economist from the NZ Institute of Economic Research.
”But as much as the Government will want to support households that are struggling, any direct payments would have an inflationary effect, and quite an immediate impact as well.”
On top of that, the Government has the added headache of rebuilding costs from this year’s extreme weather.
Treasury has estimated the bill for that at between $9 billion and $14.5b for the coming years, Leung points out.
But the storms also highlight the need for increased investment to bolster climate change resilience and adaptation, she says.
Then, as always, there are all the competing demands from important sectors such as health and education.
Prime Minister Chris Hipkins has already dubbed Thursday’s big reveal a “no-frills Budget”.
But Robertson indicated last week that he will be aiming to find a balance between supporting New Zealanders with “the cost of living, delivering the services, recovery and resilience and fiscal sustainability”.
The Government had found $4 billion to work with through savings and reprioritisation, he said.
It’s not surprising that among all that, the New Zealand business community has low expectations.
“It’s an election year and we know that election years don’t tend to involve a lot of stuff, particularly from Labour governments, that are designed for the business community,” says Brett O’Riley, chief executive of the Employers and Manufacturers Association (EMA).
Delivering a pre-Budget speech to the EMA last month, Hipkins deliberately highlighted three areas for investment that resonate with business groups: skills, science and infrastructure.
“We’ve been pretty consistent about wanting to see some incentives for businesses to invest in technology,” O’Riley says.
“We’d also like to see, I guess, a real recognition around the labour market and some of the challenges that we’re seeing.”
A Government review of the innovation system is underway. “We’d be keen to see what direction that was taking,” he says.
“We know that when we get the innovation settings right, that will be good for business and we know that businesses have an appetite to invest in R&D.
“It would be good to see some movement and that could be a tax break, it could be an expanded amount of funding into that area, it could be encouraging the science community to work more closely with the business community. All of those things would be welcome.”
A survey of more than 500 small and medium-sized businesses this month found the majority aren’t holding out much hope for anything as significant as a tax break in the Budget.
According to MYOB’s latest SME Snapshot (a nationwide survey of more than 500 owners and decision-makers at small and medium-sized enterprises) nearly two-thirds (62 per cent) are not confident that the Budget will deliver benefits for businesses like theirs.
Just under a third (32 per cent) were “quite” or “very” confident it would, and the remainder were unsure.
When it comes to what business would most like to see announced, topping the list is policy that delivers a reprieve from spiralling costs – with 44 per cent wanting the company tax rate cut from its current 28 per cent to 25 per cent.
That was followed by a further 30 per cent who wanted to see a permanent reduction in the cost of public transport and fuel.
“The call for a slight reduction in the company tax rate is a perennial feature on the Budget wish list for local SMEs,” said MYOB spokesperson Jo Tozer. “However, in this high-inflation environment, it’s also understandable that businesses are seeking some relief from rising costs.”
While businesses were doing it tough, they still strongly supported investment in improving or safeguarding the future of their communities, she said.
“Most recognise there may not be a great deal in it for them and are therefore keen to see the Government prioritise spending in areas like healthcare, infrastructure and skills training.”
O’Riley agreed: “Business wants to see the Government acting responsibly.”
“There’s huge pressure on law and order, there’s huge pressure on the health system and there’s huge pressure on education,” he said.
“All of those things impact the business community in various ways. So we want to make sure those core services are well-funded and that there’s a real recognition that we are short of teachers, we are short of nurses, we are short of specialists in those areas, we’re short of skilled people and infrastructure.”
Business was looking for signals, through the Budget process, that the Government was going to be investing in those areas and would encourage people to migrate to New Zealand, he said.
“The Budget, of course, is a very important financial document, but it’s also important with the signals that it sends to the rest of the world.”
Unfortunately, the Government won’t have a lot of money at its disposal with which to send those signals.
“The fact that we’ve got a slowing economy, that potentially constrains the Government’s ability to increase its tax revenue,” said NZIER’s Leung.
So finding the funds for rebuilding might mean crowding out other government spending in areas such as health, education, transport and housing, she warned.
With interest rates rising, any new spending would also have to be weighed very carefully against the cost of borrowing, she pointed out.
Despite the “no-frills” label being attached to the Budget, ANZ economists said they expected it “to add a little more stimulus to an already capacity-constrained economy”.
“That’s still ‘frilly’ as far as inflation and the RBNZ is concerned,” said ANZ senior economist Miles Workman.
“While fiscal policy is the right tool to respond to cyclone Gabrielle, the decision not to fund the rebuild by increasing taxes or introducing a levy means the response will require reprioritisation of spending,” he said.
“And to the extent that that doesn’t cover the cyclone’s tab, it’ll likely mean higher-than-otherwise interest rates as the RBNZ responds to any inflationary implications of the larger deficits, resulting in reduced private-sector activity. There is no such thing as a free lunch.”
Westpac economists expect the Budget to show a moderate deterioration in New Zealand’s fiscal position compared to the Half-Year Economic and Fiscal Update.
“We have taken the recent Government announcements of a ‘no-frills Budget’ at face value and factored in only limited additional spending focused on cost-of-living pressures and cyclone recovery,” said senior economist Nathan Penny.
“Crucially, we expect Treasury to factor in a weaker economic outlook, translating into lower tax revenues in future years.”
That would mean the operating balance returning to surplus one year later than previously forecast, net debt to shift modestly higher, and for a moderate lift in the debt programme, he said.
In other words, the Crown would not be back in surplus until 2025/26, as opposed to current forecasts of 2024/25.
“Notably, though, the Government still meets its fiscal rules of running small surpluses allowing for economic conditions,” Penny said.
“To get there, we expect the Government will run a tight ship.” That means no increases to the Budget allowances as they were signalled back in December. Election sweeteners will have to wait, if they come at all.
It was a “very tough trade-off”, Leung said.
“We know that fiscal policy transmits through the economy faster than monetary policy, so any increase in government spending or tax relief would just add to inflation pressure and risk the Reserve Bank going higher for longer.”
That could mean signalling that more of the spending would be spread over longer timeframes that won’t add to this year’s inflation woes.
“If it’s something that is long-term and allows businesses and households to plan around it, then that could potentially limit the damage,” Leung said.
“If it is not like a sugar hit but rather it’s like a planned programme of spending.”
In a period where private-sector spending was easing, that did allow some room for government spending on infrastructure and housing, “to help make use of some slack over coming years as private-sector demand for resources eases”.
“There will be some investments that will still make sense, but the threshold for investing will be high.”
Increasing borrowing would make the Government less resilient in the face of any future emergencies, she said.
”So while they can dip into the kitty ... they would want to maintain credibility in terms of both their operations and the Reserve Bank.”
The Treasury always published the “fiscal impulse” delivered by the Budget, to give some guidance on how inflationary the Budget would be over the years, in terms of spending versus taxation, Leung said.
“Certainly, there will be interest in whether that fiscal impulse will intensify inflation further.”
As for a specific sweetener for business, the EMA’s O’Riley has one thing at the top of his wish list.
It was hard to raise debt to invest at the moment, so something that allowed businesses to depreciate investment costs early in the cycle would be very welcome, he said.
“Singapore, with their changes, allowed for 75 per cent depreciation in the first year. That was particularly aggressive.
“We may not have to be quite that aggressive, but something that really incentivises businesses to invest, that will have all sorts of flow-on benefits as well.
“It would be great to see that in the Budget. That would enable us to really be the modern digital economy that can meet New Zealand’s sustainability objectives in a way that is really long lasting rather than just short-term fixes all the time.”
The Kiwi is under pressure as the US dollar rises on expectation of higher interest rates.