Spending hike has eyes on inflation

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

Opinion

Finance Minister Grant Robertson has described his 2023 Wellbeing Budget as straightforward and practical for less than simple circumstances . . . the National Party has labelled it the Blowout Budget with “nothing for the majority of hard-working New Zealanders”.

As expected there is support for families struggling with the cost of living. Rather than making Working for Families more generous, that comes through abolishing prescription co-payments and free public transport for children, both from July this year, and the big-ticket item of an extension of 20 hours a week of free early childhood education to two-year-olds, costing $1.2 billion over four years, but not starting until March next year.

A signalled minor tax change is not to index tax brackets to inflation as many have called for, including the Opposition, but rather to collect an estimated $350m more tax from the wealthy who funnel income through trusts — with the tax rate for trusts increasing to 39c to align with the top income tax rate.

Robertson’s sixth Budget also has billions of dollars more spending and borrowing than was foreshadowed six months ago — with hikes to both operational and capital expenditure.

The biggest spending is on infrastructure and cyclone recovery, including $6 billion in initial funding for a new National Resilience Plan. Capital expenditure over the next four years is budgeted to increase by $20.5bn, $8.5bn more than was planned in December.

Operational expenditure increases by $4.8bn over the next year, $300m more than had been planned; the next three Budgets each have $500m added to operational expenditure. Robertson has also left something of a war chest for election year — an unallocated operating contingency of $5.1bn.

Treasury is forecasting the result of all this to be a $7.6bn deficit next year — up from $7bn this year — and the government books not getting back into surplus until 2026, a year later than planned.

However, it sees inflation dropping to 3.3 percent next year and 2.6 percent in 2025. Treasury also predicts GDP growth of 3.2 percent this year — a far cry from gloomy previous predictions of a long but shallow recession this year, which had hung heavily over Labour’s re-election chances — but only 1 percent GDP growth in 2024.

Core crown debt is seen rising to $181bn in 2027 (37 percent of GDP) up from $128bn now and $59bn when Labour took office in 2017.

Robertson said he did not think the extra spending in the Budget meant the Reserve Bank would need to hike interest rates further than otherwise to bring down inflation, although many economists and the National Party disagree with that assessment.