Finance Minister Grant Robertson has taken a gamble on inflation, boosting spending and borrowing more despite calls from the Reserve Bank to slow down and help it in a battle to tame interest rates.
That gamble has funded a moderately-sized package of election-year goodies: 20 hours of free early childhood education was extended to 2-year-olds from 3-year-olds, $5 prescription charges have been abolished and the Government will build some 3000 additional public homes by June 2025.
There are other large initiatives too: Whānau Ora gets extra money, as does the Government’s Apprenticeship Boost scheme, which will spend $77.1 million supporting 30,000 new apprentices.
Those are funded out of a $4.8 billion operating allowance, up $300m from the target Robertson set himself in December and a multi-year capital allowance of $20.5b, up from the $12b Robertson set himself in December last year. The Government also unveiled a sneaky tax hike, lifting the trust rate to 39 per cent from 33 per cent, netting about $1.1b over the next four years. It will mean spending as a percentage of GDP will be 33 per cent in the next year and stay above 30 per cent through to 2027.
National has already come out against some measures, with finance spokeswoman Nicola Willis saying her party would scrap free prescriptions. She and her leader Christopher Luxon described it as a “blowout Budget”.
Luxon told Newstalk ZB’s Mike Hosking this morning the Government promised a “prudent” Budget, however what New Zealanders got was a “reckless” one.
“There will be more debt and higher interest rates.”
Luxon said inflation will last longer resulting in 60 percent of Kiwis paying more mortgage rates.
“And the sad thing is, you’ve got the Reserve Bank putting breaks on higher rates and Grant Robertson pressing on the accelerator.”
Luxon said he didn’t think free bus rides for kids were a good thing or free universal prescriptions were necessary.
“People will be in pain in the next six months.”
Luxon said he didn’t support the universal free prescription because there was a need for targeted support, and use funding in other health priorities.
He said what they really wanted to see was tax relief for middle-income earners but “we haven’t got it”.
Speaking about Government spending, Luxon said “it’s astounding” they have said we are carrying on spending.
“They have gone up 80 per cent in government spending and New Zealanders need to ask have they seen 80 per cent improvement in public service?
“A massive quantum of money going in and the quality we are getting is abysmal.”
Luxon said crime was a major issue.
“We have to get really tough on it, hard on it. We cannot accept this is going to be the new normal for us.”
Speaking to TVNZ’s Breakfast this morning, Willis said they preferred a more targeted approach that would see people with a Community Services card or a SuperGold card being helped another way - so that they can afford their prescriptions.
“At the moment, the country is spending a huge amount of money - and every dollar that we spend is adding to the deficit. It’s adding to the debt,” she said.
“And so New Zealanders are going to end up paying for that - three times - with higher taxes, with higher interest rates and with more debt in the long-run. So we’ve just got to be careful.”
Willis acknowledged that pharmacies were already working together with members of the public who had a Community Services card; making sure that those who could not afford their prescriptions still got their medicines.
National also supported the high-user - people who required ongoing medicines. They would support taking the $5 prescription fee away for them, she said.
“But for a lot of New Zealanders, that $5 fee is a small way - and those who can pay it, should.”
Robertson has not splashed the cash - 79 per cent of that $4.8b was just funding the cost of standing still, but economists are surprised the Government did not show more restraint and feel he may have neglected his role in the battle to tame inflation.
There was a chorus of fears the spending announced would put pressure on the Reserve Bank to continue hiking the official cash rate, currently at 5.25 per cent. That would put further pressure on the housing market, which Treasury already sees crashing to 21 per cent below its November 2021 peak, before beginning a slow slowly rebound in mid-2024. However, they stay well below the 2021 heights in the forecast period, which stretches to 2027.
Infometrics chief executive Brad Olsen said he was already reviewing his OCR forecast, which expected a 5.75 per cent peak.
“We’d already been expecting that the Reserve Bank needs to make two further 25 basis point increases - one in May and one later on in the year. Realistically though, with the level of government stimulus now coming forward, we’ve got to put that under review.”
Olsen said he was considering a peak of 6 per cent, or even higher.
“Six might not be enough - that is the challenge,” Olsen said.
Westpac Bank senior economist Nathan Penny, whose bank is already forecasting a 6 per cent peak, said yesterday’s Budget only made that more likely.
Penny said Treasury’s interest rate forecasts seemed optimistic.
“They’ve only got a peak in the OCR of 5.25 - even the Reserve Bank has essentially said itself it is thinking of going to 5.5, let alone the 6 per cent we have said they potentially will go to,” Penny said.
“We had thought the Government will stick closer to its Budget allowances and find more savings, but essentially the increase in spending of around $8b relative to the Half-Year [Budget Update from December] is a surprise,” he said.
ANZ economists also warned the Budget would put pressure on the bank to hike rates.
They cited a Treasury document saying an additional stimulus of 1 per cent of GDP would cause the OCR to rise by an additional 30 basis points.
“All up, it may be a ‘no-frills’ Budget insofar as its focus is a little narrower than recent Budgets, but there are frills here in a macroeconomic context, with increased government spending adding to an already too strong inflation impulse, and a little more government dissaving adding widening pressure to an already too-wide current account deficit,” the economists said.
Robertson said he had confidence in the forecasts of the Treasury.
“I believe where we end up will be a balanced position,” Robertson said.
Robertson also dropped an additional $500m into his next three Budgets, lifting their allowances from $3b to $3.5b.
“There is not a lot of discretionary spending ahead here. There is a choice there - people can decide that they don’t want to fund health and education properly, we took the choice to say that we did want to do that [fund them properly],” Robertson said.
The cost of inflation is hitting the Government’s books. Cost pressures ate up about $4.71b of the last Budget’s allowance and $3.79b of this year’s Budget. It comes down in subsequent Budgets to $2.8b.
Labour pivoted squarely to the centre in this Budget.
Apart from linking main benefits to inflation, which was announced earlier this year, there were no significant spending announcements for people on benefits or recipients of Working for Families.
Instead, Labour found a universalist streak, spending a whopping $1.2b on extending 20 yours of Early Childhood Education to people with 2-year-olds. Scrapping prescription co-payments, which is designed to help 135,000 people who avoid getting prescriptions for not being able to afford the $5 co-payment, will instead be available to all Kiwis, at a cost of $619m.
Free public transport for children up to 13 and half-price fares for people up to 25 were announced at a cost of $372m, and insulation subsidies will cost $403m.
All measures were designed to address the skyrocketing cost of living, but all could be eroded if the Government’s spending plans end up fanning the flames of inflation.
The health workforce has grown by thousands in the last two years.