by Nick Clark, National Manager General Policy
At a Glance
- Big spending Budget.
- Emphasis on cost of living, health, and climate change, plus ‘business support’ and Māori.
- Surplus return delayed a year.
- Next year’s will be even bigger.
The Big Picture: Hey Big Spender
Budget 2022 is being sold by the Government as putting New Zealand on a path to a ‘Secure Future’. The Government considers its new and increased spending and its wider reform agenda (e.g., climate change, three waters, income insurance, and health reforms) essential for wellbeing. It also extended ‘targeted support’ for cost of living pressures.
Huge increases in government spending and an expansion of the state will have profound impacts on the economy and on society. But is a bigger and more activist state the best way to achieve a ‘secure future’? Or would it make New Zealand less productive, less competitive, and less nimble to respond to inevitable future shocks – so making us less secure? Can the Government implement its ambitious, costly, and complicated reform agenda? And even if it can implement them will they result in improved outcomes for New Zealanders? These are big and important questions.
Operating spending in the coming year is forecast to be $127 billion, a little lower than the current year’s (which had been inflated by Covid support) and nearly $20 billion higher than the year before. It’s forecast to rise to $138 billion in 2025/26 but this doesn’t include new spending that will be announced in subsequent budgets so spending will most probably be a lot higher by then.
The operating deficit will be $19.0 billion this year. Over the next few years revenue is forecast to increase faster than spending and a surplus is expected to be restored from 2024/25. But if spending is higher than forecast and the economy struggles to generate revenue growth a return to surplus could yet be pushed out.
A couple weeks before the Budget the Government also announced two new fiscal rules. The first was an operating surplus target of 2% of GDP and the second was a 30% of GDP limit for net debt, a new measure factoring in a wider range of assets and liabilities than before. The debt rule gives the Government considerable room to increase debt. Disappointingly there isn’t a target for operating spending or any rule for spending to meet a value for money test.
If you thought this year’s was a big Budget just wait till next year. There’s the small matter of a general election to be held later in 2023 and Labour is behind National in the polls. We can expect even more spending and maybe some ‘targeted tax relief’ aimed at low-to-middle income earners Labour wants to keep on-side come election day.
The Big Five Priorities
Budget 2022 has five major emphases for spending:
- Cost of Living
The Government has clearly been rattled by high inflation eroding people’s spending power, especially among low-to-middle income earners. Opinion polls cite the cost of living as voters’ biggest concern and it has been a factor in Labour’s decline and National’s rise. So, the Budget includes over $1 billion of ‘targeted support’, most of it slated to be temporary for the coming 2022/23 year:
- $814 million operating spending for a ‘cost of living payment’, giving $2.1 million people aged over 18 earning less than $70,000 and ineligible for the Winter Energy Payment $350 in three monthly instalments starting on 1 August. The payment is around $27 per week for the three months.
- $235 million operating spending to extend the temporary reductions in fuel excise duty and road user charges for a further two months.
- $130 million operating spending (plus $2 million capital spending) to extend the 50% reduction in public transport fares and a new 50% fare discount for Community Services Card holders for a permanent reduction for them.
- $73 million operating spending to extend the Warmer Kiwi Home programme until June 2024.
- $11 million operating spending to progress a Commerce Commission recommendation to remove barriers for new retailers to enter the market.
The Government blames Covid-19 supply chain pressures and rising energy prices from the Russian invasion of Ukraine, but it ignores the impact of extraordinary monetary and fiscal stimulus fired over the past two years. The Reserve Bank is doing its bit to withdraw monetary stimulus as it hikes the OCR and engages in quantitative tightening but the Government isn’t doing enough to help it. Although the cost of living package is well-intentioned, at least some of this spending will be a fiscal stimulus and could add to inflationary pressures, making the Reserve Bank’s job harder. This would be especially so if the support were to be extended further.
- Reforming the Health System
Budget 2022 will provide massive funding for health. This includes (over four years):
- $11.1 billion operating spending to set up the new health system, including clearing DHB deficits and addressing future cost pressures. The Government promises in its words a more streamlined and less bureaucratic health system meaning a greater focus on care and make sure it has the workforce to succeed.
- $202 million operating spending for specialist mental health and addiction services.
- $1.3 billion capital spending to invest in health infrastructure.
- $191 million operating spending for a two-year funding boost to ensure more medicines available to more New Zealanders.
This all sounds good in a press release, but will the Government be able to ensure the money is well spent with value for money and implement the reforms to meet a goal of better health outcomes?
- Climate Emergency Response
Budget 2022 placed a big emphasis on climate change, with the Government’s Emissions Reduction Plan and associated big ticket spending announced a few days before the Budget. Announcements amounted to $2.9 billion over four years from the $4.5 billion Climate Emergency Response Fund (from ETS revenue). This includes:
- $1.3 billion operating spending and $2 billion capital spending to decarbonise the transport sector and cut transport costs for New Zealanders. It includes funding to help deliver mode-shift, measures to increase public transport capacity and encourage uptake, and financial assistance to help people shift to low emissions vehicles.
- $764 million operating spending (plus $1 million capital spending) to fund industrial decarbonisation initiatives and to support a transition to a highly renewable electricity system.
- $156 million operating spending and $191 million capital spending to establish native forests at scale, by developing long-term carbon sinks and improving biodiversity.
It’s unclear how much of this fire hose of funding for what is a long list of programmes will provide good value for money.
The primary sector did not escape the spray or the questions about value for money. In total $710 million (over four years) was allocated (1) for efforts to reduce agricultural emissions ($380 million) and (2) to expand the contribution of forestry to reduce carbon and produce green alternative fuels ($330 million).
Within agriculture there was $339 million for accelerating development of greenhouse gas mitigations; $6 million to develop phase 1 of the He Waka Eke Noa pricing system; and $35 million to support farmers, growers, and Māori entities to transition to a low emissions future, mostly information and communications to help shift practices. The money is one thing but what about the regulatory landscape that impedes uptake of new technologies, like feed inhibitors and gene editing?
Within forestry there was $256 million to boost carbon sequestration, including boosting native forest planting, and $74 million towards increasing woody biomass as an alternative to coal.
- Supporting Business Growth
The Budget provides funding for supporting businesses, including (over four years):
- $148 million operating spending to support Industry Transformation Plans in construction, advanced manufacturing, agritech, digital technologies, forestry and wood processing, food and beverage, and fisheries.
- $116 million operating spending and $76 million capital spending to boost the Regional Strategic Partnership Fund to invest in local projects tailored to particular regions.
- $1 million operating spending and $100 million capital spending for a Business Growth Fund to improve access to capital for small to medium sized enterprises.
- $316 million operating spending to extend the Apprenticeship Boost Initiative, Mana in Mahi, and the Māori Trades and Training Fund.
- $61.9 billion over the next five years in Crown infrastructure investment, including Auckland light rail, water infrastructure, and rolling stock for rail.
Again, while these spending initiatives are well intentioned and many may even be necessary it’ll be important to ensure there’s a strong value for money test applied to projects funded.
- Supporting Māori and Pacific Aspirations
Budget 2022 makes a big spend in Māori and Pacific initiatives, including (over four years):
- $580 million operating spending to support the hauora Māori health services and support for Whanau Ora commissioning agencies.
- $162 million operating spending and $5 million capital spending in Māori climate change action, and equitable transition programme, and the Takutai Moana Financial Assistance Scheme.
- $155 million operating spending to support job opportunities for Māori, by continuing the Cadetships Programme and encouraging public sector procurement opportunities for Māori businesses.
- $249 million operating spending and $105 million capital spending to promote teaching and learning of te reo in schools and develop Māori media sector.
- $76 million operating spending to support Pacific health providers.
- $47 million operating spending for Pacific Science Technology Engineering Arts Maths Futures and Tupu Aotearoa.
Primary Sector Initiatives
Vote Agriculture, Biosecurity, Fisheries, and Food Safety contains appropriations of just under $1.2 billion for the 2022/23 financial year, of which:
- Agriculture: $443 million
- Biosecurity: $459 million
- Food Safety: $120 million
- Fisheries: $83 million.
In addition, Vote Forestry contains appropriations of $180 million for the 2022/23 financial year
Primary sector initiatives announced in Budget 2022 include (over four years):
- $118.4 million for advisory services to support farmers, forestry, growers, and whenua Māori owners to accelerate sustainable land use change and lift productivity.
- $40 million to help transformation in the forestry, wood processing, food and beverage and fisheries sectors through Industry Transformation Plans.
- $31.6 million to help maintain and lift animal welfare practices.
- A total food and fibre sector package of more than $1 billion, including climate change and pre-Budget announcements, such as the $710 million to tackle agricultural emissions and accelerating carbon sequestration through forestry, and $110 million to boost the biosecurity system.
Fiscal and Economic Update
Budget 2022’s economic forecasts are less rosy than last year’s with weaker economic growth and higher inflation, higher unemployment, and higher interest rates. Impacts of a slower economy on tax revenue and higher spending mean a one year delay to a return to fiscal surplus.
Table 1: Economic Forecasts 2020/21-2025/26
March Years | 2020/21 (Actual) | 2021/22 (Forecast) | 2022/23 (Forecast) | 2023/24 (Forecast) | 2024/25 (Forecast) | 2025/26 (Forecast) |
Real GDP (Production Measure, annual % change) | 5.3 | 1.7 | 4.2 | 0.7 | 1.6 | 2.5 |
Consumer Price Index (annual average % change) | 3.3 | 6.7 | 5.2 | 3.6 | 2.7 | 2.2 |
Unemployment Rate (annual average %) | 4.0 | 3.1 | 3.3 | 4.4 | 4.8 | 4.7 |
Employment (annual % change) | 0.7 | 3.4 | 1.0 | 0.1 | 0.5 | 1.4 |
Current Account (annual % GDP) | -3.3 | -6.7 | -6.4 | -4.9 | -4.0 | -3.6 |
Exchange Rate (TWI) | 74.7 | 75.0 | 75.0 | 75.0 | 75.0 | 75.0 |
10-year Bond Rate (annual average %) | 1.7 | 3.2 | 3.5 | 3.8 | 4.1 | 4.1 |
90 Day Bill Rate (annual average %) | 0.3 | 1.8 | 3.4 | 3.6 | 3.6 | 3.6 |
Table 2: Fiscal Forecasts as % of GDP 2019/20-2024/25
June Years (% of GDP) | 2020/21 (Actual) | 2021/22 (Forecast) | 2022/23 (Forecast) | 2023/24 (Forecast) | 2024/25 (Forecast) | 2025/26 (Forecast) |
Core Crown Revenue | 28.6 | 28.6 | 28.9 | 29.1 | 29.4 | 29.8 |
Core Crown Expenses | 31.5 | 35.4 | 31.6 | 31.1 | 30.4 | 29.8 |
Operating Balance Before Gains & Losses | -1.4 | -5.2 | -1.7 | -0.6 | 0.6 | 1.5 |
Net Core Crown Debt (old measure) | 29.8 | 36.9 | 40.8 | 41.2 | 37.5 | 31.9 |
Net Debt (new measure) | 10.5 | 16.9 | 18.7 | 19.9 | 17.3 | 15.0 |
Total Crown Net Worth | 45.8 | 36.0 | 32.1 | 31.5 | 32.1 | 33.6 |
What Feds wanted.
Federated Farmers wanted the Government to focus on policies that will help deliver a strong economy which is productive and competitive. This means a market-based economy that’s open to the world and isn’t crippled by excessive and poor quality regulation or high taxes. Fiscal policy should be prudent and responsible, with spending growth contained and focused on delivering strong value for money.
Instead, the Government is spending up large and gambling on enough economic growth and tax revenue flowing to fund its largesse. Inflation and associated income tax bracket creep helps it by dragging more tax from low-to-middle income people which is then recycled through its spending programmes. A redistributive money-go-round is the Government’s alternative to my preference for smaller government and lower taxes which enable people and businesses to spend, save, and invest more of their own money on what they want.