To spend or not to spend?
Robertson’s Budget is facing Catch-22
Finance Minister Grant Robertson will need to be on top of his game this week to land one of the most difficult Budget balancing acts New Zealand has seen for years.
We’re at a strange point in the economic cycle. Fiscal policy needs to be cautious and measured, to avoid adding to inflation.
But the Government can’t afford not to deal with long-term underinvestment in vital infrastructure areas like health.
It’s Catch-22 for Budget 22, as ANZ economist Miles Workman cutely observed last week.
If there’s one thing Robertson has going for him on Thursday, it’s that it isn’t an election year. He has space to try to reset the political narrative around government spending.
The whole economic cycle has been weird since Covid hit.
Due to variables like Wall Street anxiety, war in Ukraine and China’s commitment to a “zero-Covid” policy, there are few signs that things will settle down soon.
What we do know is that the fiscal and monetary policy response to Covid lockdowns left too much money in the system.
The latest card transaction data shows consumer spending is still on the rise as we emerge from the gloom of the Omicron wave. We might be complaining but inflation is still yet to bite the real economy.
Stats NZ research to March also showed New Zealanders’ median wealth is higher now than when the pandemic started.
So the economy has been strong, though we can all see it’s a false reality based on emergency stimulus.
Now interest rates are rising and cash is going to start coming out of the economy fast. The sharemarket and housing market are falling as investors look ahead to higher rates and tougher times.
All of this might just be part of the price we pay for avoiding a much more serious economic crash during the pandemic. But it’s certainly not a great time for governments.
Across the Tasman, Australia’s conservative Liberal Government is in trouble. The Aussie election is next weekend and polling suggests Prime Minister Scott Morrison is going to get turfed out.
Voters aren’t looking back with any kind of gratitude for Australia’s relatively strong Covid response.
They are focused squarely on the inflation and rising interest rates hitting them in the pocket. And they blame the Morrison Government.
After the Reserve Bank of Australia hiked interest rates this month, the Labor party argued that Morrison’s economic credentials were “shredded”.
Morrison argued the hike reflected Australia’s “journey out of the pandemic”.
So it’s basically just like here, except that the political stripes of the parties involved are reversed.
If nothing else, that should be a reminder of how silly and tribal most of the political discourse about inflation has been to date.
But it appears no amount of pithy asides in Sunday business columns will change that discourse.
Incumbent governments are going to have to find their own ways to placate their grumpy electorates.
That’s not easy in an environment where throwing money at the problem no longer works.
For Robertson and Labour, the quicker this cycle plays through the better. Their best-case scenario would be a short, sharp economic slump — ideally not an actual recession — that knocks the stuffing
out of inflation.
But with so much economic direction still being set by international forces, there are no guarantees that kind of precision can be achieved.
How hard and fast the US Federal Reserve lifts rates will determine how far markets fall.
What happens in Russia and Ukraine will determine what we pay at the petrol pump.
China’s stubborn insistence that Covid must be stamped out at all cost not only threatens to prolong global supply chain issues, it now threatens to seriously dampen global economic growth.
Its effect is both inflationary and deflationary.
It would be great if those opposing forces just cancelled each other out.
Unfortunately, they might end up being stagflationary — delivering high inflation and low economic growth at the same time.
So, against that backdrop, what to expect on Thursday?
It’s been well signalled that the big spending bump will be on health. Almost everything else — climate
change, immigration and workplace training — has been or will be announced and accounted for ahead of time.
That’s the modern Budget style. It allows the Government to keep the focus tight, and where it wants it.
But for many of us the real story will be in the fiscal detail — and how Robertson frames those details.
That will offer clues to where we are headed and how the Government will play it next year when the political stakes are much higher.
The upshot is we have a Government sitting in a strong fiscal position but with limited capacity to spend without adding to inflation woes.
To complicate things, its fiscal position is likely to look worse across the next year.
By this time next year we could see inflation coming down but much more pressure on economic growth — possibly even a technical recession.
Ironically, that would allow Robertson to unleash some more targeted spending in Budget 2023.
That’s something politicians quite like to do in election years (even though they’ll never admit it).