Four things to look out for in Budget
Finance Minister Grant Robertson delivers Budget 2022 on Thursday. Here are four things to watch for:
1. Will the Government commit to new, perhaps temporary, policies to ease the pain of inflation?
Robertson is under political pressure to use the Budget to address the “costof-living crisis”.
It is the Reserve Bank’s (RBNZ) job to keep inflation in check, and some factors pushing prices up are out of the Government’s control — higher oil prices due to the Ukraine war and supply chain hold-ups due to Covid. Immigration and other policy settings also impact inflation.
Nonetheless, households will want some reprieve. Eyes will be on whether the Government extends its temporary fuel tax cut and continues to halve public transport fares.
The Government did not include these policies in its Emissions Reduction Plan on Monday, suggesting extensions are off the cards, or will be sold as ways of soothing inflation pain via the Budget. Robertson may provide lowincome households more support via the welfare system. However, major new boosts are unlikely.
Economists stress any support should be targeted to avoid exacerbating inflation.
2. By how much will new operational expenditure increase, once spending on health reforms is stripped out?
Robertson has signalled a large portion of the $6 billion increase in operational expenditure pencilled in for Budget 2022 will go towards reforming the health system.
Given this expansion is about twice as large as usual, it will be important to examine how much of the “one-off” hike is in fact going to a major “one-off” long-term investment in health.
Spending on health reforms may also include writing off District Health Board debt.
The other major Budget 2022 focus — addressing climate change — is mostly being paid for using revenue generated from the Emissions Trading Scheme.
Robertson on Monday announced $2.8b will be put towards reducing carbon emissions over four years.
This spending will come over and above the Government’s operational and capital allowances.
3. How much more debt will the Treasury issue to help the RBNZ unwind its quantitative easing programme?
During 2020 and 2021, the RBNZ created money to buy $53b of New Zealand Government Bonds (debt), which the Treasury issued to pay for Covid-related expenses.
But now the economy is overheating, the RBNZ is trying to increase the cost and decrease the supply of money in the economy. It’s trying to get rid of the government bonds bought in 2020 and 2021.
Rather than sell back to the banks, the RBNZ is required to sell them to Treasury. It has committed to selling $5b of bonds a year, starting July.
Treasury will need to borrow more to help fund the buybacks.
In its last bond issuance programme in December, it forecast issuing $64b of bonds between 2022/23 and 2025/26. Economists expect it to increase by $25-$30b.
4. By how much does Treasury see house prices falling?
Economists see the Treasury downgrading its economic outlook from its last update in December.
The Russian invasion has since created uncertainty on the geopolitical front and hiked fuel costs. Central banks have committed to tightening monetary conditions relatively aggressively, and Covid-19 is still disrupting supply chains.
Inflation is expected to support the Government’s tax take. But it is expected to take until 2025 for the books to return to surplus.
House prices falling back from astronomic levels will also affect the economic outlook. The country’s housing stock was valued at $1.76 trillion at the end of 2021, according to the RBNZ — five times the value of GDP.
Treasury, in December, forecast prices falling by only 0.2 per cent in the year to June 2023, before being relatively flat. However, it is likely to downgrade these forecasts.