Budget 2022: Long-term investment versus short-term relief

As households and businesses feel the pinch of rapidly rising prices, today’s Budget will set the political mood music for the rest of the Government’s term in office.

When Finance Minister Grant Robertson stands up at 2pm to hand down the Budget, he will be making a pitch about the importance of long-term investment in New Zealand’s infrastructure. In particular, Labour is hoping to put the health system on a firm financial footing as part of its flagship reforms abolishing district health boards and creating one mega health system.

Robertson will make the case that returning to surplus in 2025, a year later than projected – even as Government tax receipts have continued to be higher than expected – is a small price to pay for building up needed resources.

The country is, however, facing some significant economic headwinds. At 3.2%, the jobless rate is so low that the Reserve Bank says employment is ‘‘above its sustainable maximum level’’. Add the fact that the borders have only just reopened and the nation’s immigration settings are being changed, New Zealand’s economy is extremely constrained.

While Treasury’s updated forecasts tomorrow will reveal its predictions, the capacity constraints in the economy – which pre-date but were exacerbated by Covid-19 – will likely crimp growth over the next couple of years. Annual GDP growth is predicted to slow from 3% now to about 2.2% between 2024 and 2026.

Higher interest rates, coupled with falling house prices, will be making a lot of people feel poorer and will reduce households’ discretionary spending.

The only question now seems to be whether the economy will have a hard or soft landing.

Overlaid on top of all of this is inflation, now running at 6.9%, the highest since 1990. This is hitting a lot of households in the hip pocket, affecting goods and services the hardest.

With the release on Monday of its first Emissions Reduction Plan, the Government has already announced the climate part of its long-term ambitions. Now comes health and the rest.

The biggest unknown in this Budget is whether there will be any measures to relieve that costof-living pain that is clearly being felt. Labour has attacked a proposal by the National Party to adjust tax threshold and index taxes to inflation, so tax relief is highly unlikely. The slashing of the petrol excise and diesel road user charges in mid-March has helped on the one hand, but has already been gobbled up by petrol rising back over $3 per litre.

That leaves scope for adjustments to Government payments such as Working for Families, or the winter energy payment. If the Government decided to be radical it could simply send every taxpayer a oneoff cheque – but even if that were desirable, the politics of that are certainly not a slam dunk.

The overall question is whether this Budget will be the vehicle by which Labour tries to tamp down the blame on the Government for the current cost-ofliving crunch. Or whether it will proceed with its long-term plans and bank on inflation abating, tourism slowly firing back up, and any frostiness out in the electorate thawing.