How will the Budget create sustained outcomes for New Zealand?
Budget 2022 is one of few surprises, with the Government’s clear focus on addressing the short-term impacts of the rising cost of living, while continuing to push forward with its key priorities related to climate and the health sector reform. Treasury forecasts provide the context for the cost of living focus – highlighting the current economic uncertainty, with GDP growth forecast to reach a low of 0.7% in 2024 and inflation set to peak at 6.7% in 2022 before steadily decreasing.
The Government has focused on supporting low-to-moderate income New Zealanders to address short-term cost of living pressures, including the introduction of a temporary new cost of living payment of $350 to be paid over a three month period, and continued Fuel Excise Duty (FED) and Road User Charges (RUC) cuts for an additional two months. These measures are targeted at the short-term, aligned with the expected peak in inflation growth in 2022, however as the cost of living pressures continue the Government may come under pressure to continue these measures.
Alongside this, the Government continues to invest to deliver on its priorities including significant investment in the health sector to support the transition to Health New Zealand.
New Zealand’s real GDP growth is expected to peak at 4.2% by 2023, followed by a period of slower growth as a result of economic headwinds, including rising interest rates. GDP growth is forecast to reach a low of 0.7% in 2024, before increasing to 2.5% by 2026.
Inflation is expected to peak this year at 6.7%, and then to steadily fall to 2.2% by 2026. House prices are expected to decrease by 2.5%, and then remain unchanged. The employment outlook remains positive in the short-term, with unemployment anticipated to drop to 3.1% this year. However, it will then slowly increase over the following four-year period to 4.7%.
Net core Crown debt is expected to peak at 19.9% of GDP in 2024 ($84.6 billion), followed by a gradual decrease. Crown expenses remain high and steadily increase over the four-year period, reaching $138.2 billion in 2025/26. Government is expected to return to operating surplus in 2024/25.
New Zealand’s net zero future is a step closer with the release of the Emissions Reductions Plan (ERP), which outlines how the Government will achieve the first set of emissions budgets by 2035, and provides detail on how each sector is to reduce its emissions.
Emissions budgets are recommended by the Climate Change Commission and set by the Government. An emissions budget is a total quantity of emissions that is allowed to be released during an emissions budget period. Emissions budgets will act as stepping stones to reaching New Zealand’s 2050 target.
The first emission reduction plan will spend $2.9billion from the Climate Emergency Fund, however the Government recognises it only holds certain levers. As such, it is reliant on collaboration and partnerships with the private sector, iwi and Māori, communities, NGOs and civil societies to give life to the plan. Key investments include:
Key strategies for business include a national energy strategy, a national EV-charging infrastructure strategy, a transport climate research plan, a gas transition plan, a hydrogen roadmap, an action plan for decarbonising the industrial sector, a New Zealand Energy Efficiency and Conservation Strategy and a forestry and wood processing industry transformation plan.
It's great to see the Government commit fully to implementing the Regional Strategic Partnership Fund. We would like to see a good portion of that funding be allocated to diversify the Māori economy and create opportunities for sustainable growth in Māori business as we head into turbulent economic times.
We are pleased to see extra investment into the Māori Trades and Training Fund ($66 million) and investment into Te Ringa Hāpai Whenua Fund ($10 million). This support will provide a solid base for Māori business to diversify their skillsets and work toward the utilisation of their whenua for commercial use.
The $35 million investment into development of tikanga-based approaches to change farming management practices is a welcome announcement in Budget 2022. This will ensure a strong Māori input as we transition to a low carbon economy.
Unlike the previous two Budgets, there are no additional Covid-19 business support measures announced this year.
While there has been significant Government spending (c. $61.6 billion through the Covid-19 Response and Recovery Fund) to support businesses over the past two years, the next 12 months will likely remain a challenging period for small and medium-sized enterprises (SMEs) in New Zealand given rising costs, a tight labour market, and the ongoing effects of Covid-19 on certain sectors. This Budget does not include any further support for business beyond the c. $3.2 billion of spending already set aside for the existing schemes. While further business support measures would be welcomed by SMEs, the Government finds itself in a more difficult position to balance the needs of those businesses against the significantly higher inflationary environment in this current Budget. This includes considering the impact of any further stimulus on these inflationary pressures.
The Budget does announce the establishment of a $100 million Business Growth Fund which looks to improve access to capital for SMEs while allowing the owners to maintain majority control. The Fund is being developed alongside banks and we expect more details to come. This is a positive initiative, especially as SMEs continue to navigate their way out of Covid-19.
Unsurprisingly, as alluded to by the Minister of Finance in the lead up to Budget, Budget 2022 contains no significant tax changes. While there are several tax changes already on the horizon, they mainly look to make the tax system more “fair”. For example, a potential tax on payouts of retained earnings, further international tax changes for multinationals, and GST changes for gig and sharing economy platforms. What this Budget has not done is to pull the tax lever in response to some of the other challenges faced by New Zealand, including the continued rise of living costs.
Instead the Budget includes a “cost of living” payment of $350 tax-free spread over three monthly installments for those that earned less than $70,000 last year and are not eligible for the Winter Energy Payment from 1 August 2022. This payment will be administered by Inland Revenue.
The fuel excise duty reduction and the half price discount for public transport is also extended for a further two months, meaning these measures continue through to August 2022.
Tax revenue (across all tax types) has lifted in the current year and is expected to progressively increase year on year, rising from $96.8 billion this year to $130.9 billion in 2025/26. Much of this increase could be attributed to strong wage growth driven by a tight labour market and no bracket adjustments for inflation.
Finally, Inland Revenue will receive an extra $155 million over the next four years to increase its capability to collect tax debts and respond to emerging integrity risks. This seems to signal Inland Revenue will become more active in its enforcement activities going forward indicating the approach adopted by Inland Revenue during COVID-19 may be on its way out.
A year ago, Budget 2021 was reasonably upbeat. By contrast the structure of Budget 2022, as it relates to financial markets, was comparatively subdued. The economic environment, from both domestic and global perspectives, has shifted considerably across the past 12 months. Today’s Budget and updates from the Treasury reflect that shift.
As expected, the initial financial market response was fairly muted. While the Budget document contained some spending surprises, principally regarding targeted household support to address increases in living costs, from a big picture perspective, there was little the market was not prepared for. The announced fiscal stimulus prompted a mild appreciation in the New Zealand dollar and the interest rate swap curve.
Of particular interest was confirmation of increases to the New Zealand Government Bond programme. The New Zealand Debt Management Office (NZDMO) intends to issue an additional $25 billion of bonds across the forecast period - through to the 2025/26 financial year. The bulk of this additional issuance ($20 billion) will fund the repurchase of bonds held by the Reserve Bank of New Zealand (RBNZ), originally acquired under the Large Scale Asset Purchase programme as part of the bank’s monetary response to Covid-19. While interesting, and contributing to the nation persisting with a forecast deficit until 2025, the announcement was well flagged and did not materially impact markets. It is expected that the additional issuance will be absorbed without disruption, in part through New Zealand’s looming inclusion in the FTSE Russell World Government Bond Index. New Zealand sovereign debt will become a component of the index from November, expanding market demand for our debt.
Economic forecasts in Budget 2022, upon which the surplus in 2025 is built, appear to reflect both reasonableness and optimism. Projections for the Consumer Price Index (CPI) were materially elevated, suggesting current levels to be near peak and charting a path of gradual decline that leads to consumer inflation falling within the RBNZ’s target band (1% - 3%) in Q1, 2025. The most recent forecasts from the RBNZ (February Monetary Policy Statement) point to a return to within-band inflation in Q2, 2023. The RBNZ are scheduled to update those forecasts next week.
The lack of material financial market response to Budget 2022 is a positive in and of itself. No surprises.
Budget 2022 seeks to build on investments made in previous Wellbeing Budgets.
Budget 2021 sought to make a significant impact in the reduction of child poverty and hardship through increasing benefits and changes to the Working for Families scheme split across the 2021 and 2022 allowances. Budget 2022 looks to build on those investments to meet the Government’s child poverty reduction targets.
The Child Poverty Report, included in Budget 2022, shows the 2020/2021 rates on all nine income and material hardship measures in the Child Poverty Reduction Act 2018 are trending downwards. Specifically, since 2017/2018, there are:
66,500 fewer children living in households with very low incomes (after-housing-costs fixed line measure)
26,700 fewer children living in households with much lower incomes than typical households (before-housing-costs fixed line measure)
21,900 fewer children living in material hardship.
The most notable announcement is the change to child support payments. All child support payments will now be ‘passed on’ to sole-parent beneficiaries as income instead of being retained by the Government. This results in an estimated median gain of $24 per week, for 41,550 sole parent families.
This change, in conjunction with the recent changes to the Working for Families scheme and main benefit increase, and the new cost of living payment, is estimated to lift 10,000 - 18,000 more children out of poverty after the after-housing-costs measure during 2023/24. It’s also expected to lift 16,000 - 30,000 more children out of poverty on the before-housing-costs measure during the same period. However, without further policy interventions, Treasury projections estimate that lower incomes will not keep pace with middle-income households.
The Government’s commitment to reducing the impact of socio-economic barriers in schools is evident with the new Equity Index receiving $293 million of total operating funding and $8 million of capital funding to replace the old decile system.
Budget 2022 is also committed to improving the wellbeing of New Zealand’s disability community. $943 million will go towards the disability support system. This includes $735 million to fund cost pressures (including inflation) on Disability Support Services, $100 million to support a regional-based rollout of the Enabling Good Lives approach, and $108 million to establish a new Ministry for Disabled People.
$202 million has been allocated to mental health and addiction. This includes $100 million to strengthen specialist mental health and addiction services, and investment in the Mana Ake and Piki programmes to support the mental health of young people.
There is a clear focus on more equitable outcomes to improve wellbeing in Budget 2022. However, these initiatives will require continued focus, supporting policy and investment to ensure that the impacts of inflation and the projected risk of a widening gap between lower and middle incomes do not undo any progress achieved.
Andrew Jamieson shares his pre-budget expectations on what we might see from the Government to support New Zealand’s climate change agenda in Budget 2022.