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New Zealand: a new fiscal normal

New Zealand remains one of Australia’s closest economic partners, and the two countries have had similar pandemic experiences with long periods of time closed off to the world. The 2022 New Zealand Budget, handed down on Thursday, sets out a roadmap for a post-pandemic ‘new normal’.

Firstly, New Zealand has introduced a new net debt measure which is broader and closer to the international norm. On this new measure of net debt, it is clear that New Zealand has one of the lowest net debt to GDP ratios in the world – even during the surge of pandemic spending. New Zealand net debt to GDP is at 20.0% in 2022, compared to 37.5% in Australia and even higher figures across the UK (76.1%) and US (95.8%).  

New fiscal rules have also been announced. A debt ceiling of 30% net debt to GDP will apply (using the new net debt measure). The ceiling is described as a “limit rather than a target” that is “flexible enough to allow a buffer against short-term shocks”. 

A new surplus rule also applies: once New Zealand returns to an operating balance surplus (the first surplus is expected in 2024-25) surpluses are to be kept within 0-2% of GDP. This will ensure new day-to-day government spending does not add to debt, while the debt ceiling still provides space for infrastructure and other policy spending.  

Overall, New Zealand is clearly mindful of rebuilding its fiscal buffers following the pandemic. However, these new rules are slightly looser than the strict fiscal policy in place before the pandemic, which saw New Zealand achieve annual budget surpluses from 2015 to 2019. 

Chart 1: Net debt as a share of GDP (%) and new net debt ceiling  

Policy-wise, the key focus of this Budget was health and climate change. Health reforms, the “most significant reform in a generation”, totals $13.2b across the next four years. On climate, a new $2.9b Emissions Reduction Plan has been announced over four years, with strategies, policies and actions to meet New Zealand’s first emissions budget. 

A $1b cost-of-living package has also been put forward, which include extending the fuel excise tax cut for two months (to mid-August) and a new cost of living payment to over 2.1 million low- and middle-income earners starting in August. 

This cost-of-living package comes as New Zealand’s annual CPI inflation reaches a three-decade high of 6.9%, significantly higher than Australia’s 5.1% (only a two-decade high). Drivers of inflation are very similar on both sides of the Tasman, as the war in Ukraine and supply chain disruptions have seen transport costs, food costs and the price of new housing rise rapidly. 

However, a key difference is that New Zealand inflation has been growing consistently and more rapidly than Australia’s since June 2021. Where Australian economic activity and inflation took a substantial hit from the Delta outbreak in the second half of 2021, New Zealand was less impacted. New Zealand inflation has been outside of the target inflation band of 1-3% since June 2021, while Australian inflation has only been (consistently) outside of our target band from December 2021.

This sustained and growing inflation, in part, led to the Reserve Bank of New Zealand (RBNZ) moving much earlier than the RBA. The RBNZ has lifted rates four times since October 2021, with the official cash rate now sitting at 1.5% (up from 0.25% during the pandemic). The RBNZ are expected to continue with aggressive rate increases across 2022 as inflationary pressure rises. 

Looking ahead, the combination of increasing interest rates and inflation may spell difficult times for NZ households, just as in Australia. The New Zealand labour market remains tight (with unemployment maintained at a low 3.2%) though some potential relief may come with last week’s border announcement, which sees New Zealand’s border fully reopened by the end of July – three months earlier than previously announced