Today’s Budget was relatively benign in terms of new big ticket spending items, with the exception of a $1 billion cost of living package in response to the rapidly rising cost of living and calls for the Government to do more to support the average New Zealander. The economic narrative was as expected, one of slightly weaker growth but acute inflationary pressure.

All about inflation

The lead up to today’s Budget release had been largely focussed on how the Government will respond to rapidly rising prices for goods and services in Aotearoa New Zealand. Some support has already been provided for those on welfare (a boost of $20-$42 per adult per week for those on existing benefits) and at the lower end of the income spectrum (by increasing the minimum wage to $21.20).

Inflation is at the highest annual rate since 1990. Mortgage interest rates have more than doubled for those who have rolled off a one or two-year mortgage rate in recent months, increasing mortgage costs for many households, with many more due to roll onto higher interest rates in the coming year.

The rapidly increasing cost of living was recognised today through the Budget’s announcement of a ‘cost of living payment’ for those earning less than $70,000 a year (who aren’t eligible for the Winter Energy payment). The payment is a total of $350, delivered in three monthly instalments. It’s estimated that about 2.1 million New Zealanders will qualify for this payment. In addition, the Government announced it’s extending the half-price public transport subsidy until August and extending the 25 cents excise tax reduction on fuel for another two months. They have also made a 50% reduction in the cost of public transport permanent for those with a Community Services Card. The total support package is worth approximately $1 billion.

Further, the Government is looking at introducing legislation to ban covenants on land as a barrier for supermarkets to access new sites and thereby restrict competition. This is in the hope of increasing choices between supermarkets to encourage greater competition.

The Treasury acknowledged that while inflationary pressures were initially expected to be transitory, they are now much more widespread and embedded, with non-tradables (domestic) inflation hitting a 30-year high earlier this year. The Treasury revised up its inflation forecasts significantly across the next five years, with inflation not expected to be back toward the Reserve Bank of New Zealand’s (RBNZ’s) 2% target level until 2026.

The RBNZ is responding to this by rapidly increasing the Official Cash Rate (OCR) and we expect to see another 50 basis point rate hike at the next Monetary Policy Review on 25 May 2022. The Treasury is forecasting the OCR to peak between 3.25-3.50% by the end of 2023 – in line with the RBNZ’s own forecasts.

Corelogic House Price Index and Treasury Forecasts

Economic growth more muted and should be watched closely

While economic growth in Aotearoa New Zealand has held up better than expected through the pandemic, a combination of rising interest rates, ongoing capacity issues and lower global growth has meant the Treasury has revised down its growth outlook from 2023 onwards. The Treasury’s forecast for the 90-day bank bill rate has been revised up by around 0.5 percentage points. The global economic outlook has dimmed, driven by the on-going war in Ukraine and the stringent COVID-19 pandemic response in China which is hampering economic output and demand there.

Despite the softer growth outlook, the higher inflation trajectory is strong enough to more than counteract any negative impact on nominal growth forecasts. Nominal gross domestic product (GDP) growth is stronger overall throughout the forecast period than in the 2021 Half Year Economic and Fiscal Update (HYEFU) (see table 3 below), resulting in an additional $40.5 billion in tax revenue. The Government’s books are now expected to be back in the black in fiscal year 2024/25, a year later than indicated in the 2021 HYEFU due to a weaker economic growth forecast.

The overall impact on aggregate demand from the Government’s spending profile is expected to be contractionary from 2023 onwards, and by more than suggested in the 2021 HYEFU. At a high level this would suggest that Government spending may be adding less to aggregate demand and hence inflationary pressure than previously forecast – answering the question of ‘how inflationary will this Budget be?’. The details will matter though as we look ahead as the timing of major investments and infrastructure spending still risks crowding out private sector spending in a highly constrained environment.

Fiscal Impulse

More debt to be issued to fund the Large Scale Asset Purchases (LSAP) bond buy-back and expenditure

The New Zealand Debt Management Office has increased its forecast bond issuance by a total of $26 million. This will cover $20 million of bond buybacks from the RBNZ as it unwinds its LSAP programme and another $6 billion set aside to cover off additional expenditure.