• The 2022 Budget was delivered against a gloomier backdrop. The latest forecasts suggest more subdued growth, more persistent inflation, and further tightening in the labour market.
• The headline numbers provided little surprise. The Government stuck to their previously signalled $6bn increase in baseline spending. And the accounts will return to surplus a full year later in 2025.
• The headline grabbing announcements were policy aimed at alleviating the uncomfortable rise in the cost of living. Including a two-month extension to fuel excise tax cuts and public transport subsidies.
• However, the Government is walking a fine line between boosting spending to tackle policy issues and exacerbating domestic inflation.
• Despite a stronger starting point the Treasury predicts the Government will run a larger fiscal deficit compared to the half-year update deliver six months ago.
• In line with expectations NZ Debt Management lifted gross debt issuance by $26bn, largely the result of the RBNZ’s QT programme (worth ~$20bn).

The 2022 Budget was delivered against a gloomier backdrop, with slowing global growth in the face of surging inflation, ongoing covid disruption (in China) and the War in Ukraine. At home, a clearly capacity constrained economy has helped to push inflation to a multi-decade high of close to 7%. And rising interest rates, in part due to the response of policy makers to fight inflation is starting to weigh on aggregate demand. The Budget presented a weaker fiscal outlook, although one that remains confined within the boundaries of new fiscal rules.

In terms of the headline numbers, there wasn’t too much new in the budget. As already signalled, the operating allowance for the Budget 2022 was kept very close to $6bn ($5.9bn). Despite a much stronger-than-expected starting point shown in the books, the Treasury predicts that the Government will generate an operating surplus in a full year later in 2025 June year. And overall, the fiscal numbers were a downgrade on December’s update. The new net debt measure (that includes a wider array of financial instruments) peaks at 19.9% of GDP in 2024.

The 2022 Budget delivered a big spend up, and next year’s budget was given a boost too. The focus of spending was directed at longer-term issues facing NZ (health reform and climate change). A departure from the covid response of the last two years. A massive $12.9bn was directed to health over the five years to June 2026. This sizable dollop of funding will in part provide the health system with a “clean slate” as it moves to a national system, following the deficit generating DHB era.

Today’s budget was also in the spotlight for the pressing issue of the rapid rise in the cost of living. On this the Government announced a two-month extension to its fuel excise tax cuts and public transport subsidies. Also announced was a cost-of-living payment of for low-income earners not currently eligible for the winter energy payment. However, there is a deeper inflation issue a play. The economy is capacity constrained, and the RBNZ is currently pouring cold water on it by delivering already aggressive interest rate hikes. There is concern a fiscal spending spree would exacerbate inflation and require even more aggressive monetary policy tightening down the road. The Treasury’s fiscal impulse analysis suggests that fiscal policy will contract in the years ahead. However, this will depend on the actual timing and composition of future spending. To illustrate what’s at stake, the Treasury’s forecast of domestic inflation (non-tradable) is projected to remains above 6% through to mid-2023. Any upward deviation from the plan risks further stoking domestic inflation pressures.

The Kiwi economy is expected to rebound following the Omicron disruption. But beyond that, a slowdown in economic activity is expected. Because the intense difficulty in finding staff and materials means it’s getting harder and increasingly expensive to eke out further growth. A significant weakening in household demand too is expected to contribute to the slowdown as rising interest rates and rising prices stretch budgets. Compared to the HYEFU 2021, the tweaks to Treasury’s main eco forecasts suggest: more subdued growth, more persistent inflation, and further tightening in the labour market.

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