Budget 2023 focuses on cost of living, cyclone recovery
Finance Minister Grant Robertson has delivered his sixth Budget, the last before the 2023 election, with a focus on cost of living, climate change, and rebuilding from Cyclone Gabrielle and the Auckland floods.
As Ministers had signaled beforehand, there is no significant change to tax rates, with money instead being focused on lowering family costs by increasing government subsidies. The lion’s share of new funding, 79%, goes into cost pressures for public services, including $1b for health sector wages and additional staff.
A recession is no longer forecast, but slower growth will mean that labour force growth (driven by high immigration) will outstrip job creation, leading to unemployment rising to 5.3%. Inflation is projected to return to the 1-3% target range in the second half of 2024, with wage increases exceeding inflation throughout the forecast period.
The response to Cyclone Gabrielle and the Auckland storms means higher operating expenses and that capital investment will be higher than previously forecast, increasing borrowing and pushing out the Government’s return to surplus by a year.
The Government highlighted four cost of living announcements as the centrepieces of the Budget:
- 20 hours free early childhood education expanded to include two-year-olds
- $5 prescription co-payment scrapped
- Free public transport for under-13s, half priced for under-25s
- Reducing power bills: 100,000 more insulation and heating retrofits
Political reaction
Minister Robertson was at pains to paint the picture that the ‘cupboard is bare’, highlighting that most funding had gone to cost pressures and that other initiatives Ministers would have liked to fund had to be deprioritised. He also made the point that the rebuild effort after Cyclone Gabrielle had materially affected the Government’s need to spend more money in the near-term, but that the track to return to surplus was still in place and net debt remains low by international standards.
The cost of living package measures have been designed to have broad impacts while managing the overall fiscal cost, and also have positive climate impacts.
National’s finance spokesperson Nicola Willis labeled it the “blowout Budget”, criticising the lack of tax cuts, additional borrowing, and the delayed return to surplus.
Key announcements
Childcare announcement: Families who were not previously receiving childcare subsidies would save an estimated $133.20 a week in childcare costs if a two-year-old child attended ECE for at least 20 hours a week. An additional $322 million available to ECE services to lift the pay for teachers to help them move towards parity with their counterparts in kindergartens. From 1 January 2024 there will be an increase of 5.3 percent to subsidies for playcentre, kōhanga reo and home-based ECE services.
Free prescriptions: The $5 co-payment for prescription medicines will be removed from July this year, making 31m prescriptions a year free. More than 135,000 adults did not collect their prescription because of cost in 2021-22. This is particularly the case for low-income families, Māori, Pasifika peoples, and disabled New Zealanders.
Cut price public transport: Free fares on buses, trains and ferries for children aged 5 to 12 and half price discounts for all passengers aged 13 to 24 from July 1 2023 (children under 5 are already free), and Total Mobility Users will be introduced from July 2023, when the current temporary policy of half price public transport for all users expires (permanent half price fares Community Service Card holders were announced last Budget). The Budget also funds public transport authorities to increase bus drivers’ wages to increase public transport capacity.
Expansion of insulation and heating retrofits: The Warmer Kiwi Homes programme will be nearly doubled in scale, delivering 26,500 insulation and heating retrofits per year for the next four years. Energy efficient hot water heaters and LEDs will be added as an additional product through Warmer Kiwi Homes, and also a subsidy scheme for mass market uptake of LEDs.
New National Resilience Plan: The Government is setting aside $6 billion to build back better with greater resilience from the recent Auckland floods and Cyclone Gabrielle, and protect New Zealanders from increasingly severe and unpredictable weather events. Another $100m will repurpose the Christchurch rebuild agency, formerly known as Ōtākaro Limited, to help Government organisations deliver infrastructure projects. Now known as Rau Paenga, the Central Crown Infrastructure Delivery Agency, will support organisations that don’t have day-to-day experience of delivering large, complex projects.
Health: The Health Budget will be boosted by $1.3b to address cost pressures. Over $1 billion will go towards increasing health workers’ wages and boosting staff numbers, with a focus on areas facing greatest demand. The funding includes $63 million for progressing safe staffing and allows for an additional 500 new nurses to be employed. PHARMAC’s funding for purchases increases from $1.186b to $1.311m.
Disability support: Budget 2023 will provide $863.6 million to help ease cost pressures on Government disability support services. Budget 2023 also makes half price fares for Total Mobility services permanent. The Government will end the Minimum Wage Exemption (MWE), which allows disabled people to be paid less than the minimum wage, by mid-2025 and introduce a Wage Supplement for employers of disabled people.
Education: Budget 2023 includes $1.2 billion in new infrastructure expenditure over a five-year period. This will deliver approximately 300 more classrooms and up to four schools. This will add approximately 6,600 student places to the School network. Budget 2023 extends the Apprenticeship Boost initiative to the end of 2024. The extension will enable an estimated 30,000 apprentices to start or continue. Based on projections of increased demand for tertiary education, $180.7 million is committed in Budget 2023 allowing the Tertiary Education Commission to fund 16,000 more full-time equivalent students in 2024 and 13,000 more in 2025 than previous funding levels would have allowed.
EV charging network and heavy vehicle subsidy: Major expansion of nationwide EV charging network to deliver 23 charging hubs with the private sector. Investment in public charging at community facilities for all towns with 2,000 or more people. The government will also allocate $30m over three years to provide grants towards the purchase of low emissions heavy vehicles, including trucks, heavy vans and non-public transport buses.
Green hydrogen rebate: A green hydrogen rebate will support a small number of early adopters in hard-to-abate industries to reduce their emissions by 150,000 tonnes and help to create a market for green hydrogen production in Southland. $100 million has been set aside for the rebate – $32.5 million for the first four years.
Green Investment Finance: The Government’s Green Investment Finance fund will receive another $300m in capital to invest in projects that improve sustainability, and enable private capital investment in these projects.
Tech subsidies and apprenticeships: A 20 percent rebate will be available for game development studios who qualify and meet the minimum $250,000 expenditure threshold per year. Individual studios will be able to receive up to $3 million per year in rebate funding, and the scheme will be backdated to 1 April 2023. Additionally, the Government is investing $27 million in a Digital Skills package to support the development of apprenticeship-like pilot programmes.
State housing: An extra 3,000 public homes will be funded to be built by June 2025, on top of 14,050 funded to June 2024. The Public Housing Plan will be updated in the coming weeks to show where the additional housing will be focused. It will be delivered by Kāinga Ora and Community Housing Providers including Māori and iwi partners. The Whai Kāinga Whai Oranga programme will be funded for an additional 322 homes.
Trustee tax rate: The trustee tax rate will be aligned with the top personal tax rate of 39 percent from April 2024.
Economic outlook
- Inflation forecast to fall to below 3 percent in late 2024
- Economy to grow by 3.2 percent this financial year
- Unemployment rate projected to peak at 5.3 percent next year
- Wages to grow 5.2 percent a year over the forecast period
The Treasury is now forecasting New Zealand will avoid recession as the rebuild from the flooding and cyclone events support activity, along with stronger tourism. The economy is forecast to grow by 3.2 percent in the year to June 2023, before easing to 1 percent in the following year, and then picking up to grow around 3 percent in the June 2026 and June 2027 years.
The net result is that nominal GDP is cumulatively $4.9 billion higher over the forecast period, and that the unemployment rate forecast peaks lower in the short run but stays up for longer than anticipated in the Half Year Update.
Slow economic growth is expected to reduce labour demand over the next two years and cause the unemployment rate to rise to 5.3% by late-2024, a lower and later peak than previously forecast. Employment growth will continue, with 125,000 additional jobs forecast over four years, but not enough to keep up with workforce growth driven by strong immigration. Annual wage growth is expected to fall from 7.3% in early 2023 to a more moderate 4.2% by mid-2027. Nevertheless, wage growth outpaces inflation throughout the forecast, meaning inflation-adjusted hourly earnings are expected to rise.
Inflation is expected to continue easing over the forecast period as high interest rates dampen demand. Since the Half Year Update, inflation has been similar to forecast and the Reserve Bank’s survey of inflation expectations has begun to retreat. Transport prices and construction inflation – key contributors to recent high inflation – have also eased. However, new sources of inflationary pressure create added complexity. The Treasury expects damage from the North Island weather events to result in temporarily higher inflation over 2023 due to lower supply.
In response to the additional inflationary pressures in 2023, the Treasury expects interest rates to remain higher for longer. The Reserve Bank increased the OCR to 5.25% in April, slightly higher than in these forecasts. The Treasury’s forecasts show 90-day interest rates remaining at a level corresponding to an OCR of 5.25% over 2023.
Fiscal outlook
- Net debt forecast to peak at 22 percent of GDP in 2024
- A return to surplus in 2025/2026
- Real government consumption to fall by 5 percent by beginning of 2025
Government spending will increase from 32.5% of GDP in 2022/23 to 33.0% in 2023/24, while revenue rises from 29.3% of GDP to 29.7%. As a result, the OBEGAL deficit will remain steady at 1.8% of GDP, before shrinking to 0.8% in 2024/25, and returning to surplus in 2025/26 as revenues rise and expenditure declines, as shares of the economy. Net debt will peak at 22% of GDP in 2023/24, and fall in the outyears, peaking in nominal terms at $95.3b in 2025/26.
The total fiscal impulse is a measure of the change in the Government’s fiscal support for aggregate demand from one year relative to the next – this can be seen as how much demand the Government is injecting or removing from the economy, which impacts on job creation, inflation, overall growth, and other factors. On aggregate, the fiscal impulse is expected to be contractionary over the forecast period as the deficit shrinks. However, the fiscal impulse is expected to be expansionary in 2023/24.
Real government consumption, a measure of goods and services provided by the Government, is expected to decline over the forecast period, partly reflecting the winding down of COVID-19-related spending, and the impact of wage and price inflation eroding the government’s spending power.