Spare a thought for Finance Minister Grant Robertson as he goes through the inflation figures released yesterday by Statistics NZ.
They show annual inflation running at a 30 year high of 6.9 per cent for the March 2022 year.
Only three months before that Treasury’s Half-yearly Economic and Fiscal Update (HYEFU)was forecasting inflation this year to peak at 5.1 per cent.
So the first impact of the new inflation figure will be to throw all of Robertson’s estimates for Budget spending allowances out.
But he still has to decide what to do about the erosion of his spending estimates.
He has a choice — does he maintain the policies painfully hammered out in his bi-lateral negotiations with Ministers and risk more inflation.
Or does he now have to call for trimming from the Ministries and departments (as Christopher Luxon recommends) and hope that the world is not led into recession later this year by the Ukraine war and Covid in China.
As it is, total spending in this Budget is likely to come in at less than the actual amount spent over the current Budget year.
The HYEFU forecast spending for 21/22 at $155 billion, dropping to $148 billion in the coming Budget year.
That will be because the special Covid spending will be being wound down.
Big drops are expected in social security and welfare, health, education, transport and communications and economic and industrial services; in other words, in the expenditure categories used to deliver the $74.1 billion of Covid spending over the past two years).
A more realistic assessment of where the coming Budget’s expenditure forecast might lie might come if the last pre-Covid Budget (2019) is compared with the 22/23 forecast.
That would show a spend of $139 billion in 2019 against the forecast $148 billion this year, a rise of 7.2 per cent across the three years.
If Robertson was to keep up with inflation, then based on the 2019 allocation, this year’s Budget would allocate $154 billion.
National has signalled out the $6 billion in new spending being allocated this Budget as a potential driver of more inflation.
In National’s last Budget in 2017, it allowed $1.8 billion for new spending, so the increase is substantial.
It is a one-off; the allowance is projected to decrease to $4 billion for Budget 2023 and $3.0 billion for Budgets 2024 and 2025.
Nevertheless, the $6 billion is a hefty allocation and must pressure inflation.
In the Budget Policy Statement last December, Robertson said it was a one-off reflecting substantial investment “in support of the Government’s significant reform programmes, including the transformation of the health system.”
Last year’s Budget allocated $486 million over four years toward implementing the health reforms.
So the implementation process will not need to draw on Robertson’s extra $6 billion of spending.
But the clue to why he is allocating such a large sum and where it might be going comes in the June 2021 Department of Prime Minister and Cabinet Regulatory Impact Statement on the reforms.
“These costs do not include wider non-structural costs of health reform.
“For example, to address longstanding health disparities and to shift costs away from hospital settings, changes to primary and community care will be needed to expand services and address access barriers.
“In particular, current primary care funding arrangements are not adequately adjusted for need.
“Additional costs will be expected subject to future Cabinet decisions on such issues.”
So it is not the health reforms themselves that are soaking up money but what may well be a much wider injection of cash into the health system.
Opposition leader Christopher Luxon yesterday claimed the Government was addicted to spending and it should think about wasteful spending.
Overall, Robertson yesterday was keen to convey a cautious approach to spending.
“We are continuing to keep a careful, balanced approach to our future spending,” he said.
“There are always more calls for spending than we have the money to be able to meet. So we are keeping our focus on meeting the core needs in health, education, housing, and investing in the skills, infrastructure and industries we need to grow higher paying jobs.
“Think about the new spending that you’ve got on the table and actually ask yourself, is that necessary? Is that adding fuel to the fire?” he said.
But from even within his own caucus there is concern that neither he nor the party’s finance spokesperson, Nicola Willis, have been able to come up with a specific plan as to what expenditure they would cut.
Yesterday Luxon referred to the $85.8 million subsidy on the Hamilton-Auckland train and the $29 billion budgeted for the Auckland light rail project as two examples of projects that could be looked at.
“We spend $100 million subsidizing a slow train from Hamilton to Auckland; it’s a lovely idea, and a lot of us like riding on trains, I’m sure, but at the end of the day, $100 million could be better directed to some other expenditure or some other program,” he said.
But the funding does not come from general taxation; it comes from Waka Kotahi, which gets its funding mostly from fuel excise tax.
The light rail is a capital expenditure that will be borrowed as part of the Government’s overall debt management programme. Taxpayers will get to pay the annual finance charges.
But in many ways, the inflation is a warning sign, not so much of government over-spending (though there is an element of that in it) but of the fragile state, the world economy is now in.
China’s decision to lock down Shanghai has heightened fears of a recession later this year.
Windward, a maritime data company, earlier this week estimated that a fifth of all the world’s containerships were stuck in port congestion.
Further, they calculated that a quarter of all the ships are specifically stuck at Chinese ports.
The latest port closures come just as things were starting to improve though even so, nearly two-thirds of all containerships were still behind schedule in February 2022.
The congestion and the impact it has on imports is one reason why inflation is accelerating.
But Shanghai’s lockdown has also hit our exports with a drop in Global Dairy Trade prices this week.
Westpac says that since March 15, overall dairy prices have fallen 5.2 per cent on Global Dairy Trade auctions, but prices are still at record highs at levels not seen since 2013.
Nevertheless, any prolongation of the Shanghai lockdown could have a serious impact on the New Zealand economy.
Thus Robertson must now balance the possibility that increased spending would further fuel inflation against the risk (albeit still remote) of a global recession which would require pump-priming from the Government.
It is not an easy time to be in Government – or, it would seem, in opposition either.