What is most surprising about yesterday’s Budget is how apparently painless it was to find $4 billion in reprioritisation savings.
That begs the question as to whether a tougher approach might have found more.
But that might have meant cutting programs which Finance Minister Grant Robertson resolutely refuses to do.
Instead, he has picked all the low-hanging fiscal fruit.
In doing that, he has dared National to propose further cuts which would slice into the bones of the welfare state.
That Labour’s campaign chair Megan Woods walked alongside Robertson and Prime Minister Chris Hipkins for the usual Budget walk from the Beehive to the debating chamber for the reading of the document said it all.
The Budget is a vital, if low-key, plank for Labour’s re-election campaign.
And Woods revealed some of the political strategy when she was questioned in her capacity as Housing Minister about the future of the capital investment in Kainga Ora housing after 2025.
She said: “What happens after that, I think, will be something that will need a great deal of scrutiny of every party’s manifesto going into this general election.”
Labour will thrash this theme; that National will have to make deep cuts into the welfare state to afford its mooted tax cuts.
National almost immediately fell into the trap of looking hard-hearted with their Finance Spokesperson, Nicola Willis, promising to reverse a Budget move to abolish the $5 prescription fee.
But the immediate focus yesterday, certainly from the finance sector, almost immediately went on to the increases in Core Crown Expenses being proposed by the Government.
All up, the Government is now proposing to spend an extra $8.3 billion out to 2027 over what it was proposing back in December.
However, Robertson pointed out that the new operating spend of $4.8 billion was lower than the $5.9 billion in last year’s Budget.
That is set against a reduction forecast core Crown Tax Revenue to give a larger deficit with its attendant pressure on borrowing over the next three years.
But the real concern about the deficits and the borrowing will be the potential inflationary impact and how the Reserve Bank will react to that.
The Westpac economics team said the Reserve Bank had long been highlighting the risk of a larger boost to spending.
“That risk has now materialised, supporting our view that the RBNZ will now likely be looking to move the OCR higher towards 6 per cent,” they said.
The ANZ said the Budget “certainly adds a touch more oomph to the demand pulse working against the broad macroeconomic slowdown the RBNZ is trying to engineer to tame inflation.”
All eyes will now be on the Reserve Bank’s Monetary Policy statement next Wednesday.
The Treasury, however, was optimistic that the impact of the higher spending and lower revenue might be moderate, albeit it warned that interest rates could stay higher for longer.
It now expects a more moderate slowdown in activity over the next 12 months.
It is picking growth to slow to 1.0% in the June 2024 year and average 2.7% thereafter.
Continued strength in tourism, stronger growth in net migration, rebuild activity associated with the North Island weather events and less contractionary fiscal policy would help to offset slowing demand in other parts of the economy.
“The net result is that, relative to the Half Year Update, the unemployment rate is forecast to peak lower, while interest rates are likely to stay higher for longer to manage inflationary pressure,” it said in the Budget Economic and Fiscal Update (BEFU).
“Inflation has already begun moderating, and the Treasury expects further moderation ahead, with inflation falling to 4.5% by the end of 2023 and dropping inside the Reserve Bank’s target band of 1-3% inflation by late-2024.”
The bank economists were generally sceptical about that.
But the heart of the Budget was the new National Resilience Plan which will address the infrastructure deficit but first will be directed to the cyclone rebuild.
Robertson has committed $71 billion over the next five years to infrastructure investment.
Included in that and a measure of just how unrealistic Kiwibuild’s 16,000 homes in the four years from Labour’s election to 2021 was, Robertson has now committed to just 3000 public housing “places” by June 2025.
Other big capital spending components of the $71 billion include education, defence, the health sector and Waka Kotahi.
But perhaps one of the most remarkable aspects of the Budget was the $4 billion in savings identified out to 2026 – 27 by a Treasury exercise that began late last year.
A substantial amount was unspent Covid money, but over and above that, nearly half came from money that had been appropriated to agencies but which had been unspent and was sitting waiting to be used (or possibly forgotten about).
POLITIK understands that Treasury officials found agencies were reluctant to admit to the surplus cash and presumably even more reluctant to part with it.
But it has been an important exercise and is likely to now be repeated on an annual basis.
However, to get new savings on the scale announced yesterday would mean cutting programmes altogether.
There were political nudges and winks in the Budget, too; the decision to level up the tax rate on Trusts with income tax rates came from Revenue Minister David Parker and amounted to him dipping his toe into the wealth tax water.
Robertson told the media briefing that 90 per cent of the money held in New Zealand trusts was held by five per cent of them.
There was an extension to the Clark Government’s 20 hours of free early childhood education; two-year-olds are now eligible.
Education Minister Jan Tinetti said this would save the two-year-olds’ parents $133.20.
That compares with National’s promise to pay 25 per cent of all childhood education fees but with an upper limit of $75 a week.
There will also be free public transport for those under 13-year-olds and half-price for those under 25s.
And in a move which was a response to a full-on lobbying campaign, the Government has agreed to a rebate of 20 per cent for electronic studios game development who spend at least $250,000 on development.
The campaign highlighted that game exports now earn the country more than wool and are a prime example of a weightless export built on IP.
Science Minister Ayesha Verrall has been able to get $451 million for three multi-institution research hubs focused on health and wellbeing; oceans, climate and hazards and advanced manufacturing, biotech and energy.
The hubs will likely be in Wellington and will bring together existing Crown Research Institutes and university and private research facilities.
They are a product of the Future Pathways programme to reform science and innovation.
However, there may be questions, from the unions in particular, about how the research hubs will relate to the industry transformation plans, which are only slowly beginning to appear.
It was clear yesterday that the Budget was not what Robertson might have hoped before the cyclone that he could have presented. But instead, he has had to find $941 million of operating expenditure and $195 million of capital funding for cyclone recovery.
“Were there other things that I wanted to do; were there other things that Ministers wanted to do; one hundred per cent, there were, but this is not the right time to deliver those things,” he said.
And so, in many ways, it was a low-key Budget. It was not, by itself, an election winner.
However, as Robertson endlessly points out, there is still the election manifesto to come.