Finance Minister Grant Robertson used the word “balance” around 30 times in his 40-minute briefing yesterday on the Budget Policy Statement.
“We’ve got a job to do here regardless of whether it’s an election year or any other year, and that is to responsibly manage the Government’s finances, strike that balance between supporting New Zealanders through a tough period of time, but also looking to the future,” he said as he wrapped the briefing up.
“I think we’ll be judged in the election on our overall performance and on our ability to support New Zealanders through difficult times.
“We’ve done it before. We’ll do it again.”
But it is not going to be pretty getting there.
Balance means making tough choices.
Robertson wants Ministers to be prepared to “murder their darlings”; to prioritise the must haves rather than the “nice to haves”.
His strategy seems to be to get all of the bad news out of the way by the Budget with the option then of an overall policy “reset” set against Treasury’s forecasts that the worst of the inflation (and therefore the Reserve Bank’s aggressive interest rate hikes) should be over by then.
He is up against it.
The Government will emerge from its election year budget setting “bilaterals” between Ministers and the Finance Ministers, with some Ministers carrying heavy bruises.
Robertson is caught.
In his May 19 Budget, he set the Budget spending allowance for the 2023 Budget at $4.5 billion, but since then, the consumers’ price index has moved by at least four per cent. (We have yet to see the figure for the December quarter).
Ordinarily, a Finance Minister might raise the next Budget’s spending allowance to take some accountof that inflation, but if he were to do so, he would run the risk of stoking the inflationary fires.
But to add to his challenges, much of next year’s spending allowance is already committed.
It is explained in the Budget Policy Statement released yesterday with the HYEFU.
“Some of the Budget 2023 operating allowance of $4.5 billion average per annum has already been allocated at Budget 2022, largely in part to the Government introducing a multi-year funding approach in a number of areas, including the 2023/24 health budget,” the statement said.
“ This approach brings forward the funding decision rather than any costs, but reduces the overall size of funding available for future Budgets.”
And then came the critical sentence.
“This emphasises the importance of finding reprioritisation opportunities within existing baselines.
“Ministers are exploring options for reprioritisation to fund cost pressures and new spending priorities at Budget 2023, which will support the wellbeing objectives for this Budget as well as the Government’s overarching policy goals.”
That is a complicated way of saying making a choice between what Stephen Joyce used to call the “must haves” versus the “nice to haves.”
Ministers are to be asked to bring their “reprioritisation’ proposals to the second round of Budget bilateral negotiations expected to start before the end of January.
Robertson said cost pressures would be a significant part of the Budget, and there would be allowances for them.
But that still meant cuts would be needed.
“The signal we’ve given to ministers is that if you want new initiatives beyond the small ones that relate to our manifesto promises, you need to find that money within your programs. , and you need to assess whether the new initiative is a high priority than what you are currently doing.
“What I am saying to ministers is that if there are going to be new initiatives, I need to look at reprioritisation.”
But even if they do propose a reprioritisation, it would seem Ministers might not be guaranteed that they would get to keep the savings.
“One of the great challenges of putting a budget together is making sure that all my wonderful ministers will see the collective good of being able to use reprioritisation across the government in the future,” he said.
“But there always has to be a certainty to be able to go looking for those things.
“That’s one of those balancing acts that all ministers of finance face.”
Robertson does have one extra card to play; the Prime Minister is expected to reshuffle her Cabinet in the first quarter of next year; presumably, reluctant reprioritisers could find themselves in danger of being reshuffled.
There is also the possibility of fiscal surprises.
This year Treasury has identified seven new risks to its economics and fiscal forecasts.
These include uncertainties over the He Waka Eke Noa levy; the uncapped screen production grant; the broadcasting merger; Ruapehu Alpine Lifts; wananga funding, and the Income Insurance scheme implementation.
One risk, the possible extension of the fuel excise duty and road user charges discounts, was resolved yesterday with the announcement that the scheme would be phased out by March 31 next year.
Treasury’s Haly yearly Economic and Fiscal Update was gloomy on the immediate future for the economy.
“Since the Budget Update, inflation has been higher and more persistent than forecast, and interest rate expectations have risen markedly,” the Update said.
“While we think annual CPI inflation is near its peak, we forecast it will be relatively slow to fall away – not moving back inside the 1 to 3% target band until end-2024 – and interest rates will need to rise to a higher level than previously expected to help slow growth and reduce price pressures.
“While the precise timing is uncertain, our base case is that real GDP growth is forecast to slow materially through 2023, with a contraction of 0.8% over the three quarters to end 2023 before a slow, gradual recovery in 2024 and beyond.”
With that will come an increase in unemployment.
The forecast unemployment rate is higher.
“All the components of domestic demand are forecast to decline through 2023, as household and firm incomes and balance sheets come under increasing pressure, savings built up during the COVID-19 period run down and the terms of trade decline.
“The unwind of COVID-19 related expenditures contributes to real government spending falling.
“The unemployment rate is forecast to increase through 2023 to a peak of around 5.5% in mid-2024, from the near-record low level of 3.3% recorded in the September 2022 quarter.”
Robertson was asked if he might have to consider some stimulus to the economy next year.
His answer was a qualified yes.
“The big issue we’ve got here, which is in the first part of 2023, we’re looking continually at how to bring inflation pressures down here,” he said.
“There is then the prospect of a recession in the second part of 2023.
“And those twin challenges and calibrating our response to that is going to be a difficult exercise.
“We will need to be flexible; we will need to be careful, and we will need to continue to take a balanced approach.
“So I’m well aware that depending on where we end up that when it comes to the potential recessionary period that we may be called on to do it (stimulus).
“We’re not standing still, just waiting for that.
“So we have pieces of work underway at the moment t to look at what would be counter-cyclical behaviour that the Government could do in the event that the recession was perhaps slightly worse than what’s been forecast here or even in what is forecast here.
“So we are thinking about that now, but they are the twin challenges that rub up against each other in this year. That’s what makes it such a hard year. “
Former Robertson advisor and now CTU economist Craig Renney understood perfectly what Robertson was saying.
Renney said that the Government’s books were showing the strength needed to support the economy during the predicted post-Covid economic slowdown.
Treasury accounts showed that the Government had plenty of fiscal space to deal with any challenges – government debt was forecast to be at less than 50% of its limit by 2027.
The Government would return to surplus in 2025, with taxation and expenditure remaining stable across the forecast period.
“Inflation is forecast to fall, and the economy is due to slow,” he said.
“With fewer people in work, there is both space and opportunity to make investments that will benefit the economy in the long run.
“We should be using the opportunity provided by this set of forecasts to tackle issues such as our infrastructure gap, climate change, productivity, and our housing crisis.
“This would not only benefit our economy long-term, it would help mitigate any risks that the slowdown is any worse than predicted. It would also help to manage our long-term inflation challenges”.
Robertson himself mentioned housing as one area where the Government could move if a counter-cyclical stimulus was required.
But in the meantime, Ministers are going to have to be prepared to murder their darlings.
