Finance Minister Grant Robertson showing off the cover of this year's Budget

Today’s Budget will be the big one for Grant Robertson.

In part, that will be because Labour always promised that after Covid, it would build back better.

Expectations, particularly from within Labour’s core constituency, will be high that this will be the Budget that defines the Ardern governments.

But the political climate has changed, and Labour now cannot take re-election next year as a given.

Add to that the volatile international environment with supply chains clogged by war in Ukraine and Covid lockdowns in China.

To add to the challenge is the heavy reform agenda the Government has set itself; debate and argument over Three Waters, the health reforms and the replacement planning legislation already run the risk of drowning out the key political messages the Government will want to take through to the election.

And in the background, a National Opposition that has finally begun to sort itself out now has a clear economic message; the Government spends too much, and that stokes inflation which is hitting ordinary New Zealanders in the back pocket.

The biggest challenge will be the health reforms.

Robertson has already said most of the additional (and record) $6.1 billion additional spending will go on the reforms.

Some of that is easy to account for.

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Around $1 billion will need to be added to the annual health operating Budget each year from now on to cover what has been an annual District Health Board deficit of between $500 and $1 billion.

Future health budgets can also be expected to come under increased pressure from an ageing population set against rising costs of health provision.

Treasury has estimated that health spending will increase from 6.9% of GDP in 2021 to 10.6% in 2061.

Thus that additional $1 billion will become a permanent feature of future budgets.

Much of the remainder of the $6 billion will be spent on the transition to the new health structure.

There will be some big-ticket items; a comprehensive nationwide integrated IT system for a start.

A similar scale upgrade at IRD cost $1.5 billion.

But a substantial sum will be spent on the actual restructuring of the people who work in the system.

POLITIK has obtained a PowerPoint showing the current management proposals for the new system; it is complex, down to six levels in some areas, with most roles at both the national and regional levels yet to be filled.

But the proposal is to have the positions filled and in place by June next year so that the system as a whole can begin to operate in 2023/24.

The political danger for the Government is that the proposals will be perceived as disempowering regions at the expense of metropolitan areas like Auckland or Wellington.

During the last election campaign, Labour’s manifesto said, “together we have set ourselves up for a strong recovery. A recovery that keeps New Zealand safe and drives our economy. That will continue to be the top priority for Labour in Government.”

Few would question that Labour has kept the economy humming during the various Covid lockdowns with its $74.1 billion of Covid spending.

Real Production GDP
20202021202220232024
2020 Budget forecast-4.0-1.08.64.63.6
2021 Half Yearly forecast-2.15.10.84.92.2

This table compares forecasts from the 2020 Budget, when there had been just 1500 Covid cases in New Zealand, with revised forecasts from the Half Yearly Economic and Fiscal Update last December.

The big reversal was last year when what had been forecast to be a one per cent drop in GDP turned into a 5.1 per cent increase.

As a consequence of the fall in GDP that it expected, Treasury had forecast unemployment last year to be seven per cent, but by the last quarter, it was 3.3 per cent.

The Government’s various wage and business subsidies, along with a buoyant construction industry and high agricultural export prices, all contributed to the higher growth figures.

But in a report on Tuesday, Westpac’s Acting Chief Economist, Michael Gordon, said that we were now ‘paying the bill’ for the policy stimulus that was put in place to get the economy through the worst of the pandemic.

“That ‘bill’ has come due in the form of surging consumer prices, with strong demand compounding the current intense supply pressures to push inflation to a 31 year high of 6.9%.

“That jump in prices is squeezing households’ budgets, which in turn is constraining the level of discretionary spending.”

Infometrics chief economist, Gareth Kiernan, has made similar comments.

The problem for the Government now is that the forecasters are picking that inflation will result in lower growth.

A key figure to watch today will be the adjustments to the growth forecasts over the next three years.

National, however, has seen a political opportunity in the inflation, and its finance spokesperson, Nicola Willis, regularly talks about a “cost of living crisis”.

“You can feel it when you pay your rent or pay your mortgage; inflation is the highest it has been in 31 years, up to 6.9% and inflation is a robber at every door,” she told a party conference on Sunday.

But New Zealand is not alone.

Britain yesterday recorded nine per cent inflation for April, its highest rate in 40 years and the Bank of England is forecasting it to rise to ten per cent by the end of the year.

Robertson is defensive about the impact of inflation on “ordinary” New Zealanders.

“We are taking a balanced approach and making sure that our spending continues to be carefully prioritised and targeted at the areas and people that require it the most, including supporting low and middle income New Zealanders dealing with costs of living pressures through increases to Working for Families, superannuation, benefit levels, student allowances, and the minimum wage, as well as the resumption of the winter energy payment,” he said in Parliament yesterday.

“Of course, we’ve also reduced fuel excise duty, and road user charges and halved public transport fares.”

Those transport measures, however, are only temporary for three months and were introduced in March.

The Minister may announce their extension today in the Budget.

National has proposed that the simplest way to bring relief to people would be by moving the tax thresholds up.

Their proposal would save someone on $55,000 a year $800.

Labour is widely expected to match this.

Robertson could foreshadow that today.

He was asked yesterday in Question Time by Willis specifically whether he would.

“In answer to the second part of the question, there is only one more sleep until the Budget,” he said enigmatically.