Treasury yesterday pulled out of its forecasting hat one of the country’s most dramatic fiscal turnarounds in recent years.
It has left Finance Minister Grant Robertson looking like a fiscal superman.
Tax is up to seven per cent on Budget estimates of $6.5 billion, while spending is down by 2.6 per cent or $2.9 billion.
The net effect, according to the Half Yearly Economic and Fiscal Update, is that the forecast deficit for the June 2022 year is down from $15.1 billion to $4.6 billion.
Treasury puts the hefty tax take down to stronger than expected economic activity leading up to the Delta outbreak.
They say that activity will continue and produce annual growth in tax revenue of $7 billion a year.
All up, out to 2025, Treasury is now expecting tax revenue to be 11 per cent greater than it forecast just seven months ago in the Budget Economic and Fiscal Update.
Powering this will be a buoyant economy with Treasury raising GDP growth estimates from 2024 on to around three per cent per year.
Unemployment is expected to stay below four per cent out to 2025.
But there is a price to be paid.
Treasury is now saying that inflation this fiscal year will be 5.1 per cent against its Budget forecast of 1.7 per cent, and from then on, it is not forecasting inflation to not get down to 2.2 per cent (near the Reserve Bank’s midpoint) till 2026.
And it is inflation which is the primary driver of an annual growth in tax revenue of $7 billion a year over the next four years. That also means the Government will be able to ease back on the business and job assistance it has been providing over the past two years.
“It is clear that the economy is operating close to its potential, and it no longer requires the broad economic stimulus that has helped us through the initial impacts of Covid,” Finance Minister Grant Robertson said at a briefing on the BEFU forecasts.
Treasury expects inflation to also drive the Reserve Bank to further increase the Official Cash Rate with a consequent impact on mortgage interest rates.
“As interest rates rise, we expect house price inflation will slow, culminating in a moderate decline in prices during 2023,” Treasury says.
“Additional reasons to anticipate a slowdown in house price inflation include strong supply relative to population growth, the reimposition of loan-to-value lending constraints, and recent tax changes.
“Slower house price growth will, over time, curb consumer spending via wealth effects.
“Higher mortgage rates will also directly impact consumer spending by squeezing disposable incomes for highly indebted households (although households living off savings will experience an income boost).”
But the upshot of all this is that Finance Minister Grant Robertson has plenty to spend.
The 2022 Budget Operating Allowance (the money for new spending) is up from the previous forecast of $2.4 billion to $6 billion and the following year from $2.6 billion to $4.0 billion.
Robertson said the Government had identified two areas of priority spending in the next Budget; health and climate change.
He said the Government intended to provide significant further investment to establish the new health entities on a sustainable footing and to begin delivery of the health system shifts that are envisaged through the reforms.
The CTU economist, Craig Renney, has estimated that to meet current DHB deficits, rising costs and population and demographic changes would need an annual operational funding increase of $1.43 billion.
Robertson appeared to be promising something like this.
“Through Budget 2022, we will ensure that the new (health) entities have a solid base for tackling this challenge,” he said.
“The Budget will begin a multi-year funding approach for the health sector.
“Initially, this will be a two-year funding path through the establishment phase and then from 2024, in line with New Zealand’s first health plan, we will move to a three-year funding plan.
This approach is essential for giving certainty to the sector and tackling our long term health challenges and inequities.”
Treasury has upped its forecast revenue from the Emissions Trading Scheme (presumably in the light of the steep increase in the traded value of units)and is now forecasting the scheme to bring in over $2 billion a year (as much as it gets from Road User Charges) from 2022.
He has already announced that the money will be “hypothecated” or used for a specified purpose, climate change mitigation.
“The Climate Emergency Response Fund is the mechanism through which we will do this,” he said yesterday.
“This has been established with $4.5 billion of revenue from the ETS.
“Based on the forecast proceeds over the next four years, these proceeds are a down payment on our climate spending.
“We know that the funding will be required over many years to address this complex, multifaceted issue.
“In the future, we expect to review the Climate Emergency Response Fund alongside the main budget allowances, and increased funding is necessary to invest in initiatives to help us achieve our climate objectives.
“This will be an enduring multi-year funding mechanism to support our transition to low emissions and climate-resilient economy in a way that protects our vulnerable communities.”
Robertson said that next Budget, the Climate Emergency Response Fund would focus on delivering the emissions reductions outlined in the Government’s first emissions reductions plan be released next year before the Budget.
Politically this has been the kind of pre-Christmas set of Treasury forecasts that Finance Ministers can usually only dream about.
National’s Finance spokesperson, Simon Bridges, has been focussing his attack on Robertson on the inflation figures.
Did he accept taking core Crown expenses to $128 billion next year—68 per cent more than when he first became finance Minister—in an already hot economy that would raise inflation and really hurt Kiwis? he asked in Parliament yesterday afternoon.
Robertson: “No. What I do accept is that core Crown expenses are up at 35 per cent now in response to a crisis—interestingly enough, the same level they were when the previous National Government responded through to the Canterbury earthquakes—and then they come down across the forecast period to 30 per cent and stay steady at 30 per cent. Those core Crown expenses are the things that pay for our health system, that pay for our education system, that pay to build State houses—the National Party don’t like doing that, but we know that that is our responsibility.”
The forecasts do put Labour in a strong position, but they are only forecasts. If they turn out to be wrong, Bridges may well have his day in Parliament.