Budget 2023 to limit new spending in an attempt to tame inflation

The Budget Policy Statement for Budget 2023 confirms what many suspected, the Government will have to carefully manage fiscal policy in a way that takes the pressure off inflation, while returning government spending to pre-COVID-19 levels. This follows the expansionary fiscal policy to support the economy and overall well-being through the pandemic.

While there are signs that the global pressures that have driven inflation are easing, the increases in costs are still being passed onto consumers through higher prices which are keeping inflation elevated. As Connor addresses in his HYEFU article, although Treasury forecasts inflation to ease, it will only be gradual in the medium term with a reduction to 6.5 percent in the 2023 year, before falling more quickly thereafter, returning within the Reserve Bank’s target range of one to three percent in 2025 as it falls back to 2.5 percent. This period of higher than desired inflation will see interest rates increase further, New Zealand will experience a shallow recession, and unemployment will increase. 

Successfully addressing inflationary pressures requires a fiscal response from Government. This means restricting additional or unnecessary expenditure. As a result, real Government consumption is forecast to fall by 8.2 percent between September 2023 and December 2024. The Government’s approach will require a balancing act. There are unlikely to be any significant new announcements in Budget 2023 as the economic situation limits the Government to the delivery of its 2020 election manifesto.

Those looking for big announcements or new initiatives are likely to be disappointed come May. In his foreword to the Budget Policy Statement, the Minister of Finance, Grant Robertson stated that he has directed ministers to run reprioritisation processes to create space for new initiatives within existing budgets. This is outside of the cost pressures that will be funded from the $4.5 billion operating allowance, which remains unchanged from Budget 2022. Put simply, if ministers want to fund something new, cuts will have to come from elsewhere in their budgets.

The lack of scope for additional spending limits the ambition of yet another budget. During what is shaping up to be a competitive election year, the lack of ambition in the Government’s priorities is a feature of the Budget Policy Statement which sets out the Government’s four priorities for Budget 2023:

• Supporting Kiwi families and households with the cost of living
• Careful and balanced fiscal policy, including returning to surplus in the 2024/25 year
• Getting the basics right
• Delivering on our economic plan, including through investment in infrastructure that drives growth, productivity, and reduces emissions.

Other than reducing spending, the Government is vague on what specific actions it will take in Budget 2023 to address household cost of living concerns. The major announcement to address the cost of living pressures was not specifically related to Budget 2023 although it will impact future Government finances. The Government will extend its transport related cost of living support until March 2023, before it is removed and replaced with more targeted support for low income households.

The temporary 25 cent reduction, per litre, in fuel excise, and equivalent decrease in road user charges, and the 50 percent reduction in public transport fares will come to an end. It will be replaced by long term measures to reduce the cost of public transport, including half price for all Community Services Card holders, including tertiary students. The excise reduction will continue to remain in full for February, before it is halved for March and finishing at the end of the month. At the same time half price public transport fares will end. Road user charges reduction will end on January 31st, because it can be pre-purchased and used at a later date meaning they will continue to benefit once purchased. 

These extensions are aligned with the significant uplifts to the Family Tax Credit, Superannuation, benefits, student allowances and childcare support that were previously announced in Budget 2022 and will come into force on April 1st. 

A careful and balanced fiscal policy will see the Government keep to its intention to return the budget to surplus by 2024/25. Looking ahead, the Treasury is forecasting the Government will run smaller deficits in 2022/23 and 2023/24 that will be a combined $5.1 billion less than forecast at Budget 2022. With the Government limiting its spending, net government debt is expected remain well below the cap of net debt below 30 percent of GDP. Treasury has this peaking at 21.4 percent of GDP in 2023/24 and then falling by $20 billion to 14.1 percent in 2026/27. 

Getting the basics right and delivering on its economic plan suggests that new investment will be limited. Across government, ministers and senior management will be asked to review expenditure and identify where needs can be met by prioritising existing funding to ensure core public services can continue to be delivered, and government is achieving value for money.

Any new investment will be targeted at strengthening the foundations of the economy so that it is in a position to bounce back quickly, and strongly, once inflation is back to a manageable level. This is likely to see any additional new investment in Budget 2023 focussed on capital investment in infrastructure, such as housing, health, education, and transport, as well as ongoing investment from the Climate Emergency Response Fund which has a current balance of $3.6 billion. 

Overall, the Budget Policy Statement signals that the Government will do what it needs to get inflation under control and position the economy to limit the damage, then recover from the expected recession. This is needed and welcomed. However, when combined with the underwhelming Budgets of 2021 and 2022, the need to control inflation has restricted the Government’s ability to make some of the significant investments required to build the foundations for New Zealand to emerge stronger.