Grant Robertson wants to address a cost of living crisis while avoiding piling on the inflationary pressure. We asked experts what he might try to conjure up in his election-year budget.

With the budget documents signed, sealed, and off to the printers ahead of the big reveal next Thursday, the procession of pre-budget announcements and pre-budget speeches are under way – and so, too, is the rabbit-gazing.

Grant Robertson yesterday identified the primary theme of the budget as “supporting New Zealanders with the cost of living”. That focus – one that is shared across the board – needs to be balanced with another imperative: avoiding pumping much, if any, inflationary energy into the mix. At the same time, this is an election-year budget, the government’s last big, purse-string-swinging, attention-sucking set-piece before the campaign. That brings a political gravity of its own, often with “lolly scramble” attached. But this is a low-sugar year.

The question then is this: in light of that tension between cost of living support and inflation, with the demand of the cyclone recovery on top, is there space for that other trusty budget cliche, rabbits out of hats? Or rather, in keeping with the budget branding issued by Chris Hipkins, can Grant Robertson pull any rabbits out of the no-frills soup?

Save and spend

In that speech yesterday, Robertson – who is presenting his sixth budget next week – announced that it would include “$4 billion of savings and reprioritisations over the four-year forecast period”, including that already found in the ashes of the so-called bonfire. That exercise, mirrored in the Australian budget of this week which identified $18 billion in reprioritised spending over four years, is essential to both the substance and symbolism of limiting inflationary impetus.

Though the detail is to come, it is “a lot of money in reprioritisation”, said Craig Renney, the Council of Trade Unions’ economist and former senior adviser in Robertson’s office. “Treasury officials always used to like to think about any dollar that is saved is actually worth two – you get to spend it, effectively, twice. A billion dollars a year of new money [is] quite a lot of cash.” Renney, who worked on Robertson’s first three budgets, said: “We tried to save a lot back when I was there, and the most we could ever achieve was, I think, one year when we saved $1.7 billion over four years.”

To Nicola Willis, such savings were “simply too little, too late”. Responding to Robertson’s speech, the National finance spokesperson said yesterday: “In last year’s budget Mr Robertson sprayed the public money hose around with wild abandon, adding $38 billion in new spending over four years. Now he expects New Zealanders to be grateful that he’s cleaning up a small corner of the spending mess, having only been able to sacrifice less than 1% of overall government spending.”

Does Willis anticipate any rabbits being extracted from the tin? “I predict there will be some form of tax reduction in the budget,” she told The Spinoff. “It won’t be major and it won’t be for the right reasons but for Labour to deliver a budget in the midst of a prolonged cost of living crisis without providing income relief would be indefensible.”

Budget rabbits, no-frills style

Economist Shamubeel Eaqub agreed that for all the “no frills” expectation management and the “limited headroom” afforded, the budget was sure to involve fresh support. “There simply has to be money for lower-income households. People are struggling – that data is clear – and the stress is real,” he said. While a repeat of the controversial cost of living payments rolled out in last year’s budget was unlikely, “I imagine it is going to be the middle that is firmly in focus.”

With the competing imperatives of cost of living support and curbing inflation, “ultimately you can’t square the circle”, said Eaqub. In Australia, the new treasurer, Jim Chalmers, had responded by delivering a federal budget that provided support that went wide rather than deep. While there are significant differences – Labour in Australia is pressing ahead with tax cuts pledged by the previous government as well as announcing a one-off surplus – there could be “an echo of Australia” in the New Zealand budget next week, said Eaqub, in which “everybody gets a little bit, but nobody gets a lot”, all framed as “being responsible and prudent but doing what we can”. 

Despite the repeated invoking of a “back-to-basics, bread and butter budget”, said Renney, there were still “a couple of things that you can do, which might achieve that ‘double duty’, to use the phrase the former prime minister was very fond of”. That meant looking for government-supported services “where you can say that you will reduce the cost of access to a service, which reduces people’s out-of-pocket expenses.” 

Cheaper GP visits on the cards?

Healthcare was an obvious example. You might, say, cut the cost of GP visits or prescriptions, without risking any great inflationary tailwind, or put more money into dental services. That budget rabbit “has the benefit of not only reducing out-of-pocket cost of living for people, but it would also be a welcome surprise”, said Renney.

It could also be a rabbit-free affair. “I genuinely think they’re going to want to make a real virtue out of there being nothing special in the budget.” Not just to meet the no-frills moment, but because “it can create the  space for decisions along the road after the budget”, in the remaining months before the election.

“Another area where there may well be some kind of rabbit out of a hat, just because it’s so pressing, is in the cyclone response,” said Renney. “It may be a big statement as part of the cyclone response – here is a big pot of money to help rebuild in these areas.” Having recently visited parts of the East Coast devastated by Gabrielle, “it’s quite clear where communities have been affected, they have been enormously affected … those people really, really need help – and certainty … And because we’re spending that from existing funds that were already set aside, it shouldn’t have an inflationary impact; it’s already been baked into the Treasury’s forecasts.”

A carbon dividend?

For Eric Crampton, there is a rabbit overdue evacuation from the hat: a carbon dividend. He would like to see funds from the Emissions Trading Scheme diverted to payments to New Zealand households. The NZ Initiative chief economist says the funds are currently used in large part to expedite climate initiatives likely to happen anyway. A carbon dividend would turn “industrial subsidies into household payments”. Because the funds would be distributed anyway, any inflationary impact would be minimal, he said.

In Crampton’s preferred model, the dividend, “hypothecated to the ETS”, would not be means tested, and would be a “progressive transfer” because more of the fund as a whole came from wealthier people, simply because they “spend more”.

He’s confident that a carbon dividend is a strong chance of featuring in the budget – though he acknowledges that it may be designed to target lower- and middle-income households. “If they provide a carbon dividend targeted at lower-income households, I’ll be disappointed,” he said. “If there is no carbon dividend at all I’ll be disappointed and surprised.”

The wrinkle in all of that may be the fund itself, Crampton noted, with the last carbon credit auction failing to raise a cent after it didn’t meet reserve and rolled over into June.  

What about tax?

Despite the signals from Hipkins that we should expect nothing major on tax in the budget next Thursday, Crampton is holding out hope on marginal rates. “I desperately hope that they at least start to inflation-adjust the tax brackets,” he said. Bracket creep since the last change in 2010 means “people on relatively low incomes are paying very high marginal tax rates”. 

Following the “necessary” surge in spending in response to the Covid crisis, the responsible thing to do would be to address the marginal rates, said Crampton – and given National is promising to tackle the issue, for Labour to signal a move in this direction, even if not immediate, would spike that gun. “There is largely cross-party consensus on indexation,” he said. “I really hope they would be able to find room for this.”

Neither Renney nor Eaqub anticipates any tax announcements. “If they do make changes they’ll announce them later in the year, on the promise of being elected,” said Eaqub. Renney suggested that, if anything, there might be measures on multinational tax avoidance, but much of that work, in collaboration with OECD, had been done. “There’s probably not a lot more juice to get out of that particular lemon.” As for the wider tax debate, “I think that’s a political conversation rather than a budget conversation.”

Top of Eaqub’s wish list is the government rising to its rhetoric on the national infrastructure deficit, he said, with decades of underinvestment laid bare in the impact of Cyclone Gabrielle and more recently in the operational havoc across KiwiRail. Rather than responding with a “piecemeal approach”, he wanted to see “a framework for when and where the government will get involved” when it faces “unexpected costs as a result of climate change”. 

The story – and reading into it

Fresh from reading Narrative Economics: How Stories Go Viral and Drive Major Economic Events, by Yale economist and Nobel laureate Robert J Shiller, Renney has been mulling the ways a collective mood can conflict with the data. “He talks about the need for economists to realise that economics doesn’t just happen as a consequence of models – it happens as a consequence of narratives. Certain ideas get strengthened. It doesn’t matter what the data is, it just happens.”

He sees something of that today, with the popular and political narrative being “that the economy’s doing really badly, and we need to cut government spending and that sort of thing. The data doesn’t necessarily back that,” he says. 

As long as Chris Hipkins and Chris Luxon are scrapping to radiate the image of least distracted and most abstemious, that narrative is unlikely to turn, however Renney might wish otherwise. “Because [the government] could try to be FDR and say: here’s a New Deal, we’re going to do big things, we’re going to make big changes, and we’ll all be better off. But because you don’t have that following wind, that narrative, it becomes really hard to get the public to buy.”

That creates a kind of paradox, in making it harder to invest long-term, said Renney. “In terms of this budget, the minister has been very clear. He’s found some savings. He’s tasking ministers with resetting their priorities. And every time he does that, it feeds that narrative of the need for cuts. The need to reduce investment. Whereas actually, we know that if you’re in West Auckland right now, the big problem has been underinvestment for decades in flood protection and housing and everything else. And actually, it may well be that investment is necessary to keep reducing inflation in the long run.”

One final warning from Renney, casting ahead to Thursday: there’s a whole lot we don’t know and can’t see. “Economics is always uncertain … but right now, the levels of uncertainty are even greater. Because of the cyclone impact. Because of a very uncertain global economic position. US inflation data [this week] was much better than forecast. We’ve seen other countries, such as Spain and Germany, where inflation is falling quite rapidly. But at the same time, we still face huge global challenges in terms of our export markets and the price of commodities,” he said.

“So, you know, we should be careful about over-interpreting the economic data that’s going to be put out there.” The Treasury forecasts – “and I speak as a former Treasury official with love”, he adds – are best seen as “a serving suggestion”. In 2023, “we’re forecasting in the teeth of uncertainty, and in the teeth of an election campaign where they’re going to be weaponised”, he said. “We shouldn’t over-extrapolate any doom tales or any good times in that data.”