The first budget for PM Chris Hipkins was intentionally low-key, with wins for parents and the gaming industry. The biggest surprise was an improving economic outlook, headlined by forecasts of a recession avoided.
Duncan Greive reports from the Budget 2023 lockup in the Beehive thanks to the support of The Spinoff Members.
No one can accuse PM Chris Hipkins of failing to deliver on the promise of a no-frills budget, one that definitively replaces the ambition of Ardern’s government with a back-to-basics approach Hipkins approvingly says “isn’t fancy”. The social re-engineering vision of the unemployment insurance scheme is functionally replaced with a far more pragmatic small change approach, highlighted by an extra year of subsidised childcare for two-year-olds, and an end to the $5 prescription payment (a policy already enacted by the Chemist Warehouse). There’s also free public transport for under 13s, along with a move to make it half price for under 25s.
Beneath what Robertson described in a speech to the lockup as a “sensible and responsible” budget are a set of forecasts that will have prompted a huge, relieved exhale from the upper floors of the Beehive. Treasury is no longer forecasting a recession, and while GDP growth will be an anaemic 1% over 2023, it’s predicted to return to a robust 2.7% thereafter. Wage growth is predicted to outpace inflation over the course of the forecast period, which runs through 2027, with inflation forecast to ease to 4.5% in 2023, before re-entering the Reserve Bank’s target 1-3% band by the end of 2024.
For all the good news, there are vulnerabilities within a somewhat sleepy budget. Infometrics economist Brad Olsen notes a cumulative impact of a raft of seemingly minor spending decisions. “Taken together, all of those small initiatives cost a lot,” he told The Spinoff. “There’s $9.4bn more spending over the next four years” than was predicted just six months ago. There’s also forecast for a slower recovery, resulting in $11bn less revenue over the same period, along with a doubling of debt service costs. “It doesn’t look as much like spending with restraint,” said Olsen.
One change that is presented as barely worth noting – it’s the final reference in Robertson’s draft speech – is an increase in the tax rate on trusts to 39% from 33%, bringing it into line with the top personal tax rate. It is directly tied to revelations that flowed out of IRD research that showed the most wealthy households pay less than half the tax rate of a typical worker. It is likely to be seized upon by opposition parties as a tax hike, and while Robertson was at pains to talk it down, it is forecast to raise over $1bn through 2027.
In addition to major pre-budget announcements around cyclone recovery, the budget contains $6bn in resilience funding, which is intended to specifically target the kind of infrastructure vulnerabilities that Cyclones Gabriel and Hale so ruthlessly exposed. This is in addition to a hefty $71bn committed to infrastructure investment over the next five years.
Still, while Homebrand Hipkins has successfully jettisoned a perception of an excess of ambition that began to taint Ardern, his government has found a few relatively affordable initiatives that thread the needle through a cost-of-living crisis, a high-inflation environment and the multi-billion-dollar cost of a cyclone recovery. Robertson underlined this change of posture, noting in his lockup speech that “79% of spending relates to cost pressures, up from 69% at last budget”.
A focus on children
Most prominent is an extension of the ECE subsidy to two-year-olds, a full extra year of funding for parents of young children. It’s the centrepiece of a $1.8bn increase in early childhood funding through 2027, one which will save $133.20 per week for parents at a period typically characterised by financial and emotional stress. In a similar vein, the $5 co-payment for prescriptions has also been scrapped – while the sum is trivial to many, it’s a sufficient barrier to some that 135,000 people failed to collect a prescription in the last financial year.
This is part of a clear emphasis on younger New Zealanders, with over $300m to fund free public transport for under 13s, and half price access for under 25s. This sits alongside an extension of free school lunches, and $230m over four years for increased operational funding for schools. Housing is nodded at through funding for a further 3,000 houses through Kāinga Ora and community housing providers – though this remains well short of addressing a housing waiting list which sits close to 20,000. There is also funding for insulation and hot water upgrades across a further 100,000 homes.
The gaming industry gets a surprise win
New Zealand’s $400m-a-year gaming industry has long complained of being ignored by comparison to more glamorous creative sectors, but receives an unanticipated 20% rebate on qualifying costs, at an estimated cost of $160m over four years. This will be welcomed by the sector, but with a caveat – Australia also has a 20% rebate, but there are specific state-level incentives on top. The New Zealand Initiative’s Eric Crampton acerbically credited to effective lobbying by Conor English, and feared for more subsidy creep into neighbouring sectors. On that front, the screen production grant is currently under review, and there is no extension beyond this year in the budget.
Hopes of a similarly mechanical incentive in the areas of science and research have been dashed with the announcement of three multi-institution research hubs. These will encompass a grab-bag of different areas, with manufacturing and biotech sitting alongside oceans and climate research.
There are other less costly initiatives which will likely have an outsize impact on particular communities. The minimum wage exemption for disabled peoples falls into this category. It impacts just 800 workers, but has long been a bone of contention for sector advocates. However, it is not uncomplicated, as employers and some participants in the scheme believe it has a moral complexity, with its wellbeing impact on workers outweighing a surface unfairness.
Another inequity addressed is that which surrounds Te Matatini, long run for paltry sums compared to more Pākehā-coded institutions like the ballet or symphony orchestras. It receives a healthy $34m over two years, along with $18m to help bake in understanding of Matariki. There is a further $10m to fund more reo Māori initiatives, along with $13m for Pacific languages.
Other major areas of spending previously flagged are cyclone recovery spending. “Cyclone Gabrielle was second-most costly natural disaster NZ has ever faced,” said Robertson, referencing its recovery cost, currently estimated at $9bn-$14.5bn. One area of significant spending which did not receive major emphasis in the wraparound speeches is the “public sector pay adjustment”, which provides $2.3bn through 2027 to adjust public sector wages across a raft of government agencies.
A surprisingly resilient economy
Robertson opened his lockup speech by emphasising improving Treasury forecasts around the economy, with some flow-on impacts to the government books. New Zealand’s crown debt as a percentage of GDP is now forecast to peak at 22%, well below the 30% upper bound target. By 2027 it is predicted to retreat to just 18.4% – orders of magnitude lower than the likes of the UK and US, both of which sit close to 100%.
Inflation is predicted to continue to ease, now without requiring a recession, with Treasury picking a 4.5% increase in 2023, re-entering the 1%-3% band by the December quarter of 2024. Robertson was at pains to point out that after a period of lagging, wages are set to grow faster than inflation, with Treasury forecasting 5.2% wage growth against 3.3% inflation through 2027. It’s not all good news – tax revenue is forecast to be lower than in the HYEFU just six months ago, pushing out a return to surplus by a year, while unemployment should peak at 5.3% late next year.
The economic forecasts had the air of a reward for the bread-and-butter turn of the Hipkins era – an approving nod from the economic wonks that restraint and a return to economic orthodoxy will produce fiscal dividends down the road. It was telling that Robertson once again referenced the post-GFC budgets of Key and English, proudly pointing at slides showing lower deficits as a percentage of GDP. While those looking for the kind of transformational change that swept Labour to power in 2017 will be disappointed, the new pragmatism at least has benefits the finance minister can use heading into what shapes as a fiercely normie election.