The New Zealand Government boosts spending on social benefits, health and infrastructure while forecasting that net debt will hit 43.6 per cent of GDP by 2025, around double the level before the COVID-19 crisis.
Finance Minister Grant Robertson says the budget, announced today, was based on an assessment that New Zealand had recovered faster than previously expected from the COVID pandemic – a “one in a 100-year shock” – and while net debt would reach 43.6 per cent of GDP by 2025, this was less than the 46.9 per cent previously forecast.
The theme for this year’s budget was “Securing Our Recovery”, which Robertson says strikes a “careful balance” between continuing to support and stimulate the economy while looking to “keep a lid on debt.”
“The budget will make progress on the three core goals of the government: to keep New Zealanders safe from COVID-19, accelerate our economic recovery, and tackle the foundational challenges of housing affordability, climate change and child wellbeing,” Robertson says.
Treasury estimates show that net Crown debt is expected to increase by close to NZ$100 billion by 2024/25 and peak at 48 per cent of GDP in 2022/23.
The improving economy means an increase in government revenue, with the budget estimating revenue of NZ$91.5 billion this year rising to $101.7 billion in 2023, up from December forecasts of NZ$88.3 billion in 2021 and NZ$96.9 billion in 2023.
No return to surplus yet
Government finances will not return to surplus until 2027, according to budget forecasts.
Robertson says economic growth is expected to average at 3.4 per cent over the next four years, rising from 2.9 per cent this year to 4.4 per cent in 2023 before plateauing.
This is significantly higher than previous estimates, which were for 1.5 per cent this year increasing to 3.7 per cent in 2023.
The higher than expected growth will have a major impact on unemployment, with Robertson saying that an extra 221,000 people would find jobs over the next four years as a result.
“Many economists were saying it would take until 2023 for the economy to return to previous levels,” says Robertson.
Unemployment and wage growth
Unemployment is expected to peak at 5.2 per cent this quarter, before falling to 4.2 per cent in three years’ time.
Inflation is forecast to rise to 2.4 per cent in the year to June, before falling back to between 1.7 per cent and 2.1 per cent during the following four years.
The Reserve Bank of New Zealand inflation target, a key mandate for the central bank in setting monetary policy, is between 1 per cent and 3 per cent.
“Wage growth, at nearly 3 per cent a year, will outpace inflation, meaning more money in Kiwis' back pockets,” says Robertson.
The budget also forecasts an improvement in business investment, which slumped during the pandemic, with expected growth of around 6 per cent over the course of the next four years.
Infrastructure and social investment dominate New Zealand’s 2021-22 budget
Rick Jones, CPA Australia New Zealand Country Head, describes the budget as “appropriately expansionary”, while retaining flexibility should the pandemic worsen or another global economic shock emerge.
“The budget strikes a good balance by focusing on cementing the recovery, creating jobs and addressing the underinvestment in critical infrastructure,” Jones says.
“The big investment around the lifting of weekly benefits recognises the correlation between economic prosperity and social prosperity.”
CPA Australia welcomes continuing support for small businesses’ digital transformation, with NZ$44 million for digital training, advice and support services.
However, Jones notes: “It is questionable whether the size of the investment is sufficient to push Kiwi small businesses off the bottom rungs of the small business digitalisation ladder.”
Aligning with its theme of “wellbeing”, which assesses the success of the economy by criteria beyond GDP growth, the budget allocates NZ$3.3 billion over four years to boost welfare benefits. Meanwhile, the health sector will receive NZ$4.6 billion in new day-to-day spending over the next four years, with another NZ$704 million for one-off expenses such as new buildings.
The increase in social spending will see benefits increase by between NZ$32 and NZ$55 per week, with student allowances up by NZ$25 per week.
Other major initiatives include an extra NZ$15.1 billion over the next four years for infrastructure, with major allocations of NZ$810 million for KiwiRail and for a new wagon assembly facility to be built in Dunedin.
A further NZ$761 million is earmarked for school infrastructure.
The infrastructure spend adds to the NZ$42.2 billion the government has already announced it will spend over the next four years in roads, rail, schools, hospitals and energy generation.
With the new budget announcements, the government infrastructure allocation over the next five years is NZ$57.3 billion.
There is also a commitment to renewable energy, with an allocation of NZ$300 million to recapitalise investment bank New Zealand Green Investment Finance. This comes at a what the government says is a “critical time for investment in climate change mitigation in New Zealand, as we move to implement our first Emissions Reduction Plan this year.”
On house prices, which have been a key focus for the government as prices have soared more than 20 per cent in some regions over the last year, the budget forecasts that the market will cool significantly in the short and medium term under the impact of recent measures impacting property investment.
The Treasury is now forecasting annual house price growth will be only 0.9 per cent next year, before edging up to 2.5 per cent in 2025.
The government has been concerned about the impact of housing affordability for people locked out of the market, and the budget also includes NZ$2.1 billion for operating costs and a NZ$1.7 billion capital allocation for the Housing Acceleration Fund.
Robertson says this is a “very sharp adjustment in house prices, but a very necessary one”, adding that it’s important to move away from the property market as a driver of economic growth.
“We need to make a transition to more productive growth in the New Zealand economy,” he concludes.