Budget 2022: Clear direction needed to ensure a prosperous future for New Zealand
Long term success determined by capability and execution
New Zealand is at a tipping point. Our economy is emerging from the ravages of COVID-19, and while we have managed to weather the last couple of years in relatively good shape, we are now facing several challenges, including the highest inflation rate in three decades1, rising social inequity, and a significant infrastructure deficit. As we face these challenges, we also need to operate within a sustainable debt and funding environment whilst acknowledging and effectively managing a scarcity of resources.
It was therefore critical to see Budget 2022 provide clarity of choice and thought on the programmes of work and investment the Government wishes to prioritise. In this Budget, the Government has needed to walk the line between balancing the current issues of high living costs and a return to surpluses alongside creating a healthier and more environmentally responsible Aotearoa in the longer term.
Cost of living front of mind for most Kiwis
Inflation is running rampant at 6.9%, a 32% increase in petrol prices2 over the last year combined with a 6.7% year on year increase in food prices is hitting households with significant increases in the cost of living. For those renting, Consumer Price Index (CPI) data shows rents across the country rising by 4% year on year, while TradeMe data shows rents have risen by closer to 7% over the year to March. While certain increases have been influenced by international factors and some subscribe to inflation being temporary, the Government cannot afford to simply ‘look through’ the current environment when setting its own spending priorities.
There is an expectation the Government takes stock and controls their own spending. While the recent announcement commits to small annual surpluses from 2024/25 and maintaining those surpluses in the range of 0-2% of GDP.
Today’s Budget acknowledged the need for spending to consider wider inflationary impacts, but the Government has shown a clear desire to continue to push on with healthcare and wider reform programmes. How inflationary these are likely to be will depend on how quickly the investment gets rolled out especially with much of the funding directed into areas of the economy that are already facing capacity constraints.
The Budget also clearly showed the political heat associated with the “cost of living crisis” was top of mind. The headline item being a cost-of-living package costing $1 billion and expecting to positively impact 2.1 million New Zealanders.
The reform agenda
Reform is also upon us in an abundance, with health and climate at the forefront. There is pace in the need to deliver change, deliver capabilities and deliver funding. However, we live in a world of limited resources, especially in Aotearoa. We have low levels of unemployment, restricted immigration, and talent shortages, so a step back needs to be taken to ensure there is robustness in the process, an ability to execute on expectations, a return on investment and an ability for all New Zealanders to keep up with the pace of change.
With this in mind, it was pivotal that Budget 2022 provided a clear direction from the Government about the areas and the outcomes they want to drive, the incentives for others to come on the journey, and managing this with a degree of fiscal prudence. The Government will be under particular scrutiny about whether value for money is being delivered from their reform agenda and climate objectives. Direction and intent is one thing but execution is ultimately what will drive the scorecard.
Addressing the infrastructure deficit
Earlier this year Treasury advised New Zealand has a significant infrastructure deficit and this needs to be addressed as a matter of urgency to ensure it doesn’t continue to grow3. Minister Robertson has advised that the Government is planning for a $61.9 billion Crown spend on infrastructure from 2022 to 2026.
Infrastructure has traditionally been fraught in terms of managing execution, capability and budgetary envelopes with the resultant challenges to meeting return on investment expectations. Accordingly as we embark on significantly increased infrastructure programmes (which are well needed) spending needs to ensure not only is there value for money but that the programme of investment is choreographed. Without such a structured ‘cross-sector’ approach to manage timing and capability the efficiency of the spend and quality of outcomes will be significantly challenged.
Both the reform agenda and the infrastructure programme can’t be delivered by the Government in isolation and require strong support and integration from business and community organisations.
Investing in business potential
While Budgets are inherently about public spending, its nice to see some investment being made in Aotearoa’s SME business sector. The Government has committed $100 million of funding over the next year for a “Business Growth Fund” (BGF). The BGF will provide SME’s with access to finance, with effectively the Government taking minority interest shareholdings and a seat at the boardroom table of qualifying SMEs. The challenge will be ensuring that the investment can be delivered in a robust, responsible and timely manner and that process and regulation do not become over-bearing barriers to access.
New Zealand is open but so is the world
The Government also needs to carefully consider immigration policies to ensure demand is not hampered by a shortage of workers as New Zealanders head overseas, exacerbating an already tight labour market.
The growing cost of living combined with wage growth lagging behind headline CPI inflation to date, at a rate of 3% against 6.9%4, will only encourage the return of the brain drain to countries such as Australia and the United Kingdom. Theoretically we should start to see immigration return, although recent data suggests that we are likely to experience a more significant number of people leaving than arriving until the end of this year.
A lack of workers is already proving to be a handbrake on economic growth and adds further to inflationary pressure. It is that economic growth that underpins the projected return to surpluses and is the buffer against future shocks.
The healthcare sector has an acute shortage of workers and recent strikes from health professionals have highlighted the current fragility of our healthcare system and lack of staff. A constrained labour market may well hamper the Government’s ability to deliver the reform programmes set out in the Budget.
As Aotearoa opens itself up to the world again, we need to be positioning ourselves as maintaining a strong economy and continuing to be a great place for investment. The Government’s signals around the opportunities they want to pursue in this space will be paid close attention by the international market and clarity around these will be critical to attract business and investors back to our shores.
The current climate provides a number of opportunities for the Government to show clear thinking around mapping out the future for a successful and prosperous Aotearoa and Budget 2022 has certainly provided insights as to major investments in health, climate and infrastructure as being the Government’s key levers for doing so. But there remain questions as to the breadth and speed of the agenda.
Today’s Budget shows a strong determination from the Government not to deviate from its wide-sweeping long-term reform goals, while acknowledging the overt need to buffer current cost of living challenges. But there is a risk in the current environment that this will not fully address the impacts for much of the general population who are facing into acute price increases, falling house prices and higher interest rates.
Longer term success will ultimately be determined not by the ambition of the reform programmes but by capability and execution. Sometimes less is more.
- Annual inflation reaches 30-year high of 6.9 percent | Stats NZ
- Note that the Government’s petrol excise duty and road use charge cost were both reduced by 25 cents per litre and public transport subsidies came into effect at the very end of this period.
- Treasury warns New Zealand has massive infrastructure gap, expected to get bigger in future - NZ Herald
- Annual wage inflation rises to 3.0 percent | Stats NZ