Budget 2023: Budget at a glance
Economic overview – Budget 2023: facing up to the economic challenges
The New Zealand economy is expected to have already entered recession. Inflation has risen to levels not seen for a generation, necessitating a rapid monetary policy response. The scale and speed of rate hikes has been unprecedented. Interest rate hikes combined with ongoing uncertainties, supply chain disruption, geopolitical tensions and deteriorating global growth, have resulted in a softer pace of growth than previously expected.
Surprisingly, all signals from Budget 2023 suggest that New Zealand will avoid a recession.
Economic growth, in real terms, is expected to increase 1.0% in 2023-24 and 2.1% in 2024-25 compared to previous expectations of 3.5% and -0.4% in the December 2022 Half Year Economic and Fiscal Update (HYEFU). While there is a slowdown in real terms, a larger nominal economy means more tax revenue.
Economic growth in nominal terms, is expected to increase to 5.3% in 2023-24 and 5.3% in 2024-25 compared to previous estimates of 4.5% and 5.5%. According to the new economic projections, core crown revenue will decrease by 2.0% (2023-24) and 2.2% (2024-25) compared to previous projections.
Much of the slowdown is centred on household spending. Households’ purchasing power in real terms has fallen as inflation bites, wage price growth fails to keep pace, and increased interest rates put pressure on household budgets. The full economic impact is yet to be realised, with 60% of mortgages due to be re-priced in the next 12 months.
The “bread-and-butter” Budget brings some support to households with the cost-of-living crisis by expanding the Warmer Kiwi Homes programme to provide approximately 100,000 new heating and insulation installations, 7,500 hot-water heat pumps and 5 million LED light bulbs, and introducing new initiatives such as scrapping prescription co-payments, free public transport for children and KiwiSaver contributions for paid parental leave. Given the scale of interest rate increases over the past year, it is conceivable that the economic downturn could be underestimated. The effect on household expenditure is uncertain – as many households have no prior experience living through a period of high inflation and high interest rates. It remains to be seen whether the cost-of-living support risks counteracting efforts to bring inflation under control.
The job market continues to deteriorate. Unemployment is forecast to increase from 3.7% to 5.0% in 2023-24, and 5.3% in 2024-25. While there has been improvement in net migration for the past three quarters that provides some relief to labour market needs, workforce shortages remain acute in some sectors. For example, limited spare capacity in the construction sector, particularly in the regions affected by Cyclone Gabrielle, may constrain the pace of the rebuild – a key focus of the 2023 Budget.
Given the current economic climate, it is important for the Budget to be mindful of additional spending. Although net core debt is 22%, total Crown borrowings is forecast to sit at 59% of the economy in 2024-25 (slightly up from the previous estimate of 58.3% made in December 2022). New Zealand is, however, still in a good position relative to other advanced economies.
Overall, the context of the “bread-and butter” Budget 2023 necessitated the Government to make decisions around trade-offs. There is a need to navigate the competing priorities of addressing the cost-of-living crisis and mitigating impacts of climate change, while also reprioritising the infrastructure investment pipeline to reflect new priorities.