An average Budget for the Government, but a tough one too for the Opposition

Friday, 19 May 2023

National Party finance spokesperson Nicola Willis says her party would return a $5 co-payment to medicine prescriptions, after the Government promised to remove the fee in Budget 2023.

ANALYSIS: Whether or not it factored into Finance Minister Grant Robertson’s Budget strategy, he may have made it tougher for the National Party to make big promises in the run-up to the election.

Despite not showing any obvious signs of irresponsible largesse, Robertson’s sixth Budget was more generous than many economists might have expected, or indeed wanted.

ASB senior economist Mark Smith said it would do little to prevent the official cash rate from moving up or drive a meaningful improvement in the country’s gargantuan $34 billion current account deficit.

The Treasury is now not expecting the Government’s books to return to balance until the year ending June 2025, a year after it had previously expected.

Infometrics principal economist Brad Olsen believes there’s a risk the Government might not really get back into the black until a year after that, given that the government surplus pencilled in for the June 2026 year is now a wafer-thin $600 million – or a mere 0.1% of GDP.

The increase in government debt during the past few years has been truly sobering, notwithstanding Robertson’s upbeat assessment of how New Zealand’s government debt compares to other economies.

Finance Minister Grant Robertson, centre, hopes he has found ways to ease the cost of living without making the monetary policy hawks squawk.

Net core Crown debt – which to be fair does exclude the $62b the Government has saved up in the NZ Super scheme – has climbed from just under $58b in June 2019, before the Covid pandemic, and the Treasury now expects that to hit $179b in the year to June next year.

Even taking into account inflation, net core Crown debt has far more than doubled in the space of a few short years.

Robertson argued the Budget set the scene for a drop in inflation, and while that might be over-egging it, it does appear that the new spending in the Budget has at least been carefully targeted not to put too many obstacles in the way of inflation’s gradual retreat.

Getting rid of the $5 co-payment on prescriptions, for example, isn’t going to push up the price of drugs by much, since the price of medicines is usually negotiated directly by Pharmac.

And although higher childcare subsidies will leave more money in the pockets of young families to spend, that could be partially offset by it enabling more parents to rejoin the labour force earlier, putting a downward pressure on wages.

If there was one key message from Robertson on Thursday, it was that its measures would “ease the cost of living our households face without exacerbating inflation pressures as much as tax cuts would”.

Together, the prescription and childcare changes are budgeted to cost about $450m a year.

Robertson could instead have reduced the cost of living by raising the contentious $48,000 tax bracket at which the marginal income tax rate jumps to 30%, to a nice round $50,000 from April next year.

That would have “saved” anyone earning more than $50,000 a year $250 a year at a cost to the Government of a little under $400m a year.

It might have seemed tempting politics to suck some of the wind out of the sails of National’s promise to index-link tax brackets to inflation, ahead of the election.

But the political upside for Robertson is that he is not doing any of National’s work for the Opposition.

National Party finance spokesperson Nicola Willis confirms the party has not yet determined when the starting date for its indexation would be.

National Party finance spokesperson Nicola Willis may now need to match tax cuts with spending cuts more dollar-for-dollar, but believes the savings are there to be had.

So it is not clear whether it might adjust tax brackets from the time National said that would be a good idea, from the time it won an election, or from its first Budget, or backdated to some particular point in time.

But Willis says the party remains committed to reducing the tax burden by $1.8b a year at a minimum.

In the light of the Treasury’s updated forecasts that looks like a tough ask, at least in the near term.

More than ever, any tax cuts implemented by National that aren’t fully matched by genuine cuts in spending risk feeding straight through into higher interest rates, and a drop in the value the dollar that would also contribute to inflation.

Willis, at least, appears undaunted. For a start, she says National would scrap the prescription and childcare policies Robertson announced on Thursday.

“We don't agree with the proposed 20 hours free childcare for two-year olds. We prefer our approach of a family boost payment of up to $75 and a rebate for children of all ages.”

She says it would also roll back the prescription change, saying “the Chemist Warehouse already provides free prescriptions to many people”, and half-price public transport for the under-25s.

But that would still leave a lot of savings to find elsewhere to support indexation.

Willis is convinced they are out there.

“We're confident that by going through this Budget, line by line, we will find things that we won't do that will not find their way into our Budget. We're confident we will be able to campaign on tax reduction and more disciplined books.”

Financial markets might now want even more proof of that than they might have settled for before Thursday.

It may have been a fairly unremarkable Budget for the Government, but one that has also created a lot of hard work for National.