Budget week: Will action match the rhetoric?

Saturday, 25 May 2024

Luke Malpass is politics, business and economics editor for The Post.

OPINION: Reserve Bank Governor Adrian Orr sounded a grim warning this week. Inflation is remaining sticky and the bank actively considered another rate hike ahead of this week’s hold at 5.5%.

Orr said that he was personally encouraged by the news that inflation in the residential construction sector had cooled off, but he identified three areas in which inflation hasn’t cooled and over which households have no real control: increasing rents, increasing insurance premiums and increasing rates.

The rates story is one that has been overlooked in the inflation mix. Councils up and down the country have been jacking up rates significantly. Wellington had a proposed 16% rates increase this coming year, Auckland’s are going up 6.8%, 5.8% and 7.9% respectively over the next three years. Hamilton is going up 19.9%, while Christchurch is proposing a 13.24% increase for next year.

Insurance premiums have also risen sharply and are expected to do so as both in New Zealand and globally, as insurers and reinsurers re-evaluate New Zealand’s risk profile.

Rents are the other factor mentioned by Orr, which continue to rise and reflect the under-supply of New Zealand houses that has been building up for decades.

Council rate rises are often not the fault of current councils, but mostly have been a legacy of underinvestment and not properly provisioning for maintenance for many decades. And they, like all the other bits of Government and the economy are also dealing with inflation driving up the cost base.

However, it is also clearly a result of many councils spending money on non-core areas. And councils are subject to significantly less scrutiny that central Government.

In the milieu of all the reasons that inflation remains elevated, this is one that will really irk ratepayers – that council rate hikes are a major factor getting in between them and interest rate cuts.

The upshot of all of this is that for anyone with a mortgage – which thanks to years of cheap money inflated asset prices are larger than they used to be – rates relief on the Reserve Bank’s track is unlikely to be until the latter half of next year. Things change and it could come sooner, but it also may be later.

For the Government, this will be bad news. A big part of the Christopher Luxon and Nicola Willis case for this Government is that by reining in spending and getting things under control interest rates will be able to come down with time. And while Government spending has a part to play in that, it is ultimately the Reserve Bank that will decide that.

The Budget this coming Thursday will be the first major political test for the coalition and a good marker of how well it has calibrated the politics of restraint and shifting money around from “back office” to “front office” functions – although in many cases this distinction is pretty arbitrary.

Luxon has made a virtue of being predictable after the lurching Covid-19 years under Jacinda Ardern and Chris Hipkins’ governments. Everything he says is predictable and he slavishly sticks to his theory of the case and repeats the same things ad nauseam.

There is some method to this. Only long after other politicians and reporters are truly sick of hearing the same thing does it really sink into the public’s consciousness. But it could wear the public out over time.

The Budget, however, will provide a bunch of new material for him to talk about and Willis has grown into the role of Finance Minister at a rate of knots. She is across her material and has become better at explaining what the Government is up to.

The Budget will serve as the first major marker on which the Government will build its case over the coming couple of years.

One thing to keep an eye out for will be any new infrastructure announcements, after Willis used a speech to the Employers and Manufacturers Association on Thursday to basically signal that more money will be put aside for infrastructure. But expect any of it to be tightly defined and limited in scope. One of the key lessons learned from the second Ardern term was the political danger of trying to do too much and not achieving any of it particularly well.

It will also be the first real indicator of how just how ambitious this Government plans to be.

As reported on in The Post on Friday, a Taxpayers’ Union Curia Research Poll found that there was a healthy majority either in favour of the current level of public service cuts or in favour of even more.

It is only one data point, but one that will buoy the Government.

But any public service cuts will only be a very small bit of what Willis has to achieve - which is a rebalancing of the booked and digging New Zealand out its structure deficit – which basically means that the Government is currently and consistently borrowing to fund current spending.

The other interesting thing to watch will be how many of NZ First and ACT’s policies make Budget Day, whether through programmes that are cut or new things that are announced and reprioritised.

A major thing that all eyes will be on is the tax cuts, which Willis has repeatedly said will be the centrepiece of the Budget. There has been significant political capital invested in this by the National Party – and the by extension the coalition. They will have to be significant enough that people don’t just write it off as too little.

One of Labour’s problems was that it was not able to deliver cost-of-living relief and its one-off cost-of-living payment in the 2022 Budget did not pay much of a political dividend. Labour’s argument at the time was that it didn’t want to do anything too inflationary and wanted to just make things a bit easier.

While the tax cuts will have a crucial difference – they will be permanent and not a one-off payment – they too could suffer from the same political problem – that they are too modest.

Since being in opposition and continuing in Government, National has been decrying how spending has got out of control. But it is worth remembering that it will continue to increase in this Budget, it will just be at a lower track than Labour had planned to do it.

Thursday will show for the first time if the Government’s demonstrated intent matches the rhetoric that has preceded it.

All the while, inflation is still running warm. And its main drivers are costs that households and businesses – as well as the Government and Reserve Bank – can do very little about.