Willis’ challenge: Budgeting for a high cost economy
Wednesday, 29 May 2024
ANALYSIS: Today Finance Minister Nicola Willis will visit the printers to see the copies of the Budget documents rolling off the presses, ahead of delivering it on Thursday.
It is a Budget that will take place in the worst economic conditions the nation has faced since the global financial crisis, and probably since the early 1990s — although in a very different way. Credit markets are not seizing up and the financial sector is not teetering: it is instead a more endemic economic malaise.
That is against the backdrop of stubbornly high inflation, a real per person recession and an increasing Government debt level and interest bill. Sorting that out is made much more difficult by the fact that growth has been dragging significantly on the Government’s tax take.
The past few years mean, in effect, that Nicola Willis has had to budget for a high cost, low productivity economy, with less money than last year. Even if it were desirable, it can’t invest new money in anything for fear of pushing out inflation’s return to the Reserve Bank of New Zealand’s 1% to 3% threshold.
In the middle of all of this, the Government will be delivering some sort of income tax relief — most likely by shifting some tax brackets and through some working tax credits — although the ultimate design will be revealed on Thursday. The particular political challenge is finding the money and delivering in a non-inflationary manner.
The fiscal deficit, which at Treasury’s half-year update was expected to be 2.2%, will almost certainly rise this year, and require the Government to issue more bonds in order to pay for the shortfall caused by the lower tax take.
And it isn’t abstract. It is being felt around the motu.
Business Canterbury yesterday released its Canterbury business confidence survey which showed confidence plummeting from 44% being positive about future financial performance six months ago to only 19% being positive now.
Some 59% of business are worried about a dip in consumer demand, up from 27% this time last year.
That echoes a survey from the Auckland Business Chamber on Monday which found that 65% of businesses expect a continuation or decline in New Zealand’s economic performance, while overall, 65% have negative business confidence, up from 52% last quarter.
There is also a general agreement that the economic indicators seem to be lagging the real-world sentiment and economic crunch in cities and towns around the land.
“A structural deficit and cyclical pressures, that we have long pointed out, make for an awkward backdrop for a Budget. But that is the current situation, leading into the Government’s Budget on Thursday,” BNZ Research said in a note.
On Tuesday, Tower Insurance reported that its premiums had risen by 20% in the past year. A few hours later, the time the Reserve Bank announced it would be introducing debt-to-income ratios for new mortgage lending.
The insurance rises have been felt and are for justifiable reasons around risk, but they are just one part of the rising cost structure around the country. Last week Reserve Bank Governor Adrian Orr highlighted rising council rates and rents among the stubborn bits of the domestic economy that are still inflationary. And even though construction and food price inflation has slowed, costs are still historically high.
The central bank’s new debt to income ratio — limiting the amount of debt a person or couple can borrow compared to income at a 6:1 ratio — appears to be putting more macroprudential tools in place for if the mostly flat housing market gets some froth back.
Willis for her part has been talking about value for money, spending better and reassuring the nation that the Budget will not be a document containing swingeing cuts.
This is a new era of restraint and it is felt more broadly than these shores. In the United Kingdom, would-be Labour chancellor of the exchequer Rachel Reeves has been making very similar noises about simply managing the fiscal policy better.
Willis frequently talks about the economic hangover from Covid-19.
The Covid-19 party has long been over, but Thursday will be the first day that New Zealanders will see what the after party clean up really looks like and the limits on parties in future.
The Budget is handed down at 2pm on Thursday May 30.
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