Today I made the pilgrimage to Wellington for the Budget.
Budget Day pageantry is always a bit odd, but in a weird way I kind of like it. It’s an excuse to mingle with an eclectic mix of fellow economists, media, and other misfits, who come to town for the Finance Minister’s annual sausage roll shout.
As I sat in the Budget lock-in this morning, I reflected on one of the key debates that had emerged in the lead-in to this year’s Budget. The debate in question was whether the Budget was going to add unnecessary fuel to the current inflationary fire, or whether it stood a chance of sparking longer-term change that sets the country up for a more productive, resilient, and inclusive future.
Dealing with whether the Budget would stoke the inflationary fire, the first thing that stood out to me was that spending in the upcoming fiscal year will be lower than it is currently. This spending pullback, coupled with a higher tax take (due to inflation pushing up wages, company earnings, and GST revenue), will help narrow the government’s deficit by around two thirds, from a whopping $19 billion deficit in 2022 to just $6.6 billion in 2023. Assuming the Treasury’s forecasts hold, then the deficit turns to surplus by 2025 and government debt peaks at a net 20% of GDP – well below the government’s 30% of GDP debt ceiling.
Most of the spending pullback is because the Covid-19 lolly scramble of wage subsidies, business support, and extraordinary temporary health costs is behind us. This spending served a function that kept us safe and the lights on for many, but its day is done barring another severe wave of the pandemic. Continuing to spend on these things would simply add demand to an already tight economy and create inflation without giving us a lasting legacy.
Looking beyond the removal of one-off pandemic related expenditure, the rest of government spending does continue to creep up over the next few years. But spending growth is modest relative to projections of economic growth, meaning that the Treasury anticipates that spending as a share of the economy will settle close to its long-term average of around 30% of GDP (compared to 35% of GDP currently).
There is also a noticeable shift in the tone of what is planned. Rather than simply throwing wads of cash on sugar rushes that would only serve to stoke short-term demand, many actions have been designed to invest in our long-term productive capacity and resilience. There is the odd exception, such as a temporary $27 per week payment to households to meet rising living costs, but realistically this payment will be mellow in its inflationary effects compared to the lolly scramble cash handouts of 2020 and 2021.
Top of the government’s spending wishlist are reforms to the health system and investment in climate responses, as well as targeted investment in training, business innovation and enabling infrastructure. The intent of these initiatives is noble, and theoretically are what a textbook would tell you to do to unlock a more productive, inclusive, and sustainable future. However, theory and practice are two different things.
The challenge I have is that I struggle to see how New Zealand’s public sector will have the capacity and capability to deliver so much transformation in such a short space of time. The reality is that our public sector is already overworked, and bleeding workers to consultancies and other sectors. This means that the government’s change management processes and high levels of capital investment are going to take longer and ultimately cost a lot more than anticipated. I want to be proved wrong, I really do, but I don’t buy that the government is going to be able to deliver on its plans across all fronts.
So for me, Budget 2022 is not so much about debating whether a certain level of government spending itself adds to inflation or not, it’s more a question of delivery. My gut tells me it would be better to focus on doing a few changes well, rather than biting off more than the government can chew. The perverse thing is that the complexity of change often proves to be more resource hungry than originally anticipated, which in a tight economy could still stoke fiscal inflationary pressures yet.
If you want to read about Budget 2022 at a glance, then here is a handy guide from The Treasury.