The Minister of Finance delivered a multi-billion dollar spending package

Aimed at securing this year’s election, spending at this level will likely delay any interest rate easing by the Reserve Bank.

For SME business leaders, unless your business is directly or indirectly involved in the infrastructure sector, there is very little assistance in this budget.

 

Rebuilding NZ’s infrastructure

The government could not ignore the electoral impact of being seen to support the rebuild and improvement (at least on a partial basis) of storm-damaged and ageing infrastructure in need of repair and rebuilding.

Specifically, it announced:

  • A $6 billion National Resilience Plan to repair roading, rail, telecommunication and electricity transmission infrastructure damaged in recent, and future severe weather events.
  • A previously announced $941 million to repair basic infrastructure damaged in recent floods, and improve flood resilience.

This spending of almost $7 billion is in addition to the Government’s $71 billion infrastructure plan already rolling out over the next five years.

Details of the timing and areas that will benefit from this $71 billion spending are difficult to pinpoint. However, if this spending is well-targeted, well-managed and cost-effective, New Zealand’s infrastructure and the businesses delivering the goods and services to create and commission it will benefit considerably.

 

Mounting debt

What is not difficult to pinpoint is the increase in borrowing that will occur, on top of the existing government spending since 2017. In summary, the additional borrowing, on top of levels already announced comprises:

  • $300 million more this year
  • $500 million more in the next three budgets
  • Net core Crown Debt of $181 billion in 2027 (37% of GDP), up from $128 billion currently, and $59 billion in 2017.
  • New Zealand’s books are forecasted to be in deficit until 2026, one year longer than the pre-budget forecast.

 

The effect of government spending on inflation and interest rates  

The Minister of Finance stated:

He did not believe the Reserve Bank would need to hike interest rates to deal with this increased spending.

This statement seems to defy logic. The outcome of all this government spending is that inflation is likely to stay higher for longer. This will put further pressure on New Zealand’s interest rates.

Treasury has forecasted inflation as follows:

  • A fall to 3.3% in the coming financial year
  • Inflation is forecast to be 2.5%, 2.3%, and 2.2% in the three years following the coming financial year.

Overseas inflation rates, particularly in the US, would need to fall significantly from current levels to support these Treasury forecasts. Signs of falling offshore inflation, including in the US, are starting to emerge but will undoubtedly need to accelerate.

 

Social spending highlights

  • An extension of 20 hours of early childhood education to include 2-year-olds, at a cost of $1.2 billion.
  • Abolition of the $5 prescription co-payment, at a cost of $619 million.
  • Cheaper public transport for children, at a cost of $327 million.

These initiatives aim to ease the stress for families with young children struggling with the current high cost of living.

 

We will find out how well this budget was received when New Zealanders go to the polls on 14 October 2023.

By Murray Fulton, Advantage Business Director, and Business Advisor

 

budget 2023