Finance Minister Grant Robertson may be getting grey hairs as he toils on what his backbench colleagues hope will be an election-winning budget (due for presentation on May 18).
The difficulty is that economic problems are piling up. The cost-of-living crisis is worsening – inflation, although it may have stabilised, remains stubbornly high at 6.7% and NZ’s current account deficit, at $34bn, is threatening the country’s credit rating.
The CPI figure marks almost two years of inflation above the Reserve Bank’s target range, and it is the fifth time in a row it has been more then double the maximum of the target range. Critics have noted the fact that non-tradable inflation is at its highest level since the series began demonstrates that the problem is primarily being driven domestically.
The ANZ Bank’s economists say:
“Annual CPI inflation decelerated to a still-eye-watering 6.7% in Q1, weaker than our forecast of 7.2%, and a decent clip below the RBNZ’s February MPS forecast of 7.3%. But the surprise was largely in the tradables component (the more volatile and less persistent kind of inflation).
“Non-tradables inflation (the sticky kind of inflation) came in at 1.7% q/q, weaker than the February MPS forecast of 1.9% q/q but in line with our forecast. This ‘miss’ vs. the RBNZ’s forecast didn’t prevent annual non-tradables inflation from accelerating – it’s now running at 6.8% y/y, which is more than double the ~3% annual pace that has historically been associated with headline inflation running close to the 2% target midpoint. In fact, annual non-tradables inflation is at a record high!”
Robertson plainly may find it difficult to explain in the budget just how he managed the dive into this inflation horror story.
Now, a big budget spend-up aimed at persuading voters that Labour deserves another term in office might be seen as the Finance Minister delivering a terminal punch to the economy.
If Robertson is to succeed in writing an election-winning budget he may need all the economic finesse at his (and Treasury’s) command.
Early speculation has focussed on the need to adjust tax brackets, and also the Working-for-Families system. As Ruth Richrdson, onetime Finance Minister in the fourth National government has pointed out, NZ’s lowest paid workers are now paying tax rates that were set up to sock it to those on higher incomes.
“To make things worse, the higher bracket at such a modest income level is a tax on ambition that risks killing the incentive to upskill, gun for promotion, or take on a side gig”.
Robertson may be tempted to ignore the advice he may be getting to be cautious and instead go hard on the spending front. That might bequeath any headaches to his successor.
But then what if Labour were to win the election? He would be faced with an even bigger problem in taming inflation and restoring the country’s finances to some semblance of order.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton