Awkward economic dilemmas confront the government, as it prepares to set out its economic programme in the budget next week.
The key one is this: does it use fiscal means to reinforce the work of the Reserve Bank in damping down inflation, or does it focus on the power of the budget to win the election?
Certainly the Prime Minister, Chris Hipkins, has declared it will be a “no-frills” budget. But, in the same breath, he says he wants to ease pressures on household budgets from the soaring cost-of-living.
ANZ Bank economists, in their budget preview, say that despite the ‘no frills’ label being attached to Budget 2023 ahead of its release, “we expect it to add a little more stimulus to an already capacity-constrained economy – that’s still ‘frilly’ as far as inflation and the RBNZ is concerned”.
They point out that while fiscal policy is the right tool to respond to cyclone Gabrielle, the decision not to fund the rebuild by increasing taxes or introducing a levy means the response will require reprioritisation of spending.
And to the extent that that doesn’t cover the cyclone’s tab, it’ll likely mean higher-than-otherwise interest rates as the RBNZ responds to any inflationary implications of the larger deficits, resulting in reduced private sector activity.
“There is no such thing as a free lunch”.
The economists, Miles Workman and David Croy, say, on balance, the economy has under-performed the Treasury’s December Half-Year outlook, and some of this weaker momentum is expected to be factored into the Budget Update forecasts.
“While cyclone-related spending and possibly a higher net migration assumption could provide meaningful offsets, the Treasury’s Half-Year forecasts for real activity over the medium term were quite optimistic – a high hurdle for an upgrade.
“A weaker starting point for tax and a possible downgrade to the economic outlook suggest the fiscal outlook will be weaker. Cyclone spending net of any reprioritisations will also weigh on the Government’s books. We think it’s likely that the first post-pandemic OBEGAL surplus will be delayed by another year to 2025/26.
“Increased spending (net of reprioritisations) and a weaker tax take will also put additional pressure on NZDM funding requirements. Kāinga Ora (KO) maturities after 2023 and any increase in KO spending may also add to the funding requirement, but that may be a story for later on.
“All up, while responding to the cyclone is absolutely the right thing to do, running wider-for-longer fiscal deficits and adding further macroeconomic stimulus to an already out-of-balance economy is potentially problematic. New Zealand’s record-wide current account deficit, a near record-low unemployment rate, and CPI inflation near a multi-decade high are all good reasons to consolidate the fiscal position faster than otherwise, but it’s not clear that Budget 2023 will deliver that.
“Time will tell, but to ensure value for money for taxpayers, and from an economic sustainability perspective, Budget 2023 needs a very clear and credible strategy towards eventual fiscal consolidation. Sovereign credit rating agencies and NZ Inc’s external creditors more generally appear to be watching closely”.
Whether the Finance Minister will pay attention to the delicate warning on the need to be fiscally responsible as those economists would like him to be, remains to be seen.
As Point of Order has previously suggested, it is likely Robertson will offer some tax relief to lower and middle income groups, possibly through the Working for Families programme. Other commentators have argued he will adjust tax brackets.
In other quarters, it is contended the government should be working to ease the pressure on the country’s balance of payments, which are showing very large deficits. But even though the country’s agricultural industries should be encouraged to produce even more than they are, they won’t be counting on any favours from Hipkins and Robertson.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton
They point out that while fiscal policy is the right tool to respond to cyclone Gabrielle, the decision not to fund the rebuild by increasing taxes or introducing a levy means the response will require reprioritisation of spending.
And to the extent that that doesn’t cover the cyclone’s tab, it’ll likely mean higher-than-otherwise interest rates as the RBNZ responds to any inflationary implications of the larger deficits, resulting in reduced private sector activity.
“There is no such thing as a free lunch”.
The economists, Miles Workman and David Croy, say, on balance, the economy has under-performed the Treasury’s December Half-Year outlook, and some of this weaker momentum is expected to be factored into the Budget Update forecasts.
“While cyclone-related spending and possibly a higher net migration assumption could provide meaningful offsets, the Treasury’s Half-Year forecasts for real activity over the medium term were quite optimistic – a high hurdle for an upgrade.
“A weaker starting point for tax and a possible downgrade to the economic outlook suggest the fiscal outlook will be weaker. Cyclone spending net of any reprioritisations will also weigh on the Government’s books. We think it’s likely that the first post-pandemic OBEGAL surplus will be delayed by another year to 2025/26.
“Increased spending (net of reprioritisations) and a weaker tax take will also put additional pressure on NZDM funding requirements. Kāinga Ora (KO) maturities after 2023 and any increase in KO spending may also add to the funding requirement, but that may be a story for later on.
“All up, while responding to the cyclone is absolutely the right thing to do, running wider-for-longer fiscal deficits and adding further macroeconomic stimulus to an already out-of-balance economy is potentially problematic. New Zealand’s record-wide current account deficit, a near record-low unemployment rate, and CPI inflation near a multi-decade high are all good reasons to consolidate the fiscal position faster than otherwise, but it’s not clear that Budget 2023 will deliver that.
“Time will tell, but to ensure value for money for taxpayers, and from an economic sustainability perspective, Budget 2023 needs a very clear and credible strategy towards eventual fiscal consolidation. Sovereign credit rating agencies and NZ Inc’s external creditors more generally appear to be watching closely”.
Whether the Finance Minister will pay attention to the delicate warning on the need to be fiscally responsible as those economists would like him to be, remains to be seen.
As Point of Order has previously suggested, it is likely Robertson will offer some tax relief to lower and middle income groups, possibly through the Working for Families programme. Other commentators have argued he will adjust tax brackets.
In other quarters, it is contended the government should be working to ease the pressure on the country’s balance of payments, which are showing very large deficits. But even though the country’s agricultural industries should be encouraged to produce even more than they are, they won’t be counting on any favours from Hipkins and Robertson.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton
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