Labour’s populist budget of relief brings a few surprises

Finance Minister Grant Robertson gives a copy of his Budget 2023 Speech to ACT Party Leader David Seymour (RNZ Photo by VNP/Phil Smith)

New Zealand Budget Special 2023

Venkat Raman
Auckland, May 18, 2023

Finance Minister Grant Robertson has tried to appease New Zealanders with a ‘No Frills, All Action Budget 2023,’ which aims to provide relief to middle New Zealanders while setting priorities for infrastructure rebuild caused by natural disasters this year.

Introducing the Finance Bill for 2023 to Parliament this afternoon, Mr Robertson called Budget 2023 ‘Support for Today, Building for Tomorrow.’

Relieving cost pressures

As a part of his efforts to address the cost-of-living crisis, which Chris Hipkins had touted as the ‘Bread and Butter Issue’ when he became Prime Minister in February this year, the Budget makes four major provisions.

They are (1) Extension of 20 hours of childcare to two-year-old children, meaning that parents can reduce expenses on caregivers (2) Removing the prescription charge of $5 imposed on medicines. This will benefit more than 770,000 people aged 65 years and above (3) Free public transport to children under 13 and half price for people under 25 years of age and (4) Lower household energy bills through an expanded ‘Warmer Kiwi Homes Programme.’

The Budget also provides for the Recovery and Resilience Plan and Services Delivery and Financial Sustainability which will be funded out of the total investment plan.

Mr Robertson has provided for a $3.1 billion capital investment ($465 million operating costs) for 3000 additional public housing places, $3.6 billion operating cost and $1.3 billion capital expenditure for education, an additional $1 billion for health and $190 million operating costs of supporting Kiwis to work.

Flood and Cyclone Recovery

He had already announced an allocation of almost $1 billion to flood and recovery projects that will include repairs to roads, rail and schools, apart from flood protection and mental health support. His announcement, at Taradale in Napier on May 14, 2023 came on the heels of the Treasury’s estimate of the damages wrought by Cyclone Gabrielle (February 6) and the Auckland floods (January 27) ranging from $9 billion and $14.5 billion.

According to Mr Robertson, the damages to public and private properties caused by these natural disasters were second only to the Canterbury earthquakes of 2011.

He said that about $7.5 billion will be needed to set right the infrastructure facilities owned by the central and local governments.

Mr Hipkins said that the spending announced today would cover the “basics,” as much of the country recovers from the effects of severe weather.

“This is about repairing and rebuilding what has been damaged and making smart investments, including $100 million of protection funding to ensure future events do not cause the same devastation. This recovery package will get roads, rail and schools back to where they were before the extreme weather hit this year so communities can get back to normal as soon as possible. These investments will help ease the pressure on local communities already struggling with the cost of living from having to foot the full recovery bill. We’re partnering with local government to make sure cost isn’t a barrier to the recovery work getting done,” he said.

Support to Councils

Transport Minister Michael Wood said that the government would step up to aid local councils in addressing damage to the transport network.

“Within the support announced today, $275 million is earmarked for Waka Kotahi the New Zealand Transport Agency and local Councils to repair affected roads and get New Zealand’s essential transport network operating again. This is on top of the $250 million the government announced immediately after Cyclone Gabrielle,” he said.

Trustee Tax draws flak

Budget 2023 proposes to align the trustee tax rate with the top personal tax rate of 39% from April 2024 and the provision has already drawn criticism.

Revenue Minister David Parker has argued that the move will improve the fairness of the tax system and reduce opportunities for high-income taxpayers to circumvent the top personal tax rate. He said that the IRD has shown a spike of almost 50% in income subject to the trustee rate, from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.

“Misalignment between the 33% trustee rate and the 39% top personal rate allows taxpayers to circumvent the top personal rate and reduces the progressivity and fairness of the income tax system,” Mr Parker said.

But the Taxpayers Union Campaigns Manager Cullum Purves said that Mr Hipkins has broken his ‘No Taxes’ promise.

“The government is trying to justify this tax hike by pointing to the most wealthy. But those people can keep money within company structures and pay the 28% company tax rate. In reality, this tax grab will hit small business owners who often hold business in trusts for legitimate reasons,” he said.

Spending and Public Debt

Mr Robertson has set a massive net new operating spending of $4.8 billion per year, which he said is lower than the $5.9 billion allocated in the 2022 Budget.

“New Zealand’s low public debt allows for $10.7 billion total capital investment from the multi-year capital allowance, coupled with a $6 billion National Resilience Plan, focused on closing the infrastructure deficit which has built up in this country over decades,” he said.

According to Mr Robertson, the government will manage a lower operating allowance, made possible ‘through tough decisions and a reprioritisation and savings process that has led to a total of $4 billion in savings.

The Treasury has forecast that inflation will fall to the 1% to 3% target range by next year and that the New Zealand economy will grow by 3.2% this financial year. The rate of unemployment is expected to peak at 5.3%, while wages are likely to keep pace at 5.2%. The net debt forecast will peak at 22% of the GDP, which Mr Robertson said is lower than countries with which New Zealand is compared- notably the OECD.

Based on these forecasts, Mr Robertson expects the government books to show a surplus by 2025/2026 with the real government consumption falling by 5% in 2025.

Mr Robertson expects the economy to perform better than it did during the Global Financial Crisis of 2008-2009 despite the challenging global environment, with Treasury forecasting New Zealand will avoid recession.

“The last few years have been challenging times for the international economy, with global inflation pressures and an economic slowdown weighing down prospects in New Zealand and having a real impact on people’s lives. The impact of the recent flooding and cyclone is also adding to uncertainty and has added significant costs. New Zealand is in a strong position to support households in this challenging environment, with unemployment near record lows, wages rising faster than inflation and the Government’s books in solid shape,” he said.

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