Recession is no threat but slower growth may affect the economy

Finance Minister Grant Robertson (Centre) walks with Prime Minister Chris Hipkins (right), Housing Minister Dr Megan Woods (left) and Revenue Minister David Parker (behind) to introduce Budget 2023 to Parliament on May 18, 2023 (Photo Courtesy: Getty Images through Newsroom)

Sam Sachdeva
Wellington, May 19, 2023

The government has unveiled a Budget bereft of the usual election-year treats, with New Zealand forecast to avoid a recession but bad economic conditions linger.

An expansion of free early childhood education (ECE) and the scrapping of prescription co-payments are the most notable cost of living measures in a Budget described by Finance Minister Grant Robertson as a “pragmatic” approach to a high-inflation environment.

Robertson’s sixth Budget, and Prime Minister Chris Hipkins’ first, comes with mixed news on the fiscal front, with New Zealand no longer predicted to enter a recession in 2023 – but slow growth set to endure, and unemployment to remain high for longer.

Unveiling his government’s plan for the coming year, the Finance Minister said that his focus was on “straightforward and practical investments to deal with the here and now.”

Priorities revalued

The Budget process had been well underway by the time of the Auckland floods and Cyclone Gabrielle, and the damage caused by those events had forced a re-evaluation of priorities. In addition, the government needed to avoid worsening high levels of inflation through its own spending.

“We cannot simply go on with the high levels of spending that we have seen in previous Budgets, because that is fiscally unsustainable,” he said.

The headline initiatives are the expansion of the government’s free ECE scheme, which will allow two-year-olds to receive 20 hours of free weekly care at a cost of $1.2 billion over four years, as well as the abolition of the $5 co-payment made by New Zealanders on most medical prescriptions, worth $619 million over four years.

Robertson said that the measures would relieve the pressure of “essential costs” on Kiwi households, helping to improve children’s development and remove barriers to accessing medicines respectively.

Though the prescriptions payment will be removed from July this year, the ECE expansion will not kick in until March 2024 – something the Minister said was primarily because of administration factors, and in part the value of staggering new spending.

Free public transport

The government has also announced that public transport will be free for under-13s and half-price for under-25s (at a cost of $327 million over four years) and it has also expanded its Warmer Kiwi Homes programme to provide new heating and insulation installations.

In addition to the already announced billion-dollar infrastructure spend on the cyclone recovery, $6 billion has been put aside for a new National Resilience Plan to support medium- and long-term infrastructure investment.

Core Crown revenue would remain at 32-33% of GDP across the forecast period, and spending would drop by several percentage points over the same timeframe.

“I believe that this is a responsible path to track – it takes the pressure off the Reserve Bank while also ensuring that it is done in a way that does not put the funding of public services like health, education and housing at risk,” Robertson said.

The Treasury forecast

In its Budget Economic and Fiscal Update, the Treasury said that it no longer predicted a recession to take place in 2023, with the swift return of international tourism and costs associated with the Cyclone Gabrielle rebuild providing more of an economic boost than initially forecast.

However, growth would remain low and labour market conditions would begin to deteriorate, with the unemployment rate peaking lower in the short term but staying high for longer than initially anticipated.

House prices had already dropped 16.7% between November 2021 and March 2023 and were expected to fall a further 4.6% by mid-2024.

As a result of higher-than-expected spending in this year’s Budget, the government’s books were now expected to return to surplus a year later than expected, by 2025/26.

Robertson said that the government would still match the pace of the recovery seen under the National government after the global financial crisis while pushing back against suggestions that additional spending would contribute to inflation and make life harder for the Reserve Bank.

“It is a balance, it is pragmatic, and it is the right Budget for these times,” Robertson said.

In a noteworthy tax change, the trustee tax rate will be increased to 39% the new top personal tax rate introduced by Labour after the last election.

Robertson did not believe the decision amounted to a “major” tax change and said that officials had recommended making such a move if evidence showed high-income earners were using trusts to circumvent the top rate.

Sam Sachdeva is the National Affairs Editor of Newsroom based in Wellington. He covers Foreign Relations and Trade, Housing, and political matters of national significance. He is the author of The China Tightrope, on Changing New Zealand-China Relationship. The above article has been published under a Special Agreement.

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