The Government presented its 2023 Budget last Thursday. They labelled it a bread and butter Budget. The opposition said there wasn’t much butter in it. Adjectives used by the media to describe it included minimalist and no-frills.
These are not the sort of adjectives usually used to describe election year budgets. A lot of spending measures were pre-announced. This helps the Budget itself look minimalist. But total government spending will rise by almost $5 billion over the year, hardly minimalist. A sobering statistic is that 79 per cent of the increased spending is to keep up with cost pressures. It will not fund any additional services.
The Minister of Finance described it as a cost-of-living Budget. But there were only two measures that will impact on the cost of living directly: more support for the costs of early childhood education and the removal of the $5 prescription charge.
There was one tax measure, an increase in the rate of tax paid by family trusts, despite the PM saying they would not be making any major tax changes before the election. The government rationalised this discrepancy by saying the change wasn’t a major one. The measure is aimed at getting wealthy families to pay more tax and it will do this. But it will hit a lot of middle-income families too.
Unfortunately, the Budget did not do anything about any of the weaknesses in our tax system listed in my last column. This timid approach to tax reform is not helping New Zealand. Interestingly, a recent Newshub-Reid Research poll found that 53 per cent of respondents favoured some form of capital gains tax and 35 per cent opposed. Despite this, no New Zealand political party seems to be prepared to act on this issue.
Another important issue is that New Zealand has a huge public infrastructure deficit. It has built up gradually due to three decades of under-investment.
The 2023 Budget has a few measures such as building more school classrooms and restoring infrastructure damaged by weather. But the bulk of the infrastructure problem will remain for the next government. The debate on the appropriate level of public debt needs to take this infrastructure deficit into account but the two things are rarely linked.
We are proud that our debt/GDP ratios are much lower than most comparator countries. We think this means we have been more fiscally prudent than them. But if we have only achieved these low debt ratios by under-investment in things like schools, medical and transport facilities for decades, is that an achievement we should be proud of?
Some commentators said the Minister of Finance has taken a gamble on inflation by boosting spending and borrowing despite current inflation being more than double the target range. The Treasury forecasts for future inflation presented with the Budget were for the inflation rate to fall to 3.3 per cent next year and to be 2.5 per cent, 2.3 per cent and 2.2 per cent for the following three years – comfortably within the inflation target range.
If you believe the Treasury’s inflation forecasts, the 2023 Budget isn’t a gamble. But can the forecasts be believed? The Reserve Bank takes its next decision on the OCR next week. We will find out then if they believe the Treasury’s inflation forecasts. That will be the subject of my next column.