The Government says it has found $4 billion in cost savings to spend on core services, cost of living support, and cyclone recovery in Budget 2023, without adding to debt.
In a speech to the Wellington Chamber of Commerce on Thursday, Finance Minister Grant Robertson said the Budget would focus on returning to “a more sustainable fiscal position” after big spending during the pandemic.
The four themes contained in the Budget would be: cost of living support, delivering core services, economic resilience and recovery, and fiscal sustainability.
Government net debt sits at about 19% of gross domestic product (GDP), which is below the self-imposed limit of 30% which Robertson set himself in the 2022 Budget.
However, having room to respond to future crises is essential and the Labour government wants to bring its spending back to pre-Covid levels, or about 30% of GDP.
This won’t happen in this budget alone, Robertson said, as it would require cutting services to “austerity levels” but will happen across the next couple of years.
Government Ministers were told that if they wanted to fund new initiatives, they would have to find cost savings within existing budgets.
Funding set aside for job vacancies has been pulled, underspend budgets have been clawed back, contingencies have been closed, and forecasts have been reassessed.
This apparently adds up to $4 billion once combined with scrapped policies such as the public media merger, and the clean car upgrade.
Robertson said the Government had to cut back, like New Zealand households are, in order to fund its priorities—cost of living, resilience, and core services—without exacerbating inflation.
“Despite the welcome news that inflation appears to have peaked, there is no doubt it remains too high, and we are committed to playing our part in bringing it down, including by reducing our spending as a percentage of the economy over the coming years,” he said.
“We will be making targeted investments to support these goals, while continuing to manage the books carefully”.
Robertson took a jab at the opposition in his speech, by saying he was being honest about the trade-offs required when managing government finances.
“I don’t go around telling people that spending on public services will go up, public debt will go down and taxes will be cut, all at the same time,” he said.
“That fiscal Bermuda Triangle is the domain of the Opposition, and I don’t believe it is either realistic or credible”.
Economists don’t expect a budget surplus to be delivered until Budget 2025 and even then, only if future governments are willing to steer clear of big spending or tax cuts.
ANZ economists Miles Workman and David Croy said running fiscal deficits and adding macroeconomic stimulus to an already out-of-balance economy could be problematic.
“New Zealand’s record-wide current account deficit, a near record-low unemployment rate, and CPI [consumer price index] 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”.
Sovereign credit rating agencies and overseas investors will be watching more closely than usual and will want to see a “clear and credible strategy towards eventual fiscal consolidation”.
The Government had no choice other than to help communities affected by the cyclone to recover, they said, but this could have been funded with a dedicated levy or increased taxes.
Treasury’s half-year forecast predicted net debt would peak at 21.4% of GDP in the year to June 2024, leaving quite a bit of blue sky below the self-imposed debt ceiling.
“To put some perspective around the recent increase in debt, this measure was sitting at 1.8% of GDP in 2019, suggesting a ‘breach’ of the ceiling could be only one significant economic shock away,” Workman and Croy said.
Robertson wants to reload the fiscal cannon for future crises, but is unwilling to cut services or raise taxes to get there. Instead, he will rely on economic growth and small surpluses in future budgets to chip away at the debt.