NZ First Impressions: Budget 2023
The No-No Frills Budget
First Impressions: NZ Budget 2023
As expected, Budget 2023 showed a deterioration in the Government’s books.
- However, if anything, the deterioration was worse than we expected, as the Government has not been as frugal as we had anticipated.
- That said, the Government still meets its fiscal targets, but with even less headroom than before.
- For the Reserve Bank, the Budget is more expansionary than signalled at the Half-Year Update.
- For financial markets, the bond programme is larger than we had anticipated, as the Government has larger deficits to fund over the forecast period.
As expected, Budget 2023 shows a deterioration in the Government’s books. Indeed, as we predicted in our Budget preview, the operating balance (OBEGAL) returns to surplus one year later (in 2025/26) than was forecast in at the Half-Year Update last December.
However, the projected operating balances are weaker than we had anticipated. For example, we had estimated that the books would show a surplus of circa 1% and 2% of GDP in 2025/26 and 2026/27, respectively. Whereas the Treasury has forecast surpluses of just 0.1% and 0.7% for the respective years. Given the margin of error in these projections, there are clear risks that the Government does not get there in 2025/26 nor 2026/27.
The key driver of the surprise is higher forecast expenditure. We had anticipated that operating expenditure would be kept within previously announced Budget allowances and any new spending would be funded via reprioritisation and savings. That was not the case. For example, Budget 2023 shows an $8.3bn increase in forecast Core Crown expenses over the 5-year period compared to the Half-Year Update.
On the revenue side of the Budget, forecasts were largely in line with our expectations. A slower economy has flowed through to a lower tax take, with Treasury’s forecasts showing an $8.9bn reduction in forecast tax revenue versus the Half-Year Update. Notably, Treasury no longer expects a technical recession this year, although the Budget still shows a significant slowing in economic growth.
All up, the fiscal forecasts are more expansionary than we had anticipated. As a result, the Budget will add to inflation pressures in the short term. For example, Treasury estimates that the fiscal impulse is expansionary to the equivalent of 1.7% of GDP over 2023/24, compared to 0.7% contractionary as forecast in the Half-Year Update. We do note that the fiscal impulse then flips to contractionary from 2024/25 onwards.
Key initiative – the ‘Cost of Living Support’
As anticipated, the Government focused its key announcements on cost-of-living support. The $2.6bn included:
- Extending 20 hours ECE to 2-year-olds, $1.2bn;
- Scrapping prescription co-payments, $0.6bn;
- Free public transport for kids, $0.3bn; and,
- Cheaper energy bills, $0.3bn.
However, the package was larger than we had anticipated. This package was around $1bn higher than the equivalent package at Budget 2022. The initiatives were also mostly permanent, whereas last year’s were mostly temporary (e.g. time-limited direct transfers and the temporary fuel excise duties).
The other area of focus was the well-signalled spending and investment on the cyclone recovery. An additional $1bn was allocated for cyclone recovery on top of the circa $0.9bn that has already been allocated.
There was also a focus on building resilience. The Government has established a National Resilience Plan worth $6bn which is on top of the existing infrastructure pipeline. This programme will initially focus on building back from the recent weather events and will also fund strategic investments to address the long-term infrastructure deficit.
Bond programme
As expected, the Treasury has expanded the bond programme to fund larger operating deficits. In total, the programme has increased from the Half-Year Update by $20 billion to $148 billion over the five-year forecast period to 2027.
This increase was larger than we had anticipated. We had pencilled in a lift of $12bn ahead of the Budget, consisting of a $10bn increase to fund larger deficits resulting from lower tax revenue and $2bn extra capital spending (on the cyclone-related infrastructure rebuild). The extra $8bn can then be traced to the additional spending as discussed above.
Implications for RBNZ
While the Reserve Bank typically takes the Treasury’s fiscal projections as given, they have long been highlighting the risk of a larger boost to spending. That risk has now materialised, supporting our view that the RBNZ will now likely be looking at a higher OCR peak than the 5.5% it had previously projected. That said, quantifying the impact for monetary policy is no simple task; we’ll consider this in more detail in our upcoming Monetary Policy Statement preview.
Nathan Penny, Senior Agri Economist
021 743 579
Kellly Eckhold
021 786 758
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