The problem is a series of very rainy days came along just as this normalisation was meant to be under way.
Cyclone Gabrielle made the balancing act Robertson faced between delivering both prudence and vote-winning cost-of-living support that much more difficult.
So, how will he do it? Here are three things to look out for in the Budget:
1. How spending and investment will affect inflation
While the Government has committed to prescribing some sort of inflation painkiller, this support is likely to be moderate and targeted.
The cyclone has put new demands on the Crown’s finances. Meanwhile, inflation remains a problem, so spending should avoid exacerbating it.
Nonetheless, the Government might decide it’s comfortable putting some upward pressure on prices and requiring mortgage holders to pay higher interest rates for longer, for the sake of putting more money in the pockets of the most vulnerable.
The question will be how it does this – whether it provides one-off support, or permanently extends existing programmes like Working for Families.
When it comes to funding the cyclone recovery, the key question is which projects get cancelled or postponed to free up resources to repair or replace infrastructure?
It is difficult to say how inflationary the recovery will be, as this will depend on the timing of expenditure.
Robertson might raise eyebrows by expanding the capital allowance by more than planned to allocate more funding to infrastructure. But inflation will hopefully be at bay by the time much of this money physically gets out the door.
The other big uncertainty is immigration, which has ramped right up to above pre-Covid levels. On the one hand this will create capacity to support the recovery, but on the other, it will stimulate demand, putting upward pressure on prices.
When the Reserve Bank reviews the official cash rate (OCR) next week, it will need to look beyond the headline numbers in the Budget and consider how both the nature and timing of spending will affect inflation.
2. A slower return to surplus
Bank economists expect the return to surplus to take a year or so longer than the Treasury forecast when it last issued its biannual set of forecasts in December.
They see the operating balance before gains and losses (Obegal) getting back into positive territory in the year to June 2026, instead of 2025.
If this eventuates, ANZ economists note the books would’ve been in deficit for six years – the same length of time they were in the red for under the National Party’s leadership following the Global Financial Crisis and Canterbury earthquakes.
The issue is that the Government needs to find up to around $8 billion to pay for the cyclone recovery, all the while inflation is pushing up the cost of delivering existing public services.
Yes, inflation puts upward pressure on the tax take – more expensive goods and services lift the amount people pay in GST, and wage inflation puts workers in higher income tax brackets. But high interest rates, aimed at curbing inflation, are slowing economic growth, which is seeing the tax take rise by less than expected.
At the end of March, the $3.4b budget deficit was $2.5b wider than the Treasury forecast in December, partly due to the tax take being 3 per cent lower than expected.
3. More debt issuance
So how does the Government cover higher costs with a weaker-than-forecast tax take? Borrow more and reprioritise spending.
Robertson last week said he found a modest $4b behind the couch, which he would reallocate to new initiatives over four years via the Budget.
Bank economists believe that in the four years to June 2027, the Treasury will need to issue around $10b or $12b (or 10 or 12 per cent) more New Zealand Government Bonds (debt) than anticipated in December.
ANZ economists see the Treasury sticking to its plan to issue $28b of bonds in the year to June, before increasing its issuance by more than previously forecast to $32b in each of the next two years, $24b in 2026 and $22b in 2027.
By way of context, the Treasury was issuing around $10b of new bonds a year pre-Covid.
Why is debt issuance likely to remain so elevated?
One factor is that the Treasury needs to refinance a much larger volume of shorter-dated bonds issued in recent years as they mature. It doesn’t have the funds to repay the debt (as the books are in deficit), so has to roll that debt over.
The Treasury is also helping the Reserve Bank unwind its quantitative easing, or Large-Scale Asset Purchase (LSAP) programme.
It is issuing an extra $25b of bonds over the five years to 2027 to get the funds to buy back New Zealand Government Bonds bought by the Reserve Bank in 2020 and 2021 to put downward pressure on interest rates.
The Reserve Bank no longer wants to hold the bonds it created money to buy. It would rather normalise the size of its balance sheet to make it easier for it to potentially use bond-buying again in a future downturn.
