Finance Minister Grant Robertson. Photo / Mark Mitchell
ANALYSIS:
Finance Minister Grant Robertson has for years described his style of economic management as “balanced”.
Next year, more than ever, defining what constitutes “balance” will be a challenge.
Robertson will unveil some of his thinking on Wednesday when he releases his Budget Policy Statement.
The statement will set the scene for next year’s Budget, outlining how much the Government plans to spend and what its priorities will be.
In the years preceding Covid-19, Robertson had a public mandate to borrow and invest to bring about the change voters wanted.
He had to strike a balance between being “transformational” enough to appease his supporters, and conservative enough to avoid spooking those worried about Labour being at the helm of the economy.
When Covid-19 came along, Robertson had the backing of both the public and the Reserve Bank to spend what was necessary to keep the economy afloat in the face of enormous uncertainty.
The direction of travel was clear – bring forward spending to stimulate the economy. The “balance” he had to strike was between spending a lot and spending an unprecedented amount.
What constituted “balance” became less obvious by May this year when Budget 2022 was released.
There were still question marks over how embedded inflation was, so the balance that had to be struck was between investing in long-term issues around health and climate change and providing temporary support to those struggling to make ends meet, while not exacerbating inflation.
Come Budget 2023, Robertson will face a similar conundrum, but identifying that middle ground is going to be even more of a challenge.
Spending to either rival National’s costly tax cut policy, or to help those struggling in the face of inflation, risks exacerbating the problem to the detriment of everyone.
Any political wins Labour enjoys from attractive spending pledges could be eroded by the “cost-of-living crisis” dragging on, and the Reserve Bank battering mortgage holders with even higher interest rates.
But, because we have inflation due to both too much economic demand and not enough supply, a conservative Budget that cools demand will only go so far towards reducing inflation.
Robertson could conceivably lose support by delivering a boring Budget with no sweeteners, and still get punished at polls due to inflation.
While this might’ve been something Robertson was willing to grin and bear early in an electoral cycle, the stakes are higher in election year.
Taking a look at the numbers, Robertson at the May Budget forecast a $4.5 billion increase to the operating allowance in Budget 2023.
ANZ senior economist Miles Workman noted around $2b of this has already been allocated – mainly to expenditure on health – meaning Robertson has $2.5b to play with.
The higher cost of delivering the existing level of public services will eat into this, meaning Robertson may need to reprioritise a fair bit of spending if he wants to keep the pot of new operational expenditure to $4.5b.
As for new capital expenditure, Robertson at the May Budget put aside $5.1b for across Budgets 2023 to 2025.
Workman believed there was room for this to rise.
Come Budget time early next year, Robertson won’t be entirely wedded to the numbers outlined in his Budget Policy Statement. But they do set the stage.
The Treasury will on Wednesday also release an updated set of economic forecasts in its Half Year Economic and Fiscal Update.
Workman expected these to show more inflation and less economic activity than the Treasury’s last set of forecasts released at the Budget in May.
He noted the net impact of inflation on the Government’s books can be “ambiguous”.
On the one hand, it increases the Government’s tax take, but on the other hand, it increases expenses.
The other difficulty is that the Treasury has confirmed the forecasts were made before the Reserve Bank on November 23 signalled its intentions to hike the official cash rate (OCR) more aggressively than previously projected.
The Reserve Bank’s hawkish stance saw it revise its economic growth forecasts down, as it didn’t shy away from acknowledging it was orchestrating a recession to reduce inflation.
What does this mean for the Treasury? Its forecasts might not be as gloomy as the Reserve Bank’s, meaning they come with some downside risks.