Budget 2023: Liam Dann - Why not live that deficit life a bit longer?

OPINION:

Grant Robertson has just told the country we can afford not to panic.

Internally, Labour has probably looked at the polls and decided the same thing.

This Budget delivered the message that we can afford not to slash and burn our spending, and we don’t have to hurry the rebalancing of the post-Covid economy.

As a political strategy, it makes some sense.

Labour could have delivered the mother of all austerity Budgets and they’d still have struggled to get inflation under control before the election.

So, why not take the softer path, offer young families a break, slow the pace of debt reduction and live the deficit life a bit longer?

The upside is less short-term pain. Treasury now sees us skipping a recession (just) and unemployment staying stronger for longer.

That’s a good headline - and that was the one that made it to the world‘s financial markets via the Bloomberg screens.

But there are risks. Both politically and economically.

The downside is that inflation may take a little longer to ease.

The fiscal impulse (as economists like to call the effect of spending decisions) will run counter to the Reserve Bank’s efforts to slow the economy.

It might even push the Official Cash Rate to a higher peak than it might have hit, although it’s a different policy issue - immigration - that has really changed economists’ forecasts in the past few weeks.

Higher interest rates could take more money out of the pockets of mortgage holders - potentially swinging voters.

That could be costly, although Labour will be hoping that the global trends break their way and the general downward direction of inflation may be enough to reassure people things are coming right - albeit slowly.

They are taking a punt that if complaints about the cost of living haven’t knocked them out of the election race yet, they are not going to.

Heading into the election neck and neck with National might be good enough for Labour strategists, who probably back Chris Hipkins to out-charm Christopher Luxon out on the trail.

But are they taking a punt with our economic future?

Sticking with higher debt levels for longer does leave us vulnerable to another external shock. S&P Global Ratings has warned that we risk running out of “headroom” on debt if our current account deficit (our trade balance with the world) doesn’t start to come right in the coming months.

It’s a big “if”. But S&P does expect it to come right, and with tourism bouncing back fast it may well all be okay.

Moody’s was even more relaxed, saying: “New Zealand’s fiscal position remains solid compared with peers’ and will likely enable it to respond effectively to an economic shock.”

But New Zealanders are a fiscally cautious bunch. I’ll admit it makes me a little nervous.

This was not a huge transformational-style big-spending Budget on any kind of historic scale. It wasn’t miserly either.

What it was, was a classic Labour Party Budget.

If you think this country needs a short, sharp dose of austerity to get things back on track, then these aren’t your guys, and they are not pretending to be.