The Government has stood up a Ministerial Oversight Group to monitor the fallout from the war in Iran on the economy, Prime Minister Christopher Luxon and Finance Minister Nicola Willis announced on Monday.
They also held open the door to delaying 18 cents in fuel tax hikes set to begin next year.
With the cost of a barrel of Brent crude oil, a key benchmark, surging to $US110 ($185) today, a price hike that will increase costs to motorists and add to cost pressures across the economy, the Government came under pressure to respond to the crisis.
Luxon said the group would focus on fuel and supply chains.
Willis said advice from Treasury, though highly uncertain and dependent on the duration of the war, showed a range of economic scenarios.
If the conflict lasted for three months or more, there would be an inflation impact of between 0.5 and 1 percentage point. There would also be a real GDP impact of -0.2 to -0.4 points.
Willis also took the opportunity to publish Treasury’s “very positive” preliminary Budget forecasts, which showed an economic recovery taking place.
These figures were an improvement on Treasury’s last numbers, published in December.
They showed the economy grew 1.7% last year and was forecast to grow 3% this year and next.
“These positive forecasts were thanks to a combination of low interest rates, historically high export prices, a recovery in tourism and increasing consumer confidence,” Willis said.
Willis noted these figures would likely change as a result of the war.
“That was then, and this is now,” she said.
She said that there was currently no challenge to New Zealand’s fuel security.
Treasury also advised net debt would bet 1.5% lower at the end of the forecast period, which would work at about 44.6% of GDP.
She said the Ministry of Business, Innovation and Employment (MBIE) advised that there was “up to 28 days” stock of petrol, diesel and jet fuel already in the country, there was up to a further 29 days fuel en route to New Zealand which had already entered New Zealand’s waters.
Oil is now nearly 50% more expensive than it was before the United States and Israel began attacking Iran on February 28.
She said the Commerce Commission had been asked to step up fuel price monitoring to ensure retailers were not gouging prices.
Luxon and Willis were keen to impress their view that the economic recovery was under way before the war began, saying that it put the country at a good starting point.
They resisted a call from the Taxpayers’ Union to cut fuel excise like the Ardern Government.
Although the Taxpayers’ Union called for the fuel tax cut to be paid for by cutting Government spending, Willis said that ultimately, such a measure would be paid for by borrowing - as it was during the Ardern years.
“We have to remember that any short term relief on petrol tax ... ultimately you need to replace that petrol tax, we saw that with the last government when it mounted up a bill of a billion dollars and they needed to reimpose that cost afterwards.
“We need to be mindful that those hundreds of millions of dollars aren’t free,” she said.
Fuel taxes do not rise with inflation and therefore need to be raised periodically by the Government to maintain their real value. Fuel taxes have not risen since 2020.
Cabinet agreed in 2024 to raise fuel taxes by 12 cents a litre in 2027, 6 cents a litre in 2028, and 4 cents a litre each year afterwards – hikes that are still not enough to fund the Government’s road building programme which is expected to need annual top ups of about $6b a year by 2030.
Willis held the door open to cancelling that hike, noting Cabinet had not yet agreed the legislation required to give effect to it, nor introduced that legislation to Parliament.
“The Cabinet has not given consideration to that legislation yet, as is always the case with prudent Government, we assess the conditions that we face at the time.
“I’m simply acknowledging that picture might look different when we put together the Government Policy Statement,” she said.
But she warned “any actions in this area come with consequences”.
“If we reduce the revenue from petrol ta for the Government, that necessarily reduces the funds available for repairing them and rebuilding them after climactic events,” she said.