New Zealand Plans to Spend NZ$1 Billion to Ease Inflation Pain

AUCKLAND – New Zealand will spend more than NZ$1 billion ($630 million) to help low and middle-income households cope with surging inflation.

The government will give about 2.1 million people a payment of NZ$27 a week for three months from Aug. 1, Finance Minister Grant Robertson (picture) said in his annual budget released Thursday in Wellington. Reductions in fuel duties to offset soaring gasoline costs will be extended by two months, as will half-price public transport.

Robertson was under pressure to respond to what the opposition has labeled a “cost of living crisis,” as spiraling consumer prices drive inflation to the fastest in more than 30 years. The temporary fiscal stimulus comes at the same time as the Reserve Bank raises interest rates aggressively to curb price gains.

“Budget 2022 is being delivered against the backdrop of a global inflation spike, with existing supply chain pressures being exacerbated by pressure on oil prices from the war in Ukraine,” Robertson said. “This will pass, but we need to protect New Zealanders from the immediate impact.”

The Treasury Department projects inflation will slow only gradually, from 6.9% today to 5.2% by June 2023 and 3.6% a year later.

The government will also try to increase competition in the supermarket sector to lower grocery prices. In a effort to allow new entrants into the market, it will introduce urgent legislation later Thursday to ban supermarkets from placing covenants on sites that rivals may want to build on.

Robertson said the overall budget “strikes a careful balance” between curbing spending that may fan inflation and the investment the economy needs.

A Treasury indicator of fiscal impulse shows government spending has provided stimulus equivalent to 4% of gross domestic product in the current year, but becomes contractionary from the year through June 2023 onwards.

The temporary cost-of-living payment, estimated to cost NZ$814 million, is for people earning less than NZ$70,000 a year.

Pensioners and those on income support are excluded because they are already entitled to a winter energy payment. Extending the fuel reductions will cost another NZ$235 million.

The cost-of-living payment sits alongside new spending on health, climate change and the ongoing pandemic response that totals NZ$9.6 billion in the year ending June 2023. As a result, the budget deficit in the coming year widens to NZ$6.63 billion compared to the NZ$831 million projected in the half-year update published in December.

Increased spending in future years means the budget won’t return to surplus until 2024-25 – a year later than previously projected.

Increased revenue will help to absorb some of the spending pressure. The tax take is projected to improve by NZ$2.3 billion in 2022-23 helped by economic activity, wage growth and company profitability.

The Treasury projects annual average economic growth will improve to 4.2% in the year through June 2023. But growth is forecast to virtually stall a year later, slowing to 0.7% in 2023-24 as higher interest rates bite.

“The tightening of credit conditions and associated cooling in the housing market will have negative impacts for indebted households and homeowners, putting downward pressure on consumer spending,” Treasury said. “In addition to the impact from rising interest rates, real government consumption is forecast to decline as expenditure related to Covid-19 unwinds.”

New Zealand’s tight labor market is expected to persist in the near term, with annual nominal wage growth forecast to exceed 6 during 2023. But as the economy cools the jobless rate is forecast to increase and wage growth will slow, Treasury said.

Robertson’s key policy announcement was an NZ$11.1 billion spend on health over four years. The government is reforming the sector and will spend NZ$3.6 billion in the next two years to wipe away accumulated debt within the existing 20 district health boards. More investment has been allocated to pay for more services, better wages and new treatments.

The government will also continue infrastructure investment, with NZ$4.7 billion of new projects outlined including hospitals, schools and railways. – Bloomberg