Economic Weekly: Better outlook puts government in enviable position

Plenty of ex-finance ministers will have been looking enviously at the position the government found itself in at last Thursday’s budget. Budgets are usually something of a zero-sum game.  Every extra piece of tax relief or extra spending somewhere has to be balanced by a tax rise, more debt issuance or cuts elsewhere. Invariably, the ‘losers’ are more vocal than the ‘winners,’ and even relatively benign-seeming measures can put noses out of joint (for a great example of this overseas, check out the weeks long row the UK government triggered with its ‘pasty tax’).

The government didn’t have to worry about any of that this time around. Courtesy of NZ’s far-better-than-expected post-pandemic performance and a vastly improved economic outlook, it’s been able to sustain massive investments across a range of areas (including social development, health, housing and infrastructure), without any un-signalled tax rises and all while showing an improving fiscal position over the next five years. Its rare circumstances hand a government of any stripe such an opportunity.

Overall, we think the government has been sensible, returning to fiscal prudence, while avoiding the trap of tightening spending too quickly and threatening the recovery. The big headline – a large increase in welfare payments – should aid the recovery. Beyond any moral imperative, low-income households spend a greater portion of their income than higher income households, so more cash in hand should help boost consumption. The focus on infrastructure is welcome too, though we suspect capacity constraints may pose a challenge.

This week, the focus shifts from fiscal to monetary policy, with the RBNZ releasing the latest MPS at 2pm on Wednesday. There will be some large revisions in the RBNZ’s forecasts too (see our graph opposite comparing its previous unemployment forecasts with our own), but we expect the bank to keep to the dovish tone and avoid being drawn on the timetable for tightening. Like its pals in central government, the RBNZ will be mindful of the downside risks remaining, and eager to avoid crimping the recovery by tightening too quickly.