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Budget 2022


May 19, 2022

Budget 2022 Briefing


May 19, 2022

 

The Labour Government has delivered Budget 2022 against the backdrop of an economy that has grown rapidly but is now at full capacity, with rising cost of living pressures that have seen Labour lose support as centre-right voters return to National.

Finance Minister Grant Robertson’s fifth Budget contains a headline grabbing  response to this political pressure with a special cost of living payment and an extension to reductions in public transport and fuel costs, as well as continuing the Government’s priority to meet long term challenges by investing in health, education and climate change.

 

Budget at a glance

$350 payment over three months to those earning less than $70,000, benefitting 2.1m New Zealanders
Two month extension to the 25c excise tax cuts and halving of public transport prices (made permanent for Community Services Card holders)
$11.1b invested in health over four years, including a record $191m for Pharmac
$2.9b in climate change funding

 

Political reaction

Labour

Prime Minister Jacinda Ardern said: “Our economy has come through the COVID-19 shock better than almost anywhere else in the world. But as the pandemic subsides, other challenges both long-term and more immediate, have come to the fore. This Budget responds to those challenges.”

Finance Minister Grant Robertson described the Budget as striking “a careful balance. New Zealand’s economic security depends not only on addressing the near term challenges of the cost of living, supply chain disruptions and skill shortages, but also on a clear and deliberate transition to a high-wage, low-emissions economy.

“One Budget cannot solve all of New Zealand’s challenges in one year, a longer-term approach is smarter, logical and provides more certainty. Which is why we are making long term investments in health, climate and infrastructure.”

National

Leader Christopher Luxon in his Budget said Grant Robertson had “delivered the backwards Budget. He has failed, because when you cut through the words, and look at the facts, the sad news is the books are going backwards, Kiwi families are going backwards and they are being squeezed by this massive cost of living crisis.

“The cost of living package is just a bandaid on a major wound, they denied there was a cost of living crisis for a long time, and now a temporary bandaid that runs out in three months. Grant Robertson’s big solution is a temporary payment to a small group of people. If you are earning 71,000 a year, you get nothing.

“What we have seen from this government is a loss of financial discipline. Grant Robertson has a problem and he is addicted to spending. And he is damaging the economy.”

 

Economic and fiscal outlook

Treasury estimates that GDP growth has slowed dramatically in the first quarter of 2022, as a result of the very tight labour market and international prices shocks, with annual growth in the year to June 2022 being only 1.7%. This is expected to bounce back in the year to June 2023 to a rapid 4.2%. Inflation is forecast to fall gradually from its current 6.9% to 6.7% in June, 5.2% in June 2023, and 3.6% in 2024.

Employment growth is forecast to continue at a slower rate than recent years, with the very tight labour market limiting the number of workers available. Unemployment is forecast to hit a low of 3% later this year before it gradually increases back above 4% as the borders reopen and migration inflows increase. The return of net immigration population growth will be gradual, with the working age population increasing by 47,000 in the year to June 2023, compared to increases of up to 100,000 before the pandemic. The tight labour market drives hourly wage growth, which is forecast to increase to 6% by June 2023 from 4.6% now, bringing wage growth back above inflation.

Treasury sees house prices falling only 2.5% in the year to June 2023, before stabilising in the out years (this is less of a fall than bank economists are forecasting on latest data). Treasury projects the building boom will regain momentum in 2022/23 with 12.1% growth on top of the already record level of construction. This will rapidly abate the remaining housing deficit that has been a driver of demand and prices, leading construction levels to retreat between 2024 and 2026 on  the cooling housing market.

The Government books remain healthy, with the deficit rapidly decreasing and returning to surplus in 2024/25. Debt will peak at 19.9% of GDP in 2023/24, well below the new 30% debt ceiling. Government spending will fall by $1.3b in 2022/23 compared to 2021/22 as COVID spending ends, while the growing economy and wage growth will drive high tax takes, leading to the deficit rapidly shrinking from $19b in 2021/22 to $6.6b in 2022/23 and returning to surplus in 2024/25. The end of COVID response spending sees government spending as a share of the economy fall to 31.6% in 2022/23 and 31.1% in 2023/24, in line with the average for the past 25 years, and continues to fall to 30% of GDP by 2025/26.

 

Cost of living policies

The Budget contains a $1b ‘cost of living package’ aimed squarely at the so-called ‘squeezed middle’.

There will be a $350 payment (spread over three months in monthly payments) to people whose income is below $70,000 but who do not get the Winter Energy Payment (ie. not superannuants or beneficiaries). This payment will go to 2.1m taxpayers, including people on the average wage. Notably, this payment is more than those taxpayers would receive from National’s tax indexation plan.

Additionally, the current reduction in fuel excise duty and half price public transport is extended for two months with half price public transport being permanent for the one million Community Services Card holders. The Warmer Kiwi Homes programme gets another $73m in funding, enough to insulate a further 26,500 homes.

Dental treatment available to those on low incomes will be increased to $1,000 per person a year from the current $300 – this will no longer be limited to emergencies and can cover multiple visits.

Child support payments will now be directly passed on to sole-care parents on benefits from the other parent. This will lift an estimated 6,000-14,000 children out of poverty with 41,550 sole-parent families will be better off, with a median gain of $24 per week – a total of $334m over four years.

Legislation will be passed on Budget night aimed at removing barriers for new retailers entering the supermarket sector. Covenants on land that have been a barrier to supermarkets accessing new sites will be banned from stopping competition. The Government is looking at how a Code of Conduct between major retailers and suppliers could be developed, and what role a dedicated regulator for the grocery sector could play.

 

Health

Health gets a record $11.1b in operating funding over four years. The mainstay of this is a $1.8b a year increase starting in 2022/23, with another $1.3b a year starting in 2023/34. This is the first time two years’ of ongoing increases are accounted for in a Budget, a change designed to give the sector more certainty about future funding. There is a $100 million investment in specialist mental health and addiction services. The new Māori Health Authority will have $168m for direct commissioning of services, with $30m for Māori care providers and $39m for Māori health workforce development. Additionally. There is another $1.3b for health infrastructure.

Pharmac gets $191m over two years, the biggest ever increase to its medicines budget, increasing total funding to $1.2b in 2023/24. Pharmac has independence on how it uses these funds to purchase medicines but has indicated it will focus on more effective cancer treatments.

There is new funding for RNA research to develop New Zealand’s potential to produce vaccines with $40.7m tagged over four years.

Ambulance services get $166m over four years in dedicated funding, for 61 more vehicles and 248 more paramedics, while $90.7m will go to the emergency helicopter fleet.

The disability sector will receive $943m over four years as part of the establishment of the Ministry for Disabled People and the regional roll-out of Enabling Good Lives.

$37 million for the national health workforce over four years to cover:1,500 more training places for primary care work, including nursing, physiotherapy, pharmacists and optical services
1,000 places over four years for additional workforce
And $39 million over four years for Hauora Māori workforce development, covering approximately: 1,000 workforce training places
800 workforce places, targeted to increase Māori working in prioritised areas of most need.

 

Climate change

Significant climate change investments were announced on Monday in the Emissions Reduction Plan. Capital’s briefing on the Emissions Reduction Plan can be found here.

The Budget included an additional $347m to establish native forests as carbon sinks and improve biodiversity, as well as increasing woody biomass supply to replace coal.
Business, infrastructure, and workforce policies

A $100m Business Growth Fund will be established, aimed at improving access to capital for SMEs. This fund will operate in partnership with banks and take minority stakes in small businesses.

Workforce training will be continued through free apprenticeships and trades training, the Mana in Mahi programme, and Māori Trades and Training Fund.

Industry Transformation Plans receive $148m.

There will be $61.9b of capital investment over the next five years, including continuing the government house building programme in the context of rising costs, water infrastructure, rolling stock for rail, and Auckland Light Rail

 

Housing

The First Home Grant price cap will be lifted to reflect rising house prices, while the price cap on receiving the First Home Loan will be removed entirely. This will result in approximately 7,000 extra First Home Grants and 2,500 extra First Home Loans available every year. The Kāinga Whenua Loan cap will also be increased from $200,000 to $500,000.

A new $350m Affordable Housing Fund will leverage partnerships with investors, philanthropic organisations, developers, and the affordable housing sector to expand the range of housing options for people whose needs are not currently being met by the market. The first stage of the Affordable Housing Fund will offer $50m worth of grant funding to not-for-profits to deliver affordable rental housing in Auckland, Tauranga, Rotorua, Napier/Hastings, Wellington, and Nelson/Tasman.

A further billion dollars will be allocated to operating costs for public and transitional housing, with over a billion dollars in extra funding for the Government Build Programme, mostly to meet cost pressures.

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