The Government has unveiled its so-called ‘no-frills’ Budget 2023, focused on the cost of living and building better infrastructure in the face of climate change.
The Budget has four overarching themes:
Here is a list of the major spending and projects:
The Cost of Living Package targets families with young children. It is designed to ease pressure on New Zealanders in the face of global inflation and the challenges of rebuilding from extreme weather events. It provides practical cost of living relief across some of the core expenses facing Kiwis – childcare, healthcare, transport, and power bills.
The Cost of Living Package provides the following:
As announced by Prime Minister Chris Hipkins and Education Minister Jan Tinetti, Budget 2023 builds on the Government’s record of investing in schools and improving the lives of young people right across New Zealand. Budget 2023 will be investing $3.6 billion total operating and $1.3 billion total capital in education initiatives to boost skills, improve achievement and attendance, and lift pay to attract and retain teachers. It is expected Budget 2023 will build 300 new classrooms and up to four new schools to create space for 6,600 more students.
Key education related spend from Budget 2023 includes:
Science and technology is one of the key focuses of Budget 2023, with significant investment to support the Te Ara Paerangi Future Pathways. Budget 2023 demonstrates a commitment to increase research and development expenditures to 2 percent of GDP.
Budget 2023 provides the following:
Health is another crucial area of focus in Budget 2023.
Budget 2023 will provide:
Budget 2023 includes a range of investments in the education and housing sectors to support the wellbeing of Māori and Pacific communities.
Some of the initiatives include:
The Government has announced a $1 billion flood and cyclone recovery package. This new package is in addition to the $889 million the Government has already announced for repair works and business support for those affected by the recent floods and cyclones.
The flood and cyclone recovery package consists of the following:
Budget 2023 is committed to enhancing the resilience of New Zealand’s critical infrastructure while concurrently driving forward a more productive economy.
Budget 2023 will provide:
Housing is one of key areas of focus for the New Zealand Government. As part of this commitment, Budget 2023 will provide:
Budget 2023 follows the trend of previous years in allocating $1.9 billion to fighting climate change. This year, however, the money also goes towards adapting to the impacts of climate change, rather than just reducing greenhouse gas emission.
Climate spending primarily comes from the Climate Emergency Response Fund (CERF), which takes proceeds from polluters through the Emissions Trading Scheme (ETS) and reallocates it to green initiatives. Quantified abatement of initiatives funded through the CERF in Budget 2023 has been estimated to drive emissions reduction by 4.3Mt CO2e in the first two emissions budgets.
Key climate related initiatives from Budget 2023 include:
Grant Robertson has delivered a bigger than expected Budget 2023, characterised by more borrowing rather than reprioritised spending. That means more will be spent on the day-to-day running of the country, as well as on longer-term infrastructure investments. The magnitude of this additional expenditure will require the Treasury to issue a lot more debt than was expected and threatens to undermine the Reserve Bank’s attempts to tackle inflation. However, Grant Robertson said he did not believe the Reserve Bank would need to hike interest rates to deal with his increased spending – “I don’t think this is the impact of what is in that Budget,” he said.
Despite the Budget 2023 being larger than Grant Robertson foreshadowed in December, the Treasury doesn’t expect inflation to be much worse than forecast in December. It sees the rate dropping to 3.3% next year and 2.6% (within the Reserve Bank’s target range) in 2025.
Pulling it all together, the books are forecast to sink further into the red and take a year longer to get back to surplus than was expected in the Treasury’s half-year update, released in December. In other words, the books will be in deficit until 2026, one year longer than previously forecast.
The Treasury forecasts a $7 billion deficit in the current year, and a $7.6 billion deficit next year. Thereafter, it sees the deficit narrowing until the books get back to surplus by 2026.
The Reserve Bank suggested in its last Monetary Policy Statement it would lift the Official Cash Rate one more time next week, from 5.25% to 5.5%. But some bank economists earlier this week adjusted forecasts, saying stronger immigration and the likelihood of more Budget expenditure could push this peak up to 5.75% or 6%.
The Treasury noted higher interest rates will continue dampening inflationary pressures, which will continue driving house prices lower. Prices were expected to decline a further 4.6% to mid-2024, making a total peak-to-trough decline of 21.3%. This forecast for house prices will be a bitter pill for homeowners who have watched the nominal value of their property, or properties, decline since mid-2021.
The headline tax change in Budget 2023 is the raising of the trustee tax rate from 33% to 39% — effectively bringing the trustee rate in line with the top marginal tax rate. The increased rate takes effect from the 2024–25 income year. The legislation will contain measures to ensure that deceased estates and trusts for disabled persons are not subject to the 39% rate.
Noting that some taxpayers had taken advantage of the misalignment in tax rates once the top tax was raised in 2021, the Minister of Revenue pointed to the Inland Revenue’s recent High Wealth Individuals research:
“New information from Inland Revenue has shown an almost 50% spike in income subject to the trustee rate, from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.”
This begs the question whether the trustees will still be required to comply with the additional reporting requirements for New Zealand domestic trusts that came into effect from 2021–22 income year. While it’s being framed as ‘aligning’ the tax rate or closing a tax loophole, it is an increase which opponents are likely to describe as a tax hike. Grant Robertson said prior to Budget 2023 there wouldn’t be any ‘major’ tax changes.
Tax cuts, and any moves to change the tax thresholds, have been firmly ruled out on the grounds that any relaxation of tax rates would fuel inflation.
Generally, the adoption of a ‘no-frills’ budget represents a pragmatic approach to fiscal management in an era of economic uncertainty. By prioritising essential expenditures and minimising unnecessary expenses, governments can achieve financial prudence and efficiency. While a no-frills budget may require difficult choices and adjustments, it offers the potential for long-term stability and sustainability. However, it is crucial to strike a balance between necessary cost-cutting measures and maintaining essential services to ensure the well-being of citizens. Ultimately, the success of a no-frills budget depends on effective planning, transparent decision-making, and ongoing evaluation of its impact. One can hope that as the government continues to navigate complex financial landscapes, the no-frills budgeting philosophy serves as a valuable tool to guide responsible resource allocation and foster fiscal discipline. It’s likely that Labour will be hoping the additional spending is enough to win them an election, and this Budget, which is an election year budget, appears to be full of hand-outs.
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