New Zealand Finance minister, Grant Robertson, recently gave a summary of the Treasury’s Half Year Economic and Fiscal Update 2020 report. The report indicates that the economy is expected to bounce back in the coming years following depressed performance since the pandemic started.
The report has projected that unemployment will drop to just 3.1% in 2022. The economy is also expected to grow by about 4.9% in 2023, while housing prices that will continue to rise, will drop briefly in 2023. With unemployment and economic growth, the Treasury consequently expects to collect higher tax revenue. It anticipates an additional $10 billion will be collected in 2022.
The boosted tax intake is expected to help push the government back into a surplus by 2024. This would be 3 years ahead of earlier projections that a surplus would only be achieved in 2026. Current projections indicate that for the 2021/22 period, there will be an expected deficit of $20.8 billion.
Some of the increased revenue will be directed towards boosting the government’s operating allowance. This new spending will push the government’s operating allowance to an all-time high of $6 billion. Part is expected to go towards funding healthcare reforms in a one-off increase and support various climate policies. It will bring the projected government spending in 2022 to a staggering $128 billion.
However, even as some Kiwis may expect to move into higher tax brackets as their earnings increase, Robertson confirmed that the government was not considering any tax cuts.
Further bad news came in the form of inflation. Robertson indicated that inflation was expected to rise to 5.1% over the next year but fall to 3.1% in the subsequent year. It is expected to result in a higher cost of living, with low-income households being the worst impacted. When matched against wage growth that is projected to rise by 4.1%, the cost of living will increase faster than income. The situation is expected to reverse in subsequent years with wage growth outpacing the CPI inflation rate by more than 1%.
Opposition’s Simon Bridges has lambasted the government over its high spending figures and fiscal approaches that were causing families to suffer under price rises that outstripped wage increases. ACT has also criticised the government on its handling of cost of living issues, claiming that inflation could be expected to increase three times as much in 2022 than was forecast in the budget. Kiwibank’s economists seem to echo similar sentiments, stating that government spending could push inflation higher, forcing the RBNZ to work harder at cooling the economy, possibly through higher interest rates.
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