Budget allowances and the Climate Emergency Response Fund
Budget allowances show how much new investment and spending is available in each Budget over the next four years. The economic backdrop for Budget 2022 remains highly uncertain amidst ongoing domestic and global COVID-19 outbreaks. The Government will continue to balance careful Budget management with prioritising investments that meet the wellbeing objectives and the Government's overarching policy goals.
The Government has set new operating allowances at $6.0 billion for Budget 2022, $4.0 billion for Budget 2023, and $3.0 billion for Budgets 2024 and 2025. Overall, by the 2025/26 fiscal year these allowance settings are expected to have an operating impact of $16.0 billion per annum.
The higher operating allowance for Budget 2022 is a one-off, reflecting substantial investment in support of the Government's significant reform programmes, including the transformation of the health system. There is a need for substantial investment to ensure that Health New Zealand and the Māori Health Authority are established on a secure and stable footing and are able to address pressing health sector needs.
Following on from Budget 2022 allowances revert back to levels of investment similar to those announced in recent Budgets.
As part of Budget 2022 the Government will be making a step change in how it invests by embedding a multi-year funding approach for some sectors. This means Budget 2022 decisions for these sectors will cover new funding for initiatives for a few years. Therefore, it is generally expected that these sectors will not receive further funding through the next few annual Budget processes.
To enable the management of multi-year funding decisions there will be scope at Budget 2022 to announce operating spending that is funded from future operating allowances outlined in Table 1, provided that the impact broadly remains within the overall operating uplift expected from operating allowances by 2025/26.
The multi-year capital allowance has been increased by $4.0 billion across the four-year forecast period. This brings the total unallocated multi-year capital allowance to $9.8 billion, or an average of $2.45 billion to be allocated per Budget in addition to $2.3 billion of pre-committed Budget 2022 initiatives. The multi-year capital allowance was introduced at Budget 2019, moving away from a single-year allowance to allow for a longer-term investment approach to capital spending.
These allowances have been incorporated into the Treasury's fiscal forecasts in the Half Year Economic and Fiscal Update (HYEFU). The allowances are subject to change, as economic and fiscal forecasts are updated for evolving economic conditions both in New Zealand and globally.
Table 1 - Budget allowances
|Operating allowances before pre-commitments (per year)||6.0||4.0||3.0||3.0|
|Multi-year capital allowance||← 9.8 →|
Source: The Treasury
Climate Emergency Response Fund
Climate change is one of the most pressing long-term challenges facing New Zealand. To respond effectively to the challenge, we will need to make significant investments across multiple Budgets.
To address this, the Government is establishing the CERF, which will be allocated towards initiatives that support our climate change objectives. It will be an enduring, multi-year funding mechanism, to support our transition to a low-emissions and climate-resilient economy.
As part of Budget 2021 the Government announced it would be hypothecating the revenues from the ETS toward emissions reduction programmes. Based on updated forecasts of proceeds from the ETS, we expect Budget 2022 will allocate $4.5 billion over the forecast period to the CERF.
The CERF is a multi-year allocation that can be spent across years, which will enable the Government to manage effectively the pipeline of investments we need make in the climate transition. The fund will be able to support either operating or capital expenditure as required, provided the expenditure is time limited.
Table 2 - Climate Emergency Response Fund, after international climate finance pre-commitment
|Climate Emergency Response Fund||← 3.7 →|
Source: The Treasury
Although $4.5 billion will be allocated to the CERF as part of Budget 2022, more funding may be needed to support high-value, robust initiatives that reduce emissions and increase New Zealand's climate resilience in the future. This is consistent with the advice we received from the Climate Change Commission, which shows we need to start making changes now, while recognising that the road to a low-emissions, climate-resilient productive future will be a long one.
The CERF does not represent the whole picture for climate spending. There is a range of funding mechanisms available, including existing funds like the National Land Transport Fund, and institutions like New Zealand Green Investment Finance. The Government is also committed to partnering with the private sector to meet the funding and financing challenges of the climate transition.
Progress update: COVID-19 Response and Recovery Fund
In Budget 2020, the Government established the COVID-19 Response and Recovery Fund (CRRF). It is a temporary fiscal management tool used to support New Zealand's response and recovery from COVID-19. It was originally set at $50 billion and built on the initial $12.1 billion support package announced on 17 March 2020.
Changes since Budget 2021
In September 2021, the Government allocated a further $7 billion to the CRRF. In addition, $3 billion was made available from money previously allocated in the fund that had not been spent. As at 25 November 2021, $4.3 billion of the CRRF remains unallocated. The remaining CRRF balance will be targeted at providing further economic support, as well as building health system resilience, supporting the vaccination rollout, and strengthening border systems.