Budget 2023

Budget Policy Statement

Policy areas of focus

Budget 2023 will be put together in a challenging global economic environment. In the past few years, the New Zealand economy has endured a significant number of shocks. The economy is now being buffeted by global supply shocks, geopolitical tensions, and a global skills shortage. At the same time, sectors like tourism and international education continue to be affected by global disruption, while employment in other sectors such as construction has grown considerably.

Fiscal policy through Budget 2023 will continue to be contractionary, meaning that government spending will be constrained so as to not unnecessarily add to demand in the economy. The Reserve Bank has tightened the Official Cash Rate considerably since late 2021, and the current economic conditions require fiscal policy to work in concert with monetary policy, rather than pushing in the opposite direction.

The mix and phasing of spending require a careful balance in order to ensure that the Government continues to deal with the issues that are important to New Zealanders and supports them with the cost of living. Our focus will be on supporting families experiencing cost of living pressures while continuing to position New Zealand to seize the advantages of a low-emissions economy.

Budget 2023 will accordingly require difficult trade-offs. The Government will be closely examining existing spending to identify opportunities to reprioritise spending towards higher-value initiatives. This is in line with the Government's fiscal management approach throughout our term. Over the past six months, more than $3 billion of unused spending – mainly from COVID-19 measures – has been returned, including $1.6 billion in October 2022. This has created space to fund emerging priorities like the fuel tax cut and half price public transport, while also keeping a lid on our low levels of public debt.

The Government has identified four policy areas of focus for Budget 2023:

  1. Supporting Kiwi families and households with cost of living pressures

    Higher prices for food, fuel, and other necessities, as well as higher mortgage repayments, will affect New Zealand families into 2023. It is clear that low- and middle-income households will continue to be the most acutely affected by the challenges that rising prices cause.

    Wage growth will continue to support New Zealanders to meet the cost of living. Annual growth in hourly earnings has largely exceeded consumer price inflation since 2017, except for between September 2021 and June 2022. Real wages grew again in the year to September 2022, and the Treasury's Half Year Economic and Fiscal Update (HYEFU) 2022 forecasts wage growth to remain higher than inflation over the forecast period.

    Budget 2023 will continue our work to support households and businesses in a targeted manner. This is what we have done throughout this period of high global prices, including recent changes to improve access to childcare assistance.

    We will continue work to fight the drivers of high prices by ensuring that markets function competitively and deliver good outcomes for consumers. The Government has introduced legislation to prevent supermarkets blocking their competitors' access to land, and to create a Grocery Commissioner with regulatory powers to give smaller retailers and new market entrants a leg up. We have also made changes to the wholesale market for fuel – including giving the Commerce Commission the power to set fair wholesale prices if necessary – to ensure that all petrol retailers can access cheaper fuel and pass on the benefits to consumers. And in the first half of 2023 the Government will outline our response to the Commerce Commission's recently released study of the residential building supplies industry.

  2. Careful and balanced fiscal policy, including returning to surplus in the 2024/25 year

    After a period of expansionary fiscal policy to support businesses and households through COVID-19, it is now time for fiscal policy to be contractionary to take pressure off inflation by targeting expenditure to where it is needed most in the economy.

    This Budget Policy Statement confirms the plan set out in Budget 2022 that fiscal policy will be contractionary from the current 2022/23 year which began on 1 July. This means that the Government's contribution to aggregate demand in the economy is set to reduce relative to each preceding year. The Treasury's advice is that this will dampen inflation pressures in support of the Reserve Bank's independent monetary policy, taking pressure off interest rates versus a scenario where fiscal policy provided a neutral or positive impulse.

    A key driver of our forecast contractionary fiscal stance is our target to return the books back to surplus earlier than the previous Government did following the Global Financial Crisis, with five years of deficits forecast as a result of the COVID-19 response, averaging 2.5 per cent of GDP, compared to the six deficits following the Global Financial Crisis averaging 3.6 per cent of GDP.

    Ahead of the forecast surplus in the 2024/25 fiscal year, the deficits forecast in 2022/23 and 2023/24 have also reduced by a combined $5.1 billion compared to the Budget Economic and Fiscal Update (BEFU) 2022 forecast, further taking pressures out of the economy.

  3. Getting the basics right

    The Government has a strong record of investing in the public services on which New Zealanders rely. But just as high prices are putting pressure on some households and businesses, high global inflation also risks affecting the delivery of some of our core public services. Budget 2023 will continue the Government's work to ensure that the delivery of these services is maintained through this period.

    Our careful fiscal management means we can continue to target investment to where it is needed most, including ongoing investment in health, education, and housing. To ensure spending is targeted to where it is needed most, the preparation of Budget 2023 will involve public agencies examining what needs can be met by reprioritising existing funding. This process will ensure ongoing value for money from government spending, and that we remain focused on those services most vital to maintaining and enhancing New Zealand's wellbeing.

  4. Delivering on our economic plan, including through investment in infrastructure that drives growth, productivity, and reduces emissions

    While we support New Zealanders through a difficult period, we need to continue to look to the future. Budget 2023 will deliver on the Government's economic plan to support a high-wage, low-emissions economy that provides economic security in good times and bad.

    We will strengthen the foundations that underpin our wellbeing, with capital investment central to this. The Budget will continue the work to address our long-term infrastructure shortfall to boost productivity and growth, while recognising that investment needs to be carefully prioritised and sequenced to ensure there is capacity for the most value-for-money investments to be delivered.

    The Budget will also invest to unleash business potential and innovation. The Government's Industry Transformation Plans are an important part of this approach.

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