'One-off' $6 billion spending boost for Budget 2022

Anna Whyte
Source: 1News

The Government is significantly increasing the amount it has to spend in a one-off boost to $6 billion next year, pouring the cash into the health system and climate change.

There will be a “transition payment” of up to $24k, the Finance Minister says.

It comes as Treasury releases its half-year forecast, which suggests house prices could fall slightly over 2023 and 2022, while unemployment could fall even further down to 3.1 per cent.

Secretary to the Treasury Caralee McLiesh released the 2021 half year economic and fiscal update (HYEFU), saying the economic performance was stronger than expected, but uncertainty remains high.

Prior to Delta hitting New Zealand, demand was strong, which led to a better result than what was expected.

Delta saw a drop in activity over the September quarter, but it was expected to rebound, "supported by pent-up demand, continued strength in building construction" and activity being less restrictive under the new traffic light rules.

Finance Minister Grant Robertson described Treasury's forecast as indicating a "swift recovery in economic activity" after the Delta outbreak, showing "remarkable resilience and adaptability".

Money in the pot

The Government is increasing the amount it has to spend to $6 billion in Budget 2022, to pay for health reforms and climate change response.

"What we have is a health system in urgent need of repair and reform," Robertson said.

"This one-off increase in operating allowances is designed to ensure we can forge ahead with major reform programmes… the remainder of the allowances will cover significant cost pressures and fulfilling our manifesto commitments."

"The allowances will then reduce to $4b at Budget 2023, then $3b in Budgets 2024 and 2025," which would increase the capital allowance over that period by a total of $9.8b, Robertson said.

He acknowledged inequalities and major issues such as climate change and housing affordability remained.

"Now is the time to tackle major long-term issues," Robertson said.

"Managing health costs will be a major challenge for coming decades," Robertson said. He said the new entities the Government is establishing (the Māori Health Authority, a dedicated public health agency and Health NZ) would have a "solid base" to tackle health issues.

It would also spend $4.5b collected from the Emission Trading Scheme on programmes to reduce emissions from Budget 2022 (in May) onwards.

It will go into a Climate Emergency Response Fund, which Climate Change Minister James Shaw called a "game-changer that will provide billions of dollars over the next four years" to help reduce emissions.

Read more: Ardern, Shaw pledge further cut to greenhouse emissions

The Government would also publish an Emissions Reduction Plan to set New Zealand's climate action for 15 years.

"Over this time we will need to cut carbon pollution from nearly everything we do, from the way we grow food, to how we generate energy to heat our homes, to the way we get around our towns and cities," Shaw said.

Robertson said there was $4.3b remaining of the Covid Recovery Fund, after the Government had committed a total of $69.1b overall for the Covid response.

Opening the books

The growth in tax revenue in the first half of the year was offset by the Government's Covid support packages, with a deficit of $20.8 billion for 2021/22 - $16.2b more than the 2020/21 financial year.

Robertson put the deficit down to the Government investing "to keep New Zealand businesses going, keep New Zealanders in work", and in the health response.

The books are looking to return to surplus in the 2023/24 year – three years earlier than expected.

Treasury forecast net debt to peak at 40.1 per cent of GDP in the 2022/23 year, before it decreases to 30.2 per cent in the 2026 forecast period (which was previously forecast to reach 48 per cent).

He said the Government was looking to 2022 with "cautious optimism".

"These are challenges ahead with supply chain disruptions, higher inflation and ongoing Covid impacts that may affect these forecasts, but New Zealand is well placed to meet these challenges."

On the looming threat of Omicron, Robertson said it "does present another set of challenges", but New Zealand's health system had handled Delta, which had caused significant illness and death around the world.

Inflation

Supply-side constraints and strong demand in activity has seen inflation jump up, with forecasts now suggesting it could get to 5.6 per cent in March 2022 quarter, before falling across the rest of 2022.

Covid has caused massive disruptions in supply, with shipping delays and reduced availability of items in construction and electronic components.

It also pointed to 'record-high' difficulties in finding skilled labour, and near-record issues in finding unskilled labour in the September quarter based on the Business Opinion quarterly survey, which also indicated that 42 per cent of businesses were planning to increase staff in the next quarter.

Housing

Treasury is forecasting house prices to fall "slightly" over 2023 and 2024.

Despite this, buyer demand is down as investors are less willing to sell.

Interest rates are expected to rise faster than previously thought, putting pressure on house price growth, McLiesh said.

House price growth was expected to ease over 2022, after going up to 30 per cent in the June 2021 quarter. The Treasury expected house price inflation to slow due to the rise in interest rates.

"The higher OCR will translate to higher mortgage rates, reducing demand for housing. House prices are expected to fall slightly on an annual basis over 2023 and 2024, shortly after interest rates peak."

Unemployment

Unemployment fell to 3.4 per cent in the September quarter, with it looking like it could move further down to 3.1 per cent in the March 2022 quarter, before it was forecast to move back up to 4.1 per cent for the 2026 forecast.

The "increased tightness" in New Zealand's labour market is expected to see wage growth up to 4.6 per cent in December 2023, with sectors such as construction and primary manufacturing industries seeing a higher wage growth compared to industries such as tourism and accommodation.