Deputy PM Grant Robertson signals main course of status quo, with a potential side of stimulus in HYEFU

ANALYSIS: “A global slowdown in growth.” Those were almost the first words uttered by Treasury Secretary Caralee McLiesh as she stood to deliver the Treasury’s Half Year Economic and Fiscal Update (HYEFU).

Next year will see, Treasury predicts, some of the slowest economic growth since the early 1990s – except for the Global Financial Crisis (GFC) and pandemic. Treasury has joined the Reserve Bank in predicting a recession in 2023. Full fuel taxes will also be reinstated.

The Government’s chief economic agency predicts inflation – the growth in general price levels – will still be running at 6.4% next year, before falling to back within the bank’s target of 1% to 3% by 2025.

The HYEFU is basically an update on the Government’s books and includes broader commentaries of the state of the global and domestic economy as well as fiscal risks.

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It’s accompanied by the Budget Policy Statement (BPS) which outlines Minister of Finance Grant Robertson, and the Government’s, priorities as it puts together a 2023 Budget, which will be handed down in May.

Although there are no figures and specifics the BPS say that “the primary focus at next year’s Budget will be on supporting families and household experiencing cost of living pressures.”

In an election year, the big $4.5 billion operating allowance and a record tax take gives Grant Robertson wiggle room to provide significant support (such as tax cuts) in the 2023 election year Budget, although much of it will be gobbled up by inflation.

Robertson also indicated that while early 2023 could see high inflation, the second half could see a recession requiring fiscal stimulus – countercyclical spending to boost aggregate demand. He describes these as potential “twin challenges” for next year.

“I try to act in a way that is responsible for the times we live in,” he said.

Positively, Government spending as a share of the overall economy is expected to continue trending downwards, contributing less to domestic demand and therefore inflation.

In small, trade-exposed economies such as ours, running Budget surpluses on average across the economy cycle are considered important as it keeps debt low and gives the Government headroom to respond to external shocks, such as financial crises or (more recently) pandemics.

However, to use one of Robertson’s favourite terms, this BPS and the spending levels are a continuation of “balance”. This is political balance of competing objectives. It’s also his way of saying he won’t be reducing planned new operational spending.

It is essentially Robertson’s way of describing how he manages his twin objectives of putting money into Labour’s priorities – health, education, housing, infrastructure, climate change, child poverty – with an eye to running budget surpluses in the medium term.

The HYEFU forecasts a budget surplus – where revenue exceeds spending – of $1.7 billion in 2025. This is the same track as forecast in the May Budget, but the surplus will, at this stage, be about $1 billion less than predicted in May.

Budget deficits will also be smaller than forecast, with an estimated $5.1 billion less in deficits between now and when Budget surplus is achieved.

Ministers have also been asked to create space for any new schemes within their existing budgets.

This is a credit to Robertson, although it will have to be closely watched. Telling Ministers in the final year of a majority Labour Government that their pet projects won’t be funded will not be easy. And keeping a lid on spending in an election year will also be creditable, but again, something to watch.

The 7.2% headline inflation rate will also give Robertson cover to try to tighten the fiscal screws.

It is now clear that 2023 will pose the biggest political challenge to Robertson’s long term project of trying to convince the public that Labour is just as good an economic manager as the National Party. He was proud of running surpluses prior to Covid and is keen to get back to them – albeit while spending more.

The political incentives to buy votes next year will hit the reality of inflation, a grumpy electorate, a re-energised centre-right bloc of National and ACT – all of which will put pressure on that long term goal of Robertson’s.

The overall political message from the BPS seems to be: stay the course, buckle down, it is going to be a tough year which will require “tough choices”.

It will be far from austerity – a loaded political term – but after many years of cheap money and a few of expansionary fiscal policy, 2023 is definitely shaping up to be a more flinty, belt-tightening affair.

Unless fiscal stimulus is needed, of course.

Merry Christmas.