Great expectations: Grant Robertson's cost-of-living tightrope

Saturday, 13 May 2023

It’s being dubbed the “no frills” budget, but with inflation and soaring interest rates burning an average $150-a-week hole in household budgets, Finance Minister Grant Robertson faces a tricky balancing act offering relief to those hardest-hit by the cost-of-living crunch.

A mini-budget package due to be unveiled in Hawke’s Bay on Sunday, focusing on building back from adverse weather events like Cyclone Gabrielle – the cost of which has been put at between $9 billion and $14 billion – underscores the size of the Government’s fiscal headache.

**READ MORE:

* Homeowners with mortgages, families on low incomes worst hit as costs rise

* Grant Robertson warns 'unknown territory' ahead for the economy

* Cyclone Gabrielle recovery: $25 million fund for farmers and growers

**

In a speech last week, Robertson acknowledged the pain points in the economy – a tight labour market, an energy crisis, global supply chain issues and high inflation.

“More recently we have seen a number of extreme weather events that have brought the increasing impact of climate change to the forefront of our minds,” Robertson said.

With government spending already up an average $1 billion a week compared to pre-Covid, Robertson is also under pressure to address decades of infrastructure neglect, fix a severely-stretched health system, invest more in education, and deliver significant pay rises to state sector workers, who are also feeling the cost-of-living crunch.

And all that comes against the backdrop of a deteriorating economy and the latest Crown accounts showing government tax revenue dropping.

Economist Cameron Bagrie said that was bad news for the Government and the economy, because it showed the extent to which businesses were being “throttled” by inflation and interest rate rises.

”The job losses are going to start in earnest,” he said.

“The impact on businesses is not being talked about enough, because when they suffer you're going to see the job losses and that’s the second half of the year story.”

But it’s the pressure on households that people will be looking to Robertson to address in his sixth budget this week.

ASB economists calculated earlier this year that households were likely having to spend an extra $150 a week over 2023 to keep up with rising costs.

That’s due to inflation running at around 7%, and a 45% increase in household interest payments.

Essentials such as food, fuel and housing were the biggest contributors to cost increases. While house prices have come down, that’s been offset by mortgage rates increasing – if you were borrowing $500,000 two years ago it would have cost you $978 a fortnight on a 2% interest rate. Now, it costs $1557 on 6.5%.

It’s not just mortgage rates that are putting pressure on household budgets – rents are also up by more than 20% since 2016, or 3.9% in the last year.

And while wages have risen faster than in previous years – up by 4.1% in the year to December – they haven’t kept pace with those rising costs.

Food prices in particular have been a pressure point – up 12% in the year to January.

Both Bagrie, and Infometrics economist Brad Olsen, are tipping a tightly-targeted boost to Working For Families​ as the easiest way for the Government to direct assistance to those who need it most - and both are cautioning against extending blanket sweeteners like fuel-tax relief, which is due to end soon.

“They’re going to have to support those in need, but they’ve got to be really selective about that,” said Bagrie.

“Things such as the fuel subsidy have just been all political. Economically it was absurd in regard to how they applied that. Politics interfered with what should have been the right policies in regard to supporting people in need through cost-of-living problems.”

Working For Families increases are probably the most effective way to help, Bagrie said, although he’s concerned that the Government won’t be targeted enough.

“If you look at the track record of the Government over the last five years, every budget has been a bigger budget than what was anticipated because they haven't been able to keep their hands off the loot.”

That spending was contributing to the inflationary spiral, he said.

Olsen said the problem for the Government was that interest-rate rises which were putting household spending under pressure were necessary to get inflation under control – “and if the Government does too much to try and support households it runs counter to what the Reserve Bank is trying to do in terms of dampening demand, and could cause interest rates to rise further”.

“So there’s a very difficult and tricky balance to be struck… Where the Government is likely to settle, and certainly needs to from an economic point of view, is focus on those who are hardest-hit during the hardest period. The focus needs to be on benefits, but also lower-income New Zealanders who don’t have the same ability to manoeuvre their costs around like higher-income households do.”

“You could well see something like an expansion of Working For Families tax credits, or something around the likes of the winter energy payment, but souped up for another year or so.”

But such support needed to be temporary and targeted and should be seen as an extraordinary measure during a time of high inflation, to be removed once that subsided, Olsen said.

With it being an election-year budget, it will be voters who deliver the final verdict. We took to the streets to find out what they’re thinking.

Eloise Wallis, 23, tattoo artist

“With the way the world is at the moment, everything in general is so much more expensive, but I think the Government really need to focus on the basics of food and shelter coming into the new budget.

“I live with my partner who’s bought a house, but with the housing market as it is in Auckland when looking at getting a mortgage they’ll ask you about whether you have Netflix, whether you get takeaways and things like that – and that’s just to get the mortgage.

'Things like that need to be looked at too.'

Tess Parker, 30, youth worker

“I think public transport needs to be much more accessible – reducing the cost of public transport would be a really easy solution, and have lots of other positive impacts.

“The supermarket duopoly also needs to be looked at in a very serious way. People need to know that it doesn’t have to be this way.

“I’m looking to buy a house at the moment, so we’re definitely feeling a squeeze. We had help with our deposit, but if we hadn’t, it would have been a very different story.”

Matthew Fitzgerald, 48, previously self-employed

“I lost my hospitality business over the Covid period, it was just impossible being a small business owner during that time. Since that I’ve had to move into my parents’ place.

“Taking the GST off food and not taxing small businesses that have a high wage cost and small margins would definitely help.”

Karina Matich, 53, caregiver

“Being a student for so many years in the past, I’m pretty good at having money put aside, which has been a big help during this time.

“I really do think the Government need to drop the 15% tax on food and petrol – I think that would make a huge difference to a lot of people.

“Having a levy on how much fuel could go up would be a great thing too.'