Budget 2022: Labour's impossible balancing act

Tuesday, 17 May 2022

Peter Dunne was the leader of United Future and served as a minister in former National and Labour governments.

OPINION: Grant Robertson faces an almost impossible balancing act with this week’s Budget.

On the one hand, he has already promised new government spending of up to $6 billion, with the reorganisation of the health sector to be the major beneficiary, and the first allocations from the $3.7 billion Climate Emergency Response Fund have been announced. But, on the other hand, with inflation and mortgage interest rates rising sharply, he cannot afford expansionary government spending which adds to those pressures.

Robertson says this will be a business-as-usual Budget, reflecting the “new normal” rather than a “crisis” Budget like those of 2020 and 2021, delivered in the Covid-19 context. The underlying Budget numbers look reasonably good. A larger than expected tax take and recent changes to the government’s debt parameters give Robertson some leeway, even though he is still forecasting a substantial Budget deficit.

But when the Labour Government’s waning public support and recent public opinion polling showing over three-quarters of people (and just under two-thirds of Labour voters) think the Government is not doing enough to curb the rising cost of living are factored in, Robertson’s challenge becomes far more acute and his room for manoeuvre tighter. Having ruled out cutting back spending as a way of curbing current inflationary pressures, he needs to convince voters his new spending will make things better, not push up inflation and make things worse.

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On the cost-of-living front he could extend the recently introduced three-month 50% public transport fare subsidy. This would cost up to $160 million a year, although that assumes no significant increase in usage levels. He could also make the 25c a litre cut in the fuel excise tax permanent, at an annual cost of around $1.4 billion. With petrol prices still soaring and the fuel tax suspension due to end shortly, he may have no alternative to extending it for a full year, or even making it permanent, to stop prices escalating completely out of the range average households can afford.

The government has already announced increases in Working for Families Tax Credit payments of just over $200 million from the beginning of April, so further increases look unlikely there. Robertson has ruled out tax cuts and other tax changes, meaning there are unlikely to be other direct forms of family assistance introduced to deal with the rising cost of living.

The Working for Families changes, extending the public transport subsidy and fuel excise tax cut would account for more $1.8 billion of the promised $6 billion new spending. When pre-Budget announcements (like the $652 million policing and law and order package announced recently, the new $230 million apprentices training scheme and about $50 million in various educational initiatives) are added, around one third of the $6 billion would already be spoken for.

The bulk of what remains is likely to go to health, but it is not clear what the split will be between meeting the costs of setting up Health New Zealand, and capital expenditure and improvements in service delivery. What is clear is that the Government cannot afford a repeat of the 2019 additional $1.9 billion allocated to mental health, which it admitted earlier this year had yet to show any tangible results.

Given Robertson’s assertion that “we’re not going to lower fuel prices by cutting health spending” means the pressure is on the health reforms – coming into effect from July 1, to produce demonstrable and tangible results over the coming 12 months. That seems unlikely, with teething troubles inevitable with the new changes, and the Health Minister’s task force on reducing waiting times not even due to report its recommendation until September. Voters facing rising mortgage rates and living costs in the meantime will become even grumpier if they perceive they have gained nothing but more bureaucracy from the health reforms.

This opens another door for Robertson. Following the Pharmac review about access and affordability of medicines, he could take the opportunity to both increase funding to Pharmac to fund more medicines and reduce prescription costs to households. He could argue this was a practical way of both reducing household costs and improving New Zealanders’ access to medicines.

This Budget is fundamentally about restoring Labour’s fortunes and setting up National and ACT to say what services they would cut to bring spending back into balance. Its success will be determined by the extent to which voters, already telling pollsters they think National is better at managing the economy and their futures, are prepared to buy Robertson’s line. If they think he is already spending too much, they are unlikely to thank him for spending more. Judging where to draw the line between his self-proclaimed fiscal prudence and his Government’s reputation for profligacy remains Robertson’s biggest Budget challenge.