Finance Minister Grant Robertson won’t want to do anything to disturb the waves of euphoria washing over New Zealanders when he presents the budget this week. The country is still basking in the recognition accorded the Prime Minister with the top spot in Fortune magazine’s list of the world’s greatest leaders.
Even one-time National supporters line up in the queue of Ardern worshippers.
So Robertson will strive to avoid any discordant notes in the budget. Yet the fact is that the NZ economy, though it has survived the Covid pandemic with a surprising degree of success, is facing many challenges, some of them with very sharp edges, as it moves into the next cycle.
These include many issues that had been becoming acute before the pandemic struck but were made worse by it: child poverty, homelessness, inequality, mental health, skills shortages. Now there are pandemic effects, already obvious some months ago, that are making the road to recovery even more difficult.
NZ, always heavily dependent on imports, is finding supply chains disrupted. Freight charges have risen spectacularly and there are global shortages of crucial imports. Everything from building materials to pharmaceuticals is rising in cost.
Covid’s impact on the labour market has served to make shortages more acute. Skilled workers in the health, education, technology and animal care sectors have become scarce. In the rural industries the shortages of manual workers are regularly in the headlines.
So how will the Finance Minister handle the inflationary pressures building up so steeply?
Or will he just ignore them as he pumps more money into the economy?
There are high expectations among Labour supporters that benefits will be increased in the budget, but the risk is that their value will be eroded as quickly as the extra money reaches the beneficiaries.
Because more people are on some form of welfare at the moment and the government is trying to stimulate the economy, expenditure has risen sharply.
Heading into the pandemic, the government’s core expenses were about $80bn a year – $86.95bn in 2019. The economic cost of fighting Covid has put that up to $114.2bn for this year, and an expected $109.10bn next year.
Given these pressures, there seems little chance of Robertson channelling funds into raising NZ’s overall economic performance, and so blunting the Impact of inflation.
As economist Michael Reddell wrote in a recent post in his Croaking Cassandra blog:
“It is hard to think of a single thing they (Labour) have done to improve the climate for market-driven business investment and productivity growth, and easy to identify a growing list of things that worsen the outlook….”
Reddell went on to relate how NZ, which once was richer than most Eastern European countries, will soon find its economy is less productive than all or most of them.
Few among the current Cabinet have worked in the market economy and seem indifferent to the need to raise productivity in the drive to improve living standards, generally, but particularly those at the lower end.
The consequence of any further drift in productivity levels (and living standards) will see workers looking for greener pastures across the Tasman.