Soaring inflation part of gloomy outlook
Two senior economists have shared their thoughts on the New Zealand budget which has been delivered at a time when the future appears gloomy.
“The latest forecast suggests more subdued growth, more persistent inflation, and further tightening in the labour market,” said Kiwibank chief economist Jarrod Kerr.
“The headline-grabbing announcements were policy aimed at alleviating the uncomfortable rise in cost of living. However, the government is walking a fine line between boosting spending to tackle policy issues and exacerbating domestic inflation.”
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Kerr said the capacity-constrained economy had helped push inflation to a multi-decade high of close to 7%.
“And rising interest rates, in part due to the response of policy makers to fight inflation is starting to weigh on aggregate demand,” he said.
The New Zealand government announced a cost-of-living payment for low-income earners not currently eligible for the winter energy payment, which Kerr said would add to the inflation issue at play.
“The economy is capacity constrained and the RBNZ is currently pouring cold water on it by delivering already aggressive interest rate hikes,” he said.
“To illustrate what’s at stake, the Treasury’s forecast of domestic inflation [non-tradeable] is projected to remain above 6% through to mid-2023. Any upward deviation from the plan risks further stoking domestic inflation pressures.”
ASB Bank senior economist Mark Smith (pictured) said Budget 2022 showed a later return to surplus, given the weaker global backdrop and challenges posed by inflation.
“Budget 2022 highlighted the pressures on the public finances with capacity constraints, challenges posed by elevated inflation and weaker global economic outlook all weighing on NZ economic activity,” Smith said.
“The pivot towards a longer-term focus is sensible, given the longer-lasting challenges facing the NZ economy such as climate change and sizeable infrastructure deficit.”
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Smith said it might buy the government more time to deliver its agenda.
“The stakes are correspondingly higher and the government needs to get it right for future generations as well as current ones,” he said.
