Big support package to help ease costs and build industry resilience
Galloping inflation and rising interest rates have seen the government respond with a targeted program to address cost of living pressures with emphasis on low and middle-income earners.
The Key Takeaways
- Cost of living boost
- Unemployment rate to fall to 3%
- Inflation to ease over 2023
- Apprentice incentive extended but at a lower rate
- Details of new funding system for vocational education
The centrepiece of the 2022 Budget is a $1 billion support package that includes:
- an extension to the reduction of fuel excise duty introduced in March, by two months until mid-August
- an extension of the road user charges cuts introduced in April, until mid-September
- an extension of half-price public transport fares introduced on April 1, until the end of August, and
- a $350 cost of living payment in three instalments for an estimated 2.1 million people earning below $70,000
Growth outlook bumpy
The economy is facing something of a bumpy outlook, both as a result of the Omicron outbreak, and the impact of rising interest rates aimed at curbing inflation.
The country’s GDP rose 3% in the December quarter and 5.6% over the year.
However, over 2022 as a whole, the Budget forecasts GDP growth of only 1.7%, before peaking at 4.2% in 2023. For 2024, GDP is forecast at a scant 0.7%.
Tight labour conditions to remain
The challenge of finding skilled workers is likely to remain for some time.
The unemployment rate hit a record-low of 3.2% in December 2021 and remained at that level in the March quarter.
Treasury forecasts in the Budget show that unemployment is expected to fall further to 3% by mid-2023, before rising toward 5% in 2024.
The other key feature of New Zealand’s labour market has been the rise in participation, which has increased from pre-pandemic level to 70.9% as more New Zealanders have been drawn into the labour market. This is in contrast to many developed economies where labour force participation has remained low.
Treasury estimates that the tight labour market and high inflation will drive annual nominal wage growth up to 6.3%.
Inflation predicted to ebb away
Treasury thinks that the current inflation surge is temporary and will wash out of the system over the next couple of years.
New Zealand’s annual inflation rate hit a 30-year high of 6.9% in the March quarter. That was larger than expected, though in line with rates in other developed economies where the inflation menace has resurfaced.
The Budget forecasts inflation to moderate to 5% by June 2023 and near 2% at the end of 2025 as global inflationary shocks ease and monetary policy normalises.
Improving industry capability
The uncertainty flowing from international turmoil has seen the government devote funds to building more resilience and diversity in the domestic economy.
- $100m for a Business Growth Fund to provide capital funding for SMEs, being developed alongside the major banks
- continuation of the $200m Regional Strategic Partnership Fund to support local projects
Also, there are additional funds to accelerate productivity and reform through Industry Transformation Plans (ITPs), including:
- $37m for Construction Sector Accord Transformation plan
- $30m for Advanced Manufacturing ITP
- $5m for Agritech ITP
- $20m for Digital Technologies Transformation plan
- $40m for Primary Industry Transformation plan
The Budget will take funding not required from earlier emergency support to develop an Innovation Programme for Tourism, to be designed with the sector.
The Budget includes $349 million in investment in capital funding to replace and modernise rail assets.
There is also funding to progress the findings from the Commerce Commission’s report into the supermarket sector, which will look at barriers to new entrants.
The Auckland light rail moves a step closer with additional funds allocated, and MPs and staff will get new accommodation, with a planned new building at Parliament House in Wellington.
Skills and training
Apprenticeship Boost provides employers with up to $16,000 for each apprentice. Employers of first-year apprentices are eligible for $1,000 per month, and employers of second-year apprentices, $500 per month.
The payments were to end in August, but the scheme will be extended until the end of 2023.
However, the first-year subsidy rate will be reduced to $500 per month from 5 August 2022. The second-year subsidy rate will remain at $500 a month.
The government estimates that more than 190,000 people have been supported by the scheme over the past two years and that a further 38,000 will benefit from the extension.
The government will continue employment support for Māori through the Cadetship Programme ($25 million total funding) and support for Māori entities to deliver employment training through the Māori Trades and Training Fund ($66 million total funding).
There is also further support for the Mana in Mahi programme, which provides wrap-around support to help those detached from the labour market to upskill and find jobs.
The government has also unveiled the detailed design of a new unified funding system for vocational education, first announced in 2021, which is the crucial final part of the wide-ranging Reform of Vocational Education (ROVE), designed to create a consistent national skills and training architecture.
The government has outlined the latest plank in its overhaul of the country’s health system.
Last year the government unveiled the blueprint for a national health service based around two new lead entities, Health New Zealand and Te Mana Hauora Māori/the Māori Health Authority. These will replace the existing 20 district health boards and be responsible for running hospitals and delivering health services.
The Budget introduces a new multi-year funding model for health, beginning with a two-year package in Budgets 2022 and 2023, before moving to a three-year funding cycle in 2024.
Budget 2022 kicks off with $11.1 billion total operating funds and $1.3 billion in capital funds.
One crisis at a time
This Budget represents the last instalment of the government’s COVID recovery plan. It should have marked the start of a brighter economic time, but now governments everywhere face new challenges.
The emergence of global inflation, massive disruption to supply chains, the lockdown of Shanghai – one of the world’s biggest ports – and the Russian invasion of Ukraine have piled one crisis on top of another.
When the government established the COVID-19 Response and Recovery Fund (CRRF) in April 2020 it could not have imagined the final bill – $61.6 billion.
New Zealand’s economy grew by a healthy 3% in the December quarter and 5.6% over the year, signalling that the rebound is underway.
But all that government spending has to land somewhere, and in hindsight, perhaps there was too much stimulus. With inflation at 6.9% in the March quarter, the Reserve Bank has acted promptly to lift the official cash rate.
New Zealand is far from alone. Governments everywhere are hoping that this inflation is a blip and not a trend.
Unless stated otherwise, information was sourced from Stats NZ and The Treasury. This is general information only and should not be taken as constituting professional advice from Programmed. Programmed is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Programmed is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided.
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