We were promised a ‘no frills’ ‘bread and butter’ Budget and that is what we have got.

Cost of living

Having ruled out tax cuts on affordability and ‘inflation risk’ grounds, the Government has focussed on targeted support for families, students and young workers and others most affected by cost-of-living pressures – with further early childhood education subsidies, the removal of prescription charges, further public transport subsidies and measures to reduce some Kiwis’ energy bills.

Extension of Early Childhood Education subsidies to cover 2-year-olds will provide much needed assistance to working parents and should allow them to return to the workforce earlier.

Scrapping the $5 prescription charge will benefit everyone but is progressive in the sense that it will benefit kiwis with higher health needs – a sensible measure.

Free public transport for children under 13 and permanent half price fares for the under 25s is a targeted and environmentally sensible measure – but more importantly it will bring real relief for families and young people who need and have access to good public transport services. Transport subsidies were locked in for superannuitants a few years back and now they will be locked in at the other end of the demographic curve.

Rather than increasing the untargeted Winter Energy Payment that is paid, for example, to all superannuitants, the Government has chosen to fund 100,000 new heating and insulation retrofits and 5 million LED light bulbs, both aimed at reducing power bills. The more targeted approach is sensible. The obvious question is whether we have the workforce to do the retrofits.

It is pleasing to see a tweak to the KiwiSaver rules that will ensure KiwiSavers on parental leave are not disadvantaged in the long term.

Most of the cost-of-living relief measures are targeted, much more so than last year’s one-off Cost of Living payment which was heavily criticised for being untargeted. This is good to see.

The cost of living measures are unlikely to stoke inflation. They seem sensible but neither bold nor overly generous. Whether they are enough to keep those kiwis most in need warm, dry and well (and their children attending school) through this winter and beyond will be revealed in time.

Infrastructure and Resilience

Unsurprisingly the Budget has a major focus on cyclone and flood recovery, an immediate and pressing need. The cyclone was the second biggest natural disaster New Zealand has ever experienced and the floods also caused extensive damage to infrastructure.

A further $859 million of opex has been allocated to cyclone and flood recovery operating expenditure. This comes on top of the $889 million already provided. Much of this funding must be spent on road, rail, housing and school repairs but some is allocated to future flood resilience investment. Given the scale of the devastation it seems likely more than the $1.76 billion of opex will be needed over time.

Importantly the need to invest in immediate recovery measures has not come at the expense of significant allocations for medium- and longer-term capital infrastructure expenditure ($71 billion over the next five years).

$6 billion has been allocated to a National Resilience Plan to support medium- and long-term infrastructure investment. The initial focus of the Plan and its funding will be on cyclone and flood recovery but it will then turn to longer term issues.

Last year the Infrastructure Commission estimated New Zealand’s "infrastructure gap" - the value of what New Zealand should have built but has not - at $104 billion.

This figure included a "shortfall in public investment of $83 billion" and an "estimated $21 billion necessary to eliminate the current housing shortage". Those shortfall figures will have worsened as a result of the damage inflicted to infrastructure earlier this year and the consequent need for so much rebuilding.

Allocating $71 billion over the next 5 years will help reduce the infrastructure gap but reversing the effects of decades of under-investment is likely to take several decades. Neither this Government nor any future Government can afford to take its eye off the infrastructure ball.

Tax

Unsurprisingly Budget 2023 does not include any changes to the tax rates or thresholds to address bracket creep or the introduction of any new taxes (so clearly ruled out in advance). Rock and a hard place come to mind. With the need for the Government to avoid stoking inflation and to shore up revenue to cover cyclone and flood recovery costs, boldness on tax was never on the cards.

The only tax change of any significance in Budget 2023 is the alignment of the trustee tax rate with the 39% top marginal tax rate from April 2024. This closes what has become an obvious loophole.

Aligning the trustee tax rate with the 39% top marginal tax rate after a $5.7 billion spike in income taxed at the 33% trustee rate (following the introduction of the 39% rate for individuals in 2021) confirms this Government can respond quickly to evidence and data when it wants to do so.

It is a relief to see that the trustee rate change will be subject to full Select Committee scrutiny and attendant public consultation. This should allow the opportunity for any unexpected consequences and definitional issues to be addressed. The proposal is projected to increase the tax take by $350 million each year.

Non-alignment of tax rates inevitably creates distortion in the tax system. New Zealand’s tax system is full of distortions partly because of non-alignment of the rates but also because of the absence of a comprehensive capital gains tax.

Aligning the trustee rate with the 39% top marginal tax rate addresses one of the key distortions – the one least likely to scare the horses politically. Not addressing the other distortions confirms that this Government like others before it has put broader issues with the tax system in the too hard basket.

Small Business and Productivity

Budget 2023 does not include much funding specifically targeted at supporting small businesses, the backbone of New Zealand’s economy, but has an increased focus on science and technology.

The Government has picked one winner here – the gaming development sector – with a 20 percent rebate for video game development studios. This sector brought in more than $400 million in revenue in 2022 and is growing rapidly. It is not surprising that the Government has chosen to support the sector given it offers highly paid and skilled jobs. This levels the playing field with Australia which also has an active gaming sector.

The obvious question is though what is being done to support other sectors that are made up predominantly of small businesses. They may not be as ‘sexy’ as the gaming sector but they are making equally important contributions to the New Zealand economy and are having to compete with global competitors, including for labour, in the same way as the video gaming sector.

The investment of $450 million in three multi-institution science research hubs should deliver benefits for tech and R & D focussed small businesses over time but those benefits are indirect and a way off.

A total investment of $75 million opex in industry transformation seems light. Funding digital skills development ($27 million), the use of technology in the horticulture sector ($30 million) and innovation in tourism and hospitality ($18 million) are sensible but will this level of investment be transformational in such large sectors which are critical to the Government’s ‘high-wage, low emissions’ vision for the future?

Robust and efficient immigration policy settings and processes are one of the keys to enhancing our productivity, as the country develops our domestic capabilities. We are pleased to see some additional funding for visa processing services but are concerned the increase may not be enough.

Sustainability

Budget 2023 acknowledges the importance of climate-resilient infrastructure, but also New Zealand’s poor track record of investment in this infrastructure.

Further funding for the Climate Emergency Response Fund will support initiatives such as more electric vehicle charging infrastructure ($120 million) and investment in Green Investment Finance Ltd ($300 million) will help fund low-emissions activities. There is also ongoing funding for the Climate Change Commission to provide advice to Ministers on agricultural emissions pricing.

Climate change does not affect all businesses or regions equally. It poses significant and varied risks to businesses and communities depending on their geographic location and characteristics and infrastructure profile. The spending detailed in the Resilience section e.g. flood resilience above will need to be targeted to the areas most in need.

Budget 2023’s allocations provide the foundation for New Zealand’s mitigation and adaptation responses, but there remains an inherent challenge on how we best measure what matters.

Measurement itself relies on data capture. The Government’s decision to fund the development of New Zealand’s climate data infrastructure ($45 million) should support long-term credible and comparable climate-related reporting by both public and private sectors. Alongside robust data gathering and measurement lies the broader challenge of capability, which does not seem to be specifically funded by this Budget.

Health, Education, Welfare

Check the Snapshot for key Budget investments in these areas.