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Keeping the New Zealand economic recovery on track

Christina Leung, Principal Economist and Head of the Auckland Office for NZIER

Budget 2021 is a key part of the Government’s blueprint for New Zealand’s economic recovery following the sharp shock of COVID-19 which dominated economic activity here and around the world in 2020.

Whilst last week’s GDP figures showed robust activity in the New Zealand economy, the effects of the pandemic are still a pervasive part of economies globally. So this Budget was focused on keeping the recovery on track through fiscal stimulus over the longer term.

Housing, welfare and health were the biggest winners

Health, welfare and housing were the biggest winners in terms of the increase in spending relative to the Half Yearly Economic and Fiscal Update 2020 (HYEFU20). With the announcement of the $3.8 billion Housing Acceleration Fund in the Budget, housing and community development are set to receive the largest proportional increase in spending – 43 percent above what was planned in the HYEFU20.

Housing has been the focus of many discussions over the years, spanning policymakers, private and social enterprises, all the way to chats around the dinner table. The surge in house prices has been highly topical, both from the concern on what it means for home ownership, housing tenure and mobility, as well as financial and economic stability.

Falling interest rates fuelled the housing market in the pandemic when most expected the market to cool as the economy suffered

The fall in mortgage rates to new record lows in the wake of the COVID-19 outbreak has boosted housing demand, as (expected) returns on investment outweighed the cost of borrowing. This strong demand for housing pushed up house prices in the supply-constrained market. The Housing Acceleration Fund may go some way to easing some of the shortages by adding new housing supply onto the market, and dwelling consent issuance points to a strong demand for residential construction more broadly.

Capacity constraints and supply chain disruptions frustrate the response to housing and infrastructure delivery

Strong growth in residential construction has seen capacity constraints emerge in the New Zealand economy. In the construction sector, these capacity constraints reflect labour shortages and the difficulty in sourcing building materials given COVID-19 related supply chain disruptions.

The Government in Budget 2021 has allocated infrastructure investment of $57.3 billion over the next five years. However, these supply constraints present a risk of the capital investment programme being more protracted if construction work is delayed either because of resource constraints or intense cost pressures.

Boosting welfare and domestic consumption to support the economic recovery and social aims

In response to the recommendations from the Welfare Expert Advisory Group, the $3.3 billion welfare package aims to improve the wellbeing of beneficiaries as well as boost retail spending in the economy. From 1 July this year, all main benefits will increase by $20 per week. Beyond that, a second round of benefit increases will come into effect from April 2022 which will increase benefits by $32 to $55 per week, with additional top-ups for families with children. The boost to domestic household spending will be particularly important as the effects of the border restrictions continue to bite on parts of the New Zealand economy.

Health and education spending per capita are lifted too

Across the other core areas of Government spending, health spending per capita is set to increase by nearly $159 per capita, while per capita education spending is set to increase by $197 by 2024 relative to HYEFU20. Although we will see less spending per capita this year, the Government is planning to have spending per capita pick up in 2022 and 2023 before settling down to more modest levels in 2024.

More work needed on the road to recovery.

Overall, this Budget, while lacklustre, should keep the New Zealand economic recovery on track as we continue to deal with the challenges left by the COVID-19 outbreaks.