After 18 months which has seen the economy consistently outperform Treasury forecasts things are getting tough.
Luckily for Finance Minister Grant Robertson, all those months of Crown Accounts coming in “better than expected” leave him in a position to move quickly in an oil price crisis that is fast turning the public mood.
Cabinet today decided to reduce fuel excise duties and road user charges by 25c a litre each, for the next three months.
It will also subsidise public transport, halving fares for the three-month period.
The measures look like deft politics- heading off attempts by National to paint the Government as out of touch on the public’s inflation pain.
ANZ economists estimate the direct impact could reduce Consumer Price Index inflation in the June quarter by about -0.5 percentage points.
That means inflation may now peak at 6.9 per cent relative to ANZ’s current forecast of 7.4 per cent.
However ANZ is holding off any revision to its forecast for now, noting that, oil prices or other events could still hold more nasty surprises.
“We are in a position to be able to afford this,” Robertson said at the press conference this afternoon.
The latest Crown Accounts show we are, quite comfortably.
The new measures will cost the Crown about $400 million – $350m in lost revenue from the tax break and between $25 and $40m for the public transport subsidies.
As at the last published update, Crown tax revenue for the seven months to January 31, 2022 was running $1.4 billion above forecast, at $59.7b.
The key drivers were a stronger than expected corporate tax take ($1b) andindividuals’ tax ($0.5b) source deductions.
Meanwhile core Crown expenses, at $72.1b, were $1.3b below forecast, mainly attributable to lower than forecast health expenditure.
In other words we look to have made through the Covid response period more successfully than we thought we would.
Robertson has been banking most of these gains through the past year with a view to redeploying them to further the Government’s social programmes in the post-Covid period.
But he has been cautious, anticipating the pandemic era might contain further external economic shocks.
It could have been more lockdowns or some other health-related issue but it now looks like we are through the worst of that.
As the Omicron wave breaks and subsides, it appears hospitals have coped; MIQ is set to wind up earlier than anticipated.
Tourists and international students look set to return sooner than the Government’s current cautious targets.
Instead we got the curveball of a European war and a sharp spike in oil prices.
Robertson’s assertion that we can make these moves without borrowing more will irk those who argue we’ve already borrowed too much.
The Government’s strong accounts since the pandemic are still underpinned by the large increase in borrowing that was initiated at the start.
We are still in deficit. The Operating Balance before Gains and Losses (Obegal) deficit was $8b. But that is $3.7b below what was forecast in Treasury’s half-year forecasts.
Our Net core Crown debt is 35.3 per cent of GDP, much higher than it was, but $1.6b less than the half-year forecast.
These moves will put more pressure on Robertson as he juggles the spending demands of his Cabinet colleagues ahead of the May Budget.
But they can be achieved without rewriting the accounts. They won’t curb any of the Government’s major policy plans.
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