This opinion piece was first published on Stuff on 19 May 2023.

Given the current strength of food price inflation, every supermarket shopper knows that feeling when you get to the checkout, look down at your trolley, and wonder how the total cost got to be so much. Yesterday’s Budget from the government creates a similar feeling of disappointment. Core Crown spending over the next four years is forecast to be $9.4b higher than was projected in the Half Year Update last December. But where exactly has all that money gone?

Some of the major items affecting households included $1.2b on free early childhood education for two-year-olds, $700m removing the $5 part-charge for prescriptions, $400m on insulation under the Warmer Kiwi Homes programme, and over $300m on public transport subsidies for young people (all figures over four years). The aims of each of these policies are laudable: improving access to childcare to make it easier for parents to get back into the workforce; removing a barrier to vital medication (although surely the $25 prescription fee at the doctor is a bigger barrier); improving the country’s housing stock to reduce other negative health outcomes; and reducing costs and encouraging uptake of public transport for families. But there’s no sign of the spending restraint and reprioritisation that Grant Robertson spoke about in the lead-up to Budget Day.

It also seems petulant to complain about the $6b National Resilience Plan, which effectively looks like an infrastructure investment response to this year’s extreme weather events. There’s no argument that Northland, Auckland, Coromandel, Gisborne, and Hawke’s Bay need substantial investment to recover from these disasters, and few would disagree that New Zealand needs a lot more investment in its infrastructure to make up for previous underfunding. But even this tranche of spending is light on details. Given the government’s renowned lack of delivery on big-ticket items such as KiwiBuild, light rail in Auckland, or Dunedin Hospital, voters might be wondering how much of this money will translate into concrete outcomes – especially in an environment where capacity to deliver in the civil construction industry is already highly stretched.

For a government that made this Budget about “bread and butter” and focusing on the cost of living, there is surprisingly little in there for the middle voter. When fuel excise duty returns to its full rate, an increase of 29c/L at the end of June, most households are likely to be worse off, in overall terms, with the average household paying about $40 more per month to keep the car running. For those people that aren’t worse off, the flow-on effect in the next few months of higher road user charges on freight costs for everything they buy should seal the deal.

From an economic perspective, the fuel tax subsidy was an expensive and untargeted policy that shouldn’t have been introduced. At least some of today’s announcements are targeted. But politically, the removal of support means that households are facing higher costs even as government spending threatens to stoke inflation further.

Given the $9.4b spending increase, the size of government is set to remain at a significantly larger share of GDP than prevailed prior to COVID-19. In this regard, Labour appears to be taking advantage of the necessary spending increase during the pandemic to now advance an agenda of bigger government. Whereas contractionary fiscal policy had previously been estimated to knock 0.9 percentage points off economic growth in 2023/24, it is now expected to add 1.7 percentage points. Some of that expansionary fiscal stance is due to critical cyclone recovery costs – but a lot of it is driven by higher spending elsewhere.

Recent data has shown some easing in inflation and inflation expectations, but the Reserve Bank will be looking at today’s Budget and only seeing more cost and demand pressures faced by the economy. Given the fiscal outlook, Treasury’s forecast of inflation below 3%pa by the end of 2024 appear to be optimistic. Factor in net migration in March that was already running at 65,400pa (as opposed to Treasury’s estimate of 16,900), and the inflationary risks associated with strong demand are considerable. And perhaps this outcome is the worst aspect of the Budget for households. If you thought that mortgage rates had pretty much reached their peak, think again. Next week’s Monetary Policy Statement from the Reserve Bank could well signal further interest rate rises, as the Bank takes a dim view of the lack of fiscal restraint or assistance that it is getting from the government in trying to rebalance the economy.