Budget 2023: Keeping up with costs, a splash on investments

Opinion - Budget 2023 was dressed up as 'no frills'. In some ways that was the case.

A lot of the increases in spending were just to keep up with the increase in prices, for example increasing welfare payments. There was one clear highlight: Commitment to invest $77 billion in our massive infrastructure deficit.

An election year Budget is inherently political. The Budget is the agreed base on which political parties will look to change how they spend, invest, tax and borrow. There isn't a lot of wiggle room in the Budget heading into the election, meaning political parties will need to think carefully about what investments or operational spending they will reduce to fund tax cuts or reduce debt. The election race will force political parties to make difficult choices.

Each Budget is about the incremental change in the way government operates. For example, the increase in spending is 5 percent of next year's spend, while the other 95 percent is largely more of the same. This context is important to keep in mind.

There are two big buckets of spending: Operational and capital.

Operational spending gets most of the media coverage. Operational spend includes the core services of government like health, education and justice. These tend to increase with population, costs and service level increases (if any). There were some notable new initiatives:

• Extending 20 hours subsidies for childcare, but there was no announcement on how shortages of staff in the sector would be alleviated. But this policy will be welcomed by many young families, who are usually feeling the double squeeze of cost increases and reduced income from at least one parent unable to work
• Scrapping the $5 prescription co-payment is a great move - it stopped many poorer households getting their medicine
• Public transport will be free for children under 13 and half-price for those under 25. This is excellent - we need to make public transport more affordable. Now to make them more reliable and frequent
• There was a subsidy for the video game sector, to keep up with Australia (although there are additional state level subsidies there). A purist may baulk at subsidies, but industrial policy is back with a vengeance here and abroad. For the video game industry, like our film industry, subsidies may be the difference between having a sector in New Zealand or not. Whether we want to should be a national discussion

Capital spending was the big star for me in this Budget. Capital spending will average $18.5b per year for the next three years, up from $9.7 in the past three years. Some of it is for flood and cyclone recovery, but nevertheless represents a significant effort at national rebuilding. New Zealand has an infrastructure deficit of $210b. So, this increase in investment is long overdue and welcome.

There was one announcement on tax, increasing the trustee tax rate to 39 percent so high-income earners can't try and reduce their tax payments by putting their businesses or assets through a trust. This makes our tax system more coherent and will only affect the wealthy, so there should be little pushback from middle New Zealand.

Missing from this Budget, and much of our public policy, was cohesion. There was more money to build schools and classrooms, but not a lot more money for teachers, aides and support staff.

Our essential workers like teachers work for very low incomes because we exploit their goodwill. But goodwill does not feed the teachers' families or pay their mortgages. Until we can top-up these ingrained deficits and join up our policy programmes, each Budget will be a selection of patch-ups, when we need a full rebuild.