The following is the transcript of a CNBC Exclusive interview with Grant Robertson, Finance Minister of New Zealand, conducted in the wake of the release of the country's budget.
Should you choose to use anything, all references must be attributed to CNBC, Sri Jegarajah and Mandy Drury.
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MANDY DRURY (MD): Grant Robertson is the Finance Minister of New Zealand and joins us now. Minister, wonderful of you to join us here on CNBC. One of the criticisms of the budget was that there was a notable lack of big major initiatives. Was this purposely a bread-and-butter back-to-basics budget or were you just not in a fiscal position to do so?
GRANT ROBERTSON (GR): Oh, we certainly were mindful of the fact that having gone through COVID with quite significant spending to be able to support us businesses, our health system through that, that we needed to start moving back to a more fiscally sustainable position. So we've done that by the end of the forecast period, we've got a government share of GDP as expenses down about 31.5%. But that requires us obviously to move carefully. There are still investments in the budget, particularly around that cost of living area, but also into infrastructure research, science and technology. So we are still doing both of those things. But, you know, we had to come up with a pretty balanced package, this time to meet the economic conditions that we're in.
MD: Talking of the economic conditions that you're in, you've also got an election coming up in October, which is expected to be quite tough and tight. So were you therefore thinking more short term, for example, let's spend, let's try and alleviate the cost of living crisis and worry about the inflationary impact and high deficits later.
GR: On no, we're absolutely doing both of those things at the same time. We've been pretty targeted and the cost of living support that we put out in this budget, particularly as you noted around young families, and support for health costs and so on. But no, we very much had in mind to making sure that this budget contributed to inflation coming down, and what it does forecast is that we'll be back down to about 3.3% by the September quarter next year, and then 2.5% in 2025, which is inside the Reserve Bank's target band. So we very much wanted to do both of those things. I think sometimes Finance Ministers get accused of doing all sorts of things in election years, but actually I feel my job here is to help New Zealanders through this difficult economic time, but also look to those years ahead with inflation a bit lower.
SRI JEGARAJAH (SJ): Minister, can you give us a bit more color on how this budget addresses the cost of living issue for New Zealanders while not stoking inflation that is running still at 6.7%?
GR: Yeah, look we focused in this budget on the kind of easing the pressure of cost of living so rather than putting money into people's pockets through through tax cuts or a direct transfer-type payment, we've looked at the cost of early childhood education, which are a significant cost for many families. Public transport, which will now be free for children and half price for people under the age of 25. Making sure that we've removed those charges that you have for picking up prescription drugs. Those are things that we know can relieve a bit of immediate pressure, but aren't into that further stimulatory space that for instance, untargeted tax cuts would be. We're very mindful of the fact that inflation does appear to have peaked but as you note, at 6.7%, well elevated from we were used to seeing it in New Zealand. So this comes on the back of you know, significant stimulus during that COVID period. And that expenditure's dropping away, we wanted to protect the most vulnerable households, but at the same time start to do something about our fiscal sustainability.
SJ: The economic cost of the recent cyclones across the North Island and the flooding in Auckland, minister, where does that number stand? Can you bring us up to speed? How is that rebuild going to be financed and how does this change the picture overall for the budget?
GR: So the Treasury's latest estimate is as a rebuildable, cost of between nine and $14 billion, about half of which is in the public infrastructure space, which obviously is our and local government's responsibility. And so the budget does allocate funding for that within the national resilience plan, plus other funding that we've already allocated. It's essentially arrived at by a combination of reprioritization and savings that we've been able to find. We have increased the trustee tax rate within this budget that gives us a little bit more revenue there as well. And then some of the additional borrowing we have to do. So we've we've put all of those things together to finance that recovery and rebuild. And ultimately, that's the big difference between the projections we had at our half year update and now. The reason why they're coming into surpluses now slipped out by a year is largely down to the fact that we've had to meet those costs from this extreme or series of extreme weather events that we've seen.
MD: You mentioned that the cost of living alleviation initiatives were very targeted, but how much will they really ease the cost of living? And while I'm sure it's very welcomed to have an expansion of subsidized childcare, it's very welcomed to have free transport for children under 13, if you're someone who, who can't pay the rent, if you're someone who literally is having to skip meals to put food on the table, it feels like a drop in the ocean.
GR: Yeah, look, we've put in place significant amount of support for low and middle income families over the last couple of years including as recently as the first of April we saw a 7.2% increase for for main benefits and for our super annuitants our older New Zealanders as well. So we have been doing that along the way. But this period of time now was one that calls for a more targeted approach. The thing I think those those households are feeling, the cost of living pressure squeeze, need to see is that inflation is coming down. And that's what the budget shows. That's the thing that they've been looking for from us to be able to support that direction of travel, and that's what the budget does. It's always a tricky balance, finding the place where you can provide support, ease pressure, but also do the right thing in terms of long-term economic policy. And I think we've struck that balance in this budget.
SJ: Minister, two questions, can you just shed some light on the pathway towards inflation slowing to 3.3% your forecast by the middle of next year and what gives you the confidence that New Zealand can avoid recession in the second half?
GR: Obviously, these are the Treasury's forecasts, they do them independently of the government. And what they're indicating is that they believe that activity has held up somewhat better than they thought at the beginning of this year, in terms of the reason why they they are forecasting we'll avoid recession now. Tourism earnings are higher than had been expected. Net migration has come back faster. And so we're looking at up to September, net migration of about 66,000 into New Zealand and then averaging out at about 40,000 after that. So all of that gives some confidence to the Treasury forecasters that we will avoid recession. In terms of inflation, I mean, demand is coming out of the economy from the perspective of what the government does, the emergency COVID spending that we put in place is now exiting from the economy. And so they believe that that, alongside some of the easing pressures internationally, helping supply chain issues are a big deal for a country like New Zealand, where we are geographically isolated, and so some of those pressures are coming off as well which have really been pushing in on inflation. So all of that together paints the picture. I think that the Treasury forecasts are put up. Obviously, other forecasters in New Zealand might have different ideas around that. But as the Minister of Finance, I have to rely on those forecasts to put our budget together.
SJ: And can you give us a sense of the credit profile for New Zealand, in this environment where you have the very necessary rebuilding after Cyclone Gabrielle and how that fits with New Zealand's post COVID fiscal consolidation roadmap. And so the basic question, Minister, is the triple A rating going to be intact or is it potentially at risk?
GR: I think it's it's, it's we're in a sound position and I'd be very surprised if there were anything in that regard. In fact we had our rating increase during COVID. Obviously, the Cyclone was a very unwelcome development and the rebuild from it is a necessary and important one. And as I said before, we're finding different sources of financing to allow ourselves to get through that period of time. I think the underlying fundamentals of our economy are strong and resilient. There are long-standing challenges around our current account deficit, which are well known by by the ratings agencies. But you know, if you take for example, our debt position with net debt at around peaking at around 22% of GDP. That puts us in a very strong position, particularly relative to other economies. You know, and I think the ratings agencies recognize that the underlying resilience of our balance sheet is there, albeit that we're facing these particular costs around the cyclone recovery
MD: Given that you won't now return to surplus until a year later than previously forecasts. God forbid if there was another major wave of COVID. Do you have enough ammo in the tank to be able to do similar COVID spending in an emergency scale in the way that you previously did?
GR: Well obviously, we all don't want that to happen. And the indications at this stage for New Zealand is that that wouldn't happen. But yes, you know, as I said before, in terms of our debt position at 22% of GDP, part of the fiscal rules that I've put in place for the government are that we have a debt ceiling of 30% of GDP. So we're well under that. And one of the reasons that New Zealand will always, I hope, attempt to keep its debt position relatively low compared to other countries, is our susceptibility to natural disasters. Equally, we have to deal with things like the pandemic. But I think we've shown that we are prepared to use our balance sheet when we need to, but I hope all of us have got our fingers crossed during this particular part of the interview that we don't end up having to face a COVID emergency similar to what we did deal with over the last couple of years.
SJ: Minister, when you look at the major changes to the tax system in this budget, are there any? And when you look at the trustee tax, and the changes that you've made there, is that a nod to trying to bridge the income gap and wealth disparity that still exists in in many parts of the world, not least of all in New Zealand?
GR: I mean, obviously with the trustee rate, we've done something that pretty much every other economy in the world does which is to align our top personal tax rate with the trustee rate. We increase that top personal rate from 33 cents to 39 cents and in 2021. And at the time we signaled that if we saw a greater movement of people to try to put money in trust to avoid that top rate, we would act and we've been monitoring that situation. Unfortunately, we have seen a bit of a movement and an increase in the amount of trusts set up and income going into those trusts. So we've now made those rates equal, as I say pretty consistent with what you'll see around the rest of the world. It delivers to us around about, or is forecast to deliver to us, around about $350 million a year. So while it's not insignificant, it isn't alongside the rest of the budget a major tax change. We are putting that tax change through our parliamentary process and we've got some measures in it to protect some types of trusts, particularly those where disabled children are involved. But actually this is an integrity measure, essentially for our system. In terms of longer term. We've had an election as you've already pointed out this year and I think all political parties will be bringing tax policy to that. Certainly I'm a person who believes that we must always look for how we can both get integrity into our tax system but also make it fairer, but those are announcements for our election campaign rather than for the budget.
SJ: Understood. And minister just to round off how would you characterize financial stability within the New Zealand banking system?
GR: Strong, very strong, in fact, and one of the things is we've gone through the both the global financial crisis and then COVID Is that our financial system, our banking system, has held up well. You know, we do have quite strong regulation in New Zealand around banking and making sure that capital requirements are kept to a level that gives us that confidence. We have legislation currently going through Parliament to establish a depositor compensation scheme which we haven't had before. But I'm confident about the overall resilience of the New Zealand economy. We continue to be an economy where we've got goods that we want to sell to the world that people want to buy and services, as well, as you know, and I feel good, even albeit in a very challenging economic environment. I think New Zealand still in a good position.
SJ: But it's always great catching up with you. Thank you very much indeed for joining us this morning. Grant Robertson, the Finance Minister of New Zealand.
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