Finance Minister Grant Robertson is being warned any attempt to spend his way out of a recession next year could put him on a collision course with the Reserve Bank.
Treasury on Wednesday forecast three quarters of negative growth in 2023, and the minister signalled a tightening of the government's purse strings after a few years of pandemic-prompted largesse.
"I certainly don't want New Zealand to have a recession and I don't think there's anyone out there who does," Robertson told Morning Report on Thursday.
"But what we've got is a set of forecasts both from the Treasury and the Reserve Bank that are predicting that. It's a very challenging period for the global economy, and New Zealand's not at all immune from that."
Inflation hit a three-decade high of 7.3 percent in mid-2022, easing slightly to 7.2 percent in the third quarter. The Reserve Bank, tasked with bringing it down to between 1 and 3 percent, has hiked interest rates and is expected to keep doing so into 2023.
Some economists have predicted 50,000 jobs will have to go to get inflation under control.
"We're going to make sure we do our level-best to keep as many New Zealanders in work as we possibly can," Robertson said.
"Going into a difficult period for the global economy and the New Zealand economy, we will be there alongside New Zealanders as we always have been. But we do have these twin challenges - we've got the challenge of inflation, everybody acknowledges inflation is no one's friend, especially those on low and middle incomes. The Reserve Bank have their job to do, to bring inflation down. We've got to make sure our fiscal policy helps that out.
"But then as we get to the second half of the year, we have the potential of dealing with this recession and supporting New Zealanders through that… as finance minister, I've tried to adjust my approach to the situation we're in. We may well have to do that again next year, and we have to prepare for that."
Faced with the prospect of economic collapse as Covid-19 swept the world in early 2020, the government responded by spending like it never had before - tens of billions going into wage subsidies and other support as the country went into lockdown and large parts of the economy ground to a halt.
Such extravagance is not on the cards in 2023, with Robertson on Wednesday announcing the phasing out of the fuel excise tax cut and public transport subsidies.
He said government spending as a proportion of the economy would fall, taking a more targeted approach to support than New Zealanders might have become accustomed to in recent years.
"If there are new initiatives that ministers want to do, what we're saying is well, you're going to have to reprioritise what you're currently undertaking, bar a few small number of manifesto-related commitments.
"I'd call it a careful proposal… it's one that recognises we've got to get the balance right between dealing with those twin challenges, making sure we've got good public services, health and education, and try to look to the future as much as we can. But it has to have an element of flexibility built into it… we've got a very volatile global environment that we're working in."
Staying on target
ANZ senior economist Miles Workman, speaking to Morning Report after Robertson, said the finance minister would have to be extra careful not to be tempted to use broad fiscal stimulus to avoid a recession.
"If the economy goes into a recession, the government probably shouldn't be thinking about a stimulus package unless that recession is looking deflationary. Because we're in this weird economic environment where we could enter a technical recession, but if the labour market remains tight and the wage-price spiral continues through that, that's not going to change the Reserve Bank's big problem."
In other words, if inflation sticks around despite a recession, the Reserve Bank will continue to pull its big lever.
"What the government has to be cognizant of is that it has to be aware that if it provides macroeconomic stimulus, broad stimulus across the whole economy, that might just mean the Reserve Bank has to hike the OCR by more than otherwise, undoing a lot of that good the government's trying to do."
Workman said ending the public transport and fuel subsidies whilst keeping half-price fares for Community Services Card holders, was a good move - cutting costs, while maintaining support for those most in need.
Green Party spokesperson for both transport and finance Julie Anne Genter disagreed, saying the cost of making fares half-price amounted to just 3 percent of the overall transport budget.
Rather than balancing the books through spending cuts, she is calling for taxes on wealth, a wider capital gains tax, raising corporate tax rates and/or implementing an excess profits tax.
"Ultimately that needs to be used to increase benefits to liveable levels as more people may face unemployment. We can introduce rent controls, which would also be disinflationary and help protect those [struggling]," she told Morning Report.
"There's no credible economist saying record bank profits or energy companies making record profits is good for the economy."
Increasing benefits was "really important" if economists' predictions 50,000 Kiwis would need to lose their jobs to curb runaway inflation came true, she said.
Robertson said those receiving financial support - including benefits, childcare support, superannuation, student allowances and family tax credits - would enjoy a "pretty significant" boost on 1 April.
"The role for fiscal policy is to be targeted with their support," Workman said. "They will have their automatic stabilisers kicking in, meaning you've got the unemployment benefits etc automatically ramp up if unemployment rises."
He questioned whether tax cuts, as promised by National and ACT, would be appropriate, given the economic situation. While National - currently leading in the polls - traditionally promises to cut taxes, in November leader Christopher Luxon said the party would be rethinking its policies in the wake of rising interest rates.