With weekly household costs tipped to rise $150 due to inflation, Finance Minister Grant Robertson has signalled a further 2.5 percent rise in the cost of living due to the war in Ukraine.
Speaking to the Auckland Business Chamber on Wednesday, Robertson said the IMF has indicated that if Russia's invasion of Ukraine lasts a year, "it will knock a percent off global GDP, and it will increase inflation by about two-and-a-half percent".
A 2.5 percent rise in the cost of living would add further strain to New Zealand households already struggling with three-decade high 6 percent inflation.
According to ASB Bank senior economist Mark Smith, higher consumer prices and debt servicing costs could raise household weekly outgoings by an average of around $150 per week over 2022.
"It won't escape anybody in this room that 2022 is, and is going to be, a challenging and difficult year for the New Zealand economy but actually also for the global economy," Robertson said.
"We went into 2022 knowing that inflation would be an issue because global supply chains have been clogged up for some considerable length of time. That was beginning to turn a corner."
With a hint of sarcasm, Robertson added: "And then because we didn't think we'd had enough drama - a pandemic, a terrorist attack, a volcanic eruption - we thought we'd throw a war in as well just to make sure that we were kept on our toes."
As Prime Minister Jacinda Ardern signalled a "new beginning" on Wednesday with COVID-19 restrictions eased after two years battling a pandemic, the war in Ukraine has somewhat dampened any optimism that comes with it as consumer confidence plummets to its lowest point since the 2008 Global Financial Crisis.
"Tragically, the war in Ukraine is having a significant impact not only on the people who live there but also on the wider global economy. Confidence has been shaken, further supply chain constraints have been added in and then the obvious addition - particularly for New Zealand - the impact on the global oil price," Robertson said.
"The volatility will continue as a result. Nobody in this room can tell you how long the war in Ukraine will continue for. What I can say is that I think it is unlikely to be short. I think [Russian President] Vladimir Putin has gone into this with a goal and, as abhorrent as we all find that goal, he will continue to pursue it."
Robertson acknowledged that bouncing back will be slower than anticipated.
"The predictions that most economists had were that the supply chain constraints would ease off and we would start to see things get better after the first quarter of 2022. Most economists are now pushing that back to the second quarter of 2022 and potentially beyond.
"I say this only to highlight the challenging environment in which we're all operating in and the fact that the war is well and truly beyond our control but something we obviously have to manage."
Robertson said the "upside" was that he was "extremely confident about New Zealand's resilience because that's what we have shown through COVID".
He pointed to the Government's announcement last week that 25 cents per litre of fuel will be slashed from petrol taxes and public transport costs will be halved for an initial three months to help ease financial pressure on families.
"We did that because we recognised there was an immediate spike in the cost of living that was causing significant household stress," Robertson said.
Increases to the benefit, minimum wage and Family Tax Credits in April, and the Winter Energy Payment in May, are also expected to assist low-income households.
"We will continue to do those sorts of target measures," Robertson said.
An expensive pandemic
National's finance spokesperson Nicola Willis says the Government needs to "rein in their big new spending plans to take some pressure off prices and interest rates, and then deliver meaningful tax relief to the squeezed middle".
Robertson has given himself a record $6 billion in new spending for the upcoming Budget. The money will primarily cover the Government's health restructure plans and climate change initiatives.
The reforms are necessary for future genetations, he says, but the Government has already taken on more than $120 billion in debt to pay for the pandemic, according to the latest Treasury figures. A large chunk of it, about $20 billion, paid for the wage subsidy scheme.
Net debt went from 19 percent of GDP prior to the pandemic to 30.1 percent of GDP at the end of 2021. It's expected to peak at 40.1 percent of GDP in 2023. Net debt reached its peak of 54.8 percent of GDP in 1992.
However, by comparison, the United States and Britain are dealing with net debt of around 100 percent of GDP, so New Zealand is doing comparably well in terms of keeping a lid on debt.
The Government is also raking in a hefty amount of tax. Treasury's March update shows tax revenue was $1.4 billion above forecast at $59.7 billion, due to better-than-expected corporate profits and a strong jobs market.
Treasury Secretary Dr Caralee McLiesh said on Monday the "strength of the Government balance sheet prior to the COVID-19 pandemic allowed the Government to support the wellbeing of New Zealanders through an extraordinary shock".
"New Zealand's fiscal response was large by international standards," she said, but "this response has been critical in minimising unemployment, supporting a swift economic recovery, and preventing longer-lasting harm to living standards."
Treasury considers that net debt "continues to remain within prudent levels".