- Labour-led government expected to boost spending in budget update
- Boost will likely lead to higher inflation - economists
- Treasury expected to downgrade GDP forecasts on economic headwinds
New Zealand's new Labour-led government presents its first budget update on Thursday, a chance to showcase its ambitious plans to increase social spending, improve housing supply and expand public health care.
The economic and fiscal update, which usually takes place twice a year, will be the first since Labour took the helm in October, ending nine years of centre-right National Party rule.
"The new Government has inherited a reasonably strong set of books that provides it with scope to deliver planned increases in spending," said Zoe Wallis, chief economist at Kiwibank.
The centre-left government has vowed to shake up the economy to address rising inequality with well publicised plans to pour money into a homebuilding program, expand health services and provide a year of free tertiary education for first-time students.
Finance Minister Grant Robertson has already said his government will drop the previous National government's planned tax cuts, which would have taken effect in April, to put more money into social services.
In welcome news for the Reserve Bank of New Zealand, the spending boost would was expected to spur inflation, which is below the central bank's 1 to 3 percent target band.
"Increased government support will also likely add to medium-term inflationary pressures and keep the bias on subsequent OCR (official cash rate) moves tilted to the upside," ASB economists said in a research note.
The Reserve Bank of New Zealand has slashed rates to a record low of 1.75 percent and signalled it would keep rates on hold until 2020 while inflation stabilises.
Nevertheless, Thursday's update was not expected to point to entirely smooth sailing for the economy, with many analysts predicting the Treasury would downgrade its optimistic growth forecasts of 3.2 percent in 2018 and 3.7 percent in 2019.
The country has hit economic headwinds in recent months, including tight capacity in the previously booming construction sector, a slowing housing market and lower prices for dairy, the country's main goods export.
Labour's plans to curb demand in housing by banning foreign buyers of existing homes and expanding taxes on investment properties had also led many economists to forecast home prices would drop in the next year.
Robertson affirmed in a speech on Monday that his government was committed to keeping the budget in surplus and maintaining spending below 30 percent of GDP for the next five years. It would also reduce government debt to 20 percent of GDP by 2022, he said.
