Opposition Leader Christopher Luxon pinned the Prime Minister to the wall yesterday over what is widely rumoured in Wellington to be a bad set of books to be released next month when the Pre-Election Economic and Fiscal Update. (PREFU) is released.
The most recent set of monthly financial statements released by the Treasury showed that corporate tax revenue was down for the 11 months to the end of May by $2.0 billion.
Though that is a relatively small drop in percentage terms, only two per cent, the potential for it to ripple through or even increase over the term of the next Government is high.
Already POLITIK understands departments and ministries have begun looking at potential savings with at least one modelling what sort of imapct a range of cuts of up to ten per cent might have on its operations.
National has said it will release its fiscal strategy and budget costings before the PREFU is released.
But that could mean it opens itself up to more of the criticism it got yesterday from the Combined Trade Unions (CTU) economist Craig Renney that it simply can’t afford tax cuts at the same time as all the other promises it has made.
The problem facing both the Government and National is the deficit forecast.
In this year’s Budget Economic and Fiscal Update, that was forecast to turn into a surplus in 2025/26.
But it was by such a slim margin, it would reach only $557 million, that it must be vulnerable to even a small change in tax revenue between now and then.
And from the way the Prime Minister responded to a series of questions yesterday from Luxon, that would appear to be the case.
Luxon asked whether Finance Minister Grant Robertson was correct to forecast a return to surplus in 2025 – 26.
Hipkins’ response was revealing: “At the time the statement was made, yes.”
Luxon: “Has he received any advice from the finance Minister or any officials suggesting the return to surplus will be delayed again?”
Hipkins: “Well, of course, the PREFU numbers—the Pre-election Economic and Fiscal Update—are put together by the Treasury, independently of the Government.”
Luxon “So are you saying that you’ve received no advice from officials or from the Minister of Finance on whether the return to surplus will be delayed again?”
Hipkins: “It certainly would be if the member was the Prime Minister and was spending the huge amounts of money that the National Party have been promising to spend up and down the country, with no idea how they’re going to pay for it. But, of course, I have regular conversations with the Minister of Finance about the state of the Government’s finances.”
But what may be more worrying about the fiscal forecasts is also how tight they already are.
The former Reserve Bank economics and “Croaking Cassandra” blogger, Michael Reddell, posted yesterday on that issue.
“On Labour government numbers, real per capita expenditure is projected-planned to show no growth at all in the next three years,” he wrote.
“Does that seem like a prospect that would align with what we’ve seen of this Government’s approach to spending in recent years (in an era of ageing populations, public sector wage pressures etc)?
“Not to me.”
Reddell has a point.
In the BEFU, health expenditure is budgeted to increase by only 2.38 per cent in the next financial year.
That increase comes at a time when Treasury itself is forecasting inflation to be 2.5 per cent over the same period, so the Government is effectively proposing to freeze health expenditure.
It is already clear that Labour’s campaign strategy is to try and force National to debate taxation and its impact on wealth distribution.
Any proposal for the removal of GST from fruit and vegetables would play a key part in that.
It would force National to explain why it was offering sizable tax cuts to the affluent while only minor cuts to people on low incomes for whom any reduction in fruit and vegetable prices would have an immediate impact.
Under National’s proposal, someone on $85,000 would get a tax cut of $1043, but someone on $45,000 would get only $112.
But speaking in Parliament yesterday, Robertson said the Government had received no official advice on removing GST from fruit and vegetables.
That doesn’t rule that proposal out from turning up in Labour’s manifesto; indeed, there would be questions asked if the Government was using Treasury to advise on proposals in its manifesto.
But what might also worry both main parties is that Treasury’s 2021 Long Term Fiscal Position briefing paper forecast that New Zealand would start producing continuous budget deficits from 2032.
That will be within the forecast range of the Pre-Election Economic and Fiscal Update at the time of the next election, 2026.
The long-term forecasts go out to 2061, 38 years away, and a lot could happen in that time.
But the two significant trends Treasury identified to influence the forecasts will not go away.
They forecast that New Zealand Super expenses would increase from 5.0% of GDP in 2021 to 7.7% by 2061 due to demographic change.
And health expenditure would increase from 6.9% of GDP in 2021 to 10.6% in 2061.
Demographic change would account for around one-third of the projected increase, with increasing demand for healthcare, rising prices for health services, and wage growth making up most of the remainder.
That demographic change has begun as the baby boomers line up to collect their Gold Cards.
StatsNZ population forecasts show that between now and the next election (2026), the over-65 population will jump by ten per cent to almost a million, 957,000.
National has not produced any costing for its policies yet, and instead, both Luxon and Finance spokesperson Nicola Willis talk vaguely about achieving savings by making Government more efficient.
That message has certainly struck home in Wellington.
POLITIK is aware that some departments have already begun informally modelling what a reduction in their budget could mean for their day-to-day operations.
And true-to-form NZ First Leader Winston Peters yesterday produced his own version of what might be going on within the departments.
“Is it true that State Services Commissioner (Peter) Hughes met with heads of ministries yesterday to address a $20 billion hole in government revenue?” he asked in a press statement.
“The alleged purpose of the meeting was for all ministries to find and claw back cuts of 10% of Core Crown Spending to the Consolidated Fund.
“One guess what the Pre-Election Fiscal Update will look like on September 12.”
But as the expected slippage in the Government accounts shows along with Treasury’s long-term forecasts, achieving any substantial savings in Government expenditure or bringing in earlier and bigger surpluses will be an elusive goal.
