Prime Minister Christopher Luxon confirmed yesterday that he is looking for big cuts in next year’s Budget.
In part, that quest is driven by the Health NZ Budget blow-out plus what he claims is his own unique insight coming from outside the political process.
To accommodate the cuts Finance Minister Nicola Willis will, in effect, be robbing Peter to Paul.
Other agencies will face cuts to help finance the health budget so that the overall Budget numbers stay inside the Government’s deficit track.
Luxon dismissed that scenario as a “load of rubbish” at his post-Cabinet press conference yesterday.
But there is no other way of looking at the situation.
The only alternative would be to relax the deficit targets, which New Zealand First might support but which both National and ACT would oppose.
The problem is Health NZ, which was supposed to record a surplus this year but, according to papers released earlier this month, is forecasting a $499 million budget deficit.
In a report to Finance Ministers in July, Health NZ said its budget strategy was to return to a breakeven position within no more than two years.
The document said: “Themes for the next three budgets will be:
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- 2024/25 – Reset/Refocus
- 2025/26 – Breakeven
- 2026/27 – Value-add
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“Savings of at least $900 million in 2024/25 and $500 million in 2025/26 are required.”
Those would seem heroic assumptions given that Health NZ missed its 23/24 Budget target by $796 million.
Overall, Government expenditures on health missed their Budget forecast by over $1 billion in 2023 and 2024.
“We’ve got a different philosophy from the previous government on government spending,” said Luxon at his post-Cabinet press conference.
“It’s not just the operating allowance, which is very constrained.
“We’ve put some very tight limits around ourselves.
“So, we’ve got disciplined spending in place, but we’re also questioning the amount of spend that already goes on across Government.
“And as a result, we’re finding programs that don’t have the effect they’re supposed to have.
“We want to make sure we churn that money and make sure that we’re getting good value from that spend as well.”
Luxon was at pains to distance himself from previous Governments’ approach to Budget setting.
“I think it’s rather unusual in government that government only focuses on the budget incremental money and doesn’t focus on the layer cake that sits underneath based on previous commitments around spending.
“We need to make sure that the sum of the total pool of money is actually working incredibly hard. There’s a lot more we can get out of that.”
Luxon talked up his own “outsider” position in the Government as a factor that enabled him to see the whole fiscal picture.
“When you come from outside the political process, you don’t just look at the new money coming in,” he said.
“We look at the total scheme of Government, and we say, look if they are programs that aren’t really getting results or they are ineffective, then it’s okay to move and reprioritize that funding to things that are.
“And likewise, we want to make sure we’re getting a good return.
“It’s all taxpayers’ money in the end.
“So it’s not just a cost-plus mentality that we need to bring into government finances.
“We need to look at the total spend and make sure that it’s delivering the results.
“And we are results-led, and then we work out how money and resources are best deployed; they are often finite to deliver those outcomes.”
For all Luxon’s claims (or is it boasting) about having a unique insight into the Government’s books, the figure he will end up focussing on will be exactly the same one every Finance Minister and Prime Minister ends up with, and that is the size of the surplus, or, in his case, the deficit.
And that is what remains unclear.
The current forecast produced by Treasury in the Budget Economic and Fiscal Update is for the deficit to expand to $13.4 billion over the current financial year.
All of that is currently accounted for except for just over $800 million of unallocated operating expenditure.
Treasury themselves have warned the Government that its operating allowance is too small.
Health’s $1 billion-plus deficit would ordinarily come out of it. But on present projections, it would absorb all of it and still need more.
What Luxon appears to be saying, in not so many words, is that other spending in other votes will be cut.
All of that will make sense to the finance markets but only to a minority of National’s voters.
For them, Luxon’s narrative is not about spending cuts but falling interest rates, as he demonstrated yesterday.
Those are, in part, the product of the stuttering economy, but he wasn’t going to say that.
“For the last two weeks, we’ve seen the OCR fall by 50 basis points and inflation fall to 2.2%,” he told his media conference.
“That is two rate cuts under our government compared with 12 rate rises under Labour.”
The former Reserve Bank economist, Michael Reddell, yesterday tweeted a fund raising email sent out to supporters by the former National Prime Minister, Sir John Key.
It sounded on message with Luxon’s press conference comments.
“I was pleased to see the OCR reduce to 4.75% and annual inflation drop to 2.2%,” the email said.
“It’s a sign that the Government’s economic plan is putting downward pressure on interest rates, which is crucial for Kiwi families and businesses.
“This is happening because National won the election.”
But Reddell commented: “The utter shameless dishonesty of politicians past and present (this, a fundraising email from John Key). And they wonder why public trust erodes (to be clear, this is not a partisan point. The RB belatedly did its job, having earlier messed up badly).
In its statement a fortnight ago announcing the OCR drop, the Bank did not mention the Government’s fiscal policy as a reason for the drop.
Instead, it said economic activity in New Zealand was subdued “in part due to restrictive monetary policy.” “Business investment and consumer spending have been weak, and employment conditions continue to soften. Low productivity growth is also constraining activity.”
The reality is that the current recession is largely the product of the Reserve Bank’s campaign to “cool the jets”.
Whether the electorate is ready for another blast of cold air, this time from the Beehive is an open question.
