The ghost of former Treasury Secretary Gabriel Makhlouf continues to haunt the Finance Minister and Treasury as both try to come to terms with a long-term fiscal crisis.
The response so far is to address only the short term.
So Finance Minister Nicola Willis yesterday announced what will effectively be another “Black Budget” as she strives to meet the short-term fiscal targets she has promised the electorate.
And though the Treasury forecasts frightening debt levels in the years beyond 2035, Willis claims she can rope that debt in without touching taxation.
That is despite advice from fiscal experts like the International Monetary Fund saying she needed to look at increasing tax revenue.
At the same time, the coalition government is politically unable to reform New Zealand Superannuation and, it seems, unwilling to address the structural funding problems in health.
The upshot is that voters will likely have to pay for her strategy with more austerity imposed on most government services and a drive for more profits from Crown-owned enterprises like Air New Zealand and the electricity gentailers.
At the heart of Willis’s speech yesterday was a focus on government debt, which she said had leapt up by almost $120 billion between 2019 and 2024, from under $58 billion to $175 billion.
“The interest bill on government debt has soared from $3.6 billion in 2014 to $8.9 billion last year,” she said.
“That sum is more than annual core Crown expenses for the Police, Corrections, the Ministry of Justice, Customs and the Defence Force combined.”
She said the Government’s goal was to put net core Crown debt on a downward trajectory towards 40 per cent of GDP and keep it below that percentage in the longer term.
The reason to have that level of debt is to leave a buffer which could be used sometime in the future if the country was faced with an economic shock such as an earthquake or bio-security crisis, what the former Finance Minister Steven Joyce used to call a “rainy day”.
The former Treasury Secretary, Gabriel Makhlouf, defined the so-called prudent level of debt in a much-quoted paper from 2019.
“A prudent strategy would be to allow a sufficient fiscal buffer for public debt to increase following a future shock, including space for discretionary fiscal stimulus if needed, without increasing debt above the 50 to 60 per cent range,” he said.
Makhlouf’s “buffer” would allow a debt-to-GDP ratio of between 40 and 50 per cent, which, ironically, is exactly where the current debt figure is at 42.5 per cent.
However, it is not the short term that is the real problem.
Willis has been keen to show that the Government is headed (eventually) to a surplus of revenue over spending within the foreseeable future.
Last December, the Half Yearly Economic and Fiscal Update forecast that the country will still be in deficit in 2029.
It did not provide forecasts beyond then. And that is where the problems begin. Other Treasury forecasts show the debt/GDP ratio shooting rapidly upwards post 2030.
Willis said that to deal with the deficit, her strategy was to reduce it over time “through a gradual programme of consolidation and careful spending choices.”
Economists doubt that.
At the same time, she announced she would slash the “Budget Operating Allowance”, which is the “new” money available for new initiatives and programmes in every Budget.
She said yesterday she was reducing it from $2.4 billion to $1.3 billion.
Last August, she told Parliament that the Government had already pre-committed $1.37 billion per annum against the Budget 2025 allowance to meet forecast demographic, volume, and price pressures for front-line health services delivered by Health New Zealand.
Yesterday, she said there would also be new spending on defence, education, law, and order.
So, somewhere, something has got to give.
Willis will have to find massive savings (or she prefers to call it “reprioritisations”) in other areas of government spending.
NZCTU economist Craig Rennie told POLITIK yesterday that there was nowhere near enough money “even just to keep the lights on in health.”
“We haven’t put any money aside to pay for the increase in the cost of living in education or anything else, and as a consequence, you’re cutting significantly new budgets everywhere else,” he said.
However, what has clearly spooked the Treasury and, therefore, the Finance Minister is a downturn in the economy, partly provoked by the worldwide shock induced by Trump’s tariffs.
“The global economic outlook has worsened considerably since that (Half Yearly Economic and Fiscal) update,” she said.
“Tariff announcements by the US government, countervailing tariffs being imposed by China and an uncertain path for future tariffs and exemptions have created volatile global economic conditions with forecasters around the world agreeing that global growth will be lower this year and next year than they were previously predicting.
“New Zealand can’t escape the fallout.”
That means the so-called “automatic stabilisers” will eat away at the surplus as more money is needed for benefits caused by rising unemployment while tax revenue declines with an economic slowdown.
It is early days yet, and the unemployment figures from yesterday were more or less on the forecast. Still, there is an ominous warning from the Reserve Bank’s Kiwi-GDP Nowcast, which is a weekly live measure of GDP and already continues to show April figures below those of March.
But what is confounding is that though Willis might have the next four or five years under control, albeit with some brutal slashing in this Budget, she has not seriously addressed the long-term imbalances between revenue and spending.
Those imbalances are going to get worse because of the pressures of an ageing population on the health system and New Zealand superannuation.
Ibn March, the IMF said: “In the long term, population ageing will increase superannuation costs and place significant pressure on the Budget.
“It is essential to initiate early dialogue among all stakeholders regarding comprehensive reform options that can help mitigate these challenges (and other long-term spending pressures from healthcare and aged care needs) with fair burden-sharing across generations.”
And the IMF also favours broadening the country’s revenue base with capital gains or land tax.
The former Reserve Bank economist, Michael Reddell, is increasingly frustrated that the Government is unwilling to debate these long-term issues.
“The fiscal bottom line still appears to be that things are no better, in structural cyclically-adjusted terms, than they were 18 months ago, and may even be worse,” he said yesterday.
“We should no doubt be thankful for small mercies – this morning’s announcement may be one – but the outstanding imbalances are large and do not yet seem to be being addressed seriously.
“Those imbalances are bad, both absolutely and in international comparison terms.
“They are political choices. Unfortunate ones.”
Ultimately, there is only so much that Willis can cut from public spending, and the question that Reddell asks is the big one.
What happens then?
