Matthew Hooton has over 30 years’ experience in political and corporate communications and strategy for clients in Australasia, Asia, Europe and North America, including the National and Act parties, and the Mayor of Auckland.
OPINION
Nicola Willis will need to borrow $28.7 billion cash over her first four full financial years as Finance Minister.
That’s up $22.2b from the $6.5b four-year cash deficit forecast in the Half-Year Economic and Fiscal Update (HYEFU) just before Christmas.
Over the same four years, Willis’ tax cuts will cost $14.7b.
The numbers don’t lie. There is no doubt she is borrowing for tax cuts, and then a bit more.
The numbers also reveal it is simply untrue that the tax cuts have been paid for by spending cuts.
Willis announced yesterday that core government spending in 2024/25 will be $143.9b, down just $846 million from that expected in December.
Astoundingly, she plans to spend $2.6b more in 2024/25 than Grant Robertson admitted to in his last Budget.
Overall, core government spending will be $5.6b more in 2024/25 under the National-led Coalition than in the financial year about to end shared partly with Labour.
It is $16.3b more than the Government spent in Roberton’s last full financial year as Finance Minister.
In dollar terms, Willis is the biggest-spending Finance Minister in the history of New Zealand.
As a percentage of GDP, the Budget numbers are no better. Core government spending will be 33.5 per cent of the economy in 2024/25, the same as this year, and up from 32.3 per cent in Robertson’s last full financial year. Even at the peak of Covid, Robertson spent much less in dollar terms than Willis will next year, and only 0.9 per cent of GDP more.
Before Christmas, it was thought Willis would deliver a cash surplus in 2027/28 of $3.6b. There are now no cash surpluses forecast.
To service Bill English’s, Robertson’s and her own borrowing, Willis is now forecast to spend $40.5b on debt servicing over the next four financial years. It is likely to be more. Heroically, the Budget assumes yields on 10-year government bonds will be 4.6 per cent next month and down to 4.4 per cent by June 2025.
They were 4.9 per cent yesterday. The Budget also assumes inflation will be 3.4 per cent in the year about to end on June 30. That seems unlikely. The Budget suggests inflation will be only 2.2 per cent in 2024/25, also quite heroic.
House prices will broadly be stagnant for the next two years.
Whatever the unions think, the Budget forecasts for wage growth were cut from a total of 16.8 per cent over the next four years to just 13.4 per cent. Prices are expected to rise by a total of 8.5 per cent over the same period, even if inflation reaches 2 per cent by 2025/26 and stays there.
Growth forecasts are up a bit since December, although from a very poor 9.6 per cent over four years to a still meek 11.8 per cent. It’s worse on a per-capita basis, suggesting high immigration is expected to continue.
The Budget says per-capita GDP fell a shocking 2.8 per cent this financial year and will fall marginally again in 2024/25. By 2028, the average New Zealander will be just 4 per cent better off than when Aucklanders came out of the 2021 lockdown.
While the Budget says Willis will never deliver a cash surplus in the four-year forecast period, it suggests she’ll do better on the accounting measure, the operating balance before gains and losses (obegal).
Yet, that too is much worse than forecast in December, with a deficit of $23.5b expected over the next four years, up $17.4b from the $6.1b picked before Christmas.
Willis still promises an accounting surplus in 2027/28, but now of just $1.5b, down from the $3.4b forecast before Christmas.
We have every right to be dubious. Her mentor English was the master of promising tiny surpluses in the out-years that never seemed to get much closer. His eight Budgets delivered eight cash deficits and a couple of accounting surpluses of a few hundred million towards the end.
Gross debt rose from $31.4 to $86.9b through his time as Finance Minister, and net core debt from $10.3b to $61.9b. After Steven Joyce’s cash and accounting surpluses in 2017, and the Labour-NZ First surpluses in 2018 and 2019, Robertson then went for broke, borrowing as much in four years as English did in eight.
English’s argument, supported by John Key, was that New Zealand didn’t have a debt problem but a growth problem and it was important to borrow to get through hard times and keep voters onside.
As it has turned out, he and Robertson delivered us the debt problem we didn’t have but we still have the growth problem.
All indications yesterday are that Willis plans to continue on the same disastrous path as English and Robertson before her, with Joyce the only Finance Minister since Michael Cullen to have genuinely balanced the books through his time in the job.
Perhaps most heroically, the Budget makes provision for new spending over Willis’ next three Budgets of only $2.4b each, well down on her extra spending announced yesterday.
It is extremely difficult to believe, with inflation still high, that she will deliver that. A few strikes by doctors, teachers and nurses, the limited industrial action police are allowed, and a drug company coming up with a new cancer treatment and those forecasts will go the same way as Robertson’s.
They’ll be swallowed up completely if the real economic data turns out to be even slightly worse than the Budget’s optimistic forecasts for inflation, interest rates and growth over the next four years. Yet if the right spending allowances aren’t met, then Willis will not deliver even her accounting surplus by 2027/28, and the cash position will blow out by more.
A credit downgrade later this year or next, now very much on the cards, would make things even worse, further increasing the cost of debt servicing.
Lurking behind all this are the cost pressures from an ageing population that Treasury and everyone else project will create a permanent debt spiral from 2030.
The Coalition has shown itself unwilling to divert from the disastrous fiscal track we’ve been on since 2008. They have proven themselves not to be serious people. It is astonishing that even Act plans to line up and vote for the fiscal profligacy its supporters thought they were voting against when getting rid of Robertson.
The fundamental rule of MMP has again held true, that each government under that system is worse than the one before.
'I can imagine people being outraged that TVNZ signed a deal with me.'