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
Remember one number when Nicola Willis presents her first Budget on Thursday: $3.6 billion. It’s how much cash Treasury said before the election Grant Robertson needed to borrow in 2024/25. After accruals, his operating deficit before gains and losses was picked to be $6.2b.
That’s in addition to the billions he borrowed in his disastrous final years as Finance Minister, taking gross debt from the $87b he inherited to around $167b.
By Christmas 2023, things looked a bit better. Willis may have needed to borrow only $3.1b cash in 2024/25. The accounting deficit was also a fraction lower, at $6.1b.
If those numbers are higher on Thursday, Willis is indeed borrowing for tax cuts and whatever other goodies she plans.
The Government argues that’s not a fair charge.
It says the economy is worse than Treasury’s forecast before the election.
But that’s no excuse, since it’s what National warned on the campaign trail.
Pre-election, some National strategists argued privately that Christopher Luxon’s accession would so inspire the nation that it alone would turn the economy around.
That hasn’t happened, the data instead being as National warned publicly.
In any case, governments aren’t elected just to shrug in response to economic downturns but cut their cloth accordingly.
Simply saying that Luxon made a promise in early 2022, so we’re doing it, isn’t government but its abrogation.
Back then, Treasury was already meant to have banked a $2.1b accounting surplus in 2023/24, and a $14.5b cash surplus in 2024/25.
That would have put a big dent in Robertson’s Covid debts or paid for tax cuts and more spending.
But everything worsened through 2022 and 2023, demanding prudent politicians adjust their plans.
Luxon, however, wasn’t prepared to revise the main thrust of his early-2022 tax promises, quickly followed by then finance spokesman Simon Bridges resigning a week later.
Instead, Luxon lumbered Willis and National with a pre-election tax policy that was instantly and accurately panned by every financial analyst - from the far right to the far left, and everyone in between - as innumerate and irresponsible.
It was immediately obvious it would fuel more inflation.
Sure enough, in August 2023, just before the tax policy, the Reserve Bank thought non-tradeable or domestic inflation – the sort it and the Beehive can most influence – would be 3.9 per cent by now. In its Monetary Policy Statement (MPS) on Wednesday, the bank now thinks domestic inflation is still as high as 5.3 per cent.
In August 2023, before the tax policy, the bank thought the Official Cash Rate (OCR) would be peaking right now, with interest rates set to fall from July, now under six weeks away.
On Wednesday, it raised the idea of further increasing the OCR from the current 5.5 per cent, which its data now suggests will remain at or above 5.5 per cent until the second half of next year.
In practice, that means households paying more interest to the banks for at least another year.
The latest forecasts now suggest interest rates will be 0.7 per cent higher on election day 2026 than forecast before the 2023 election.
Families with a $500,000 mortgage will be paying about $135 more a fortnight when they next vote than expected in 2023.
On almost every measure, the bank’s MPS was graver than expected. With interest rates now set to stay higher for longer, the dollar immediately rose sharply and the sharemarket fell.
The fine print was worse. The bank says its forecasts are based on officially available information about the Government’s plans, including the so-called pre-Christmas “mini-Budget” and formally confirmed spending cuts.
But it says it hasn’t considered anything to be announced in next week’s Budget, including the tax cuts and extra spending for health, education, law and order, defence, disabilities services and so on.
That suggests its analysts have banked most of the spending cuts but, at this point, with their models assuming those savings will be used to reduce the deficits, lowering inflationary pressures.
If the tax cuts and new spending make the deficits higher than the Reserve Bank expects, we don’t just face interest rate hikes but a ratings-downgrade in September.
That would further increase what taxpayers must pay to service government debt, roughly half borrowed by Sir Bill English over eight years and the other half by Robertson in five, after the Bolger-Shipley and Clark Governments had paid it back.
In his last Budget, Robertson put aside $8b for debt servicing in 2024/25, but that was up to $9.7b by the election and forecast to reach an annual $12b by 2027/28.
That’s the same as law and order, defence and housing combined.
Pre-election, it was thought taxpayers would need to fork out $43b servicing the debt over the four years to June 2028, around $22,000 per household.
We’ll find out on Thursday if each household will have to pay more than that or less.
It’s odds-on it’ll be more. Before Christmas, it was thought the first cash surplus, of $3.6b, would arrive in 2027/28 and a small $140m accounting surplus the year before. Willis would have cash to start paying off English and Robertson’s debt midway through her second term.
No one believes that now. We’ve been told by the Labour Party and the public sector unions that Luxon and Willis have brutally hacked government spending. They boast they have too.
In fact, it’s barely been the slightest trim.
The Reserve Bank’s data suggests quarterly government consumption was $14.4b when voters prised the taxpayers’ credit card off Robertson, up from $11.3b under Steven Joyce. The MPS assumes it’ll fall a few hundred million this year, but stay above $14b forever.
There’s no suggestion, from anyone, that Robertson’s big spending boosts during Covid will ever be reversed. Neither Treasury, nor the IMF, nor the OECD, nor any reputable economist is projecting anything other than a permanent debt spiral from 2030.
Since 2008, one excuse after another has been made for government borrowing. First it was the global financial crisis. Then the Canterbury earthquakes. Then Covid. Then the Russian invasion of Ukraine. Now it’s the deteriorating data. Soon it will be the health costs of the baby boomers entering advanced old age.
But, unlike 2008 or even 2017, there’s no more fiscal room for excuses. We’ve been accelerating towards a cliff since 2008.
Unless Willis has an even bigger shock than the Reserve Bank delivered on Wednesday, she’ll be driving us right off it - by spending, borrowing and perhaps even taxing us more than any New Zealand Finance Minister before her.
Meanwhile, the post-election rally cooled in the United States.