“There is more to do.”
These are the words of outgoing chief executive and secretary to the Treasury Dr Caralee McLiesh, who believes cutting spending here and there won’t be enough to put the Government’s finances on a sustainable path forward.
Rather, McLiesh says “structural” changes are required to address the Crown’s “structural” deficit.
What does she mean? New Zealand needs new ways of generating revenue and cutting expenditure – a capital gains tax and a more efficient superannuation scheme.
McLiesh talked to the Herald as her five-year term comes to an end and she gets ready to return home to Australia to become the country’s Auditor-General.
McLiesh is particularly understated for someone of her stature. She steers clear of the public eye and is at pains to be politically neutral.
Her strength and humility were displayed when the Herald visited Treasury’s offices to interview her.
She had her picture taken against a photo wall of her predecessors - all men, before embracing a staffer who approached her for a heartfelt goodbye hug. When McLiesh sat down for the interview, she didn’t mince her words.
“The Crown’s fiscal position is significantly weaker following the response to the pandemic and cyclone, and other policy decisions. It’s deteriorated... Levels of debt still remain within prudent levels. However, we have significant concerns about the underlying fiscal sustainability of the operating position – ongoing revenues not covering ongoing expenses.
“We are in a structural deficit. That needs to be addressed in order to ensure that trajectory of debt doesn’t continue to go up.”
At the end of May, the books were $7.7 billion in deficit. Net core Crown debt was at 43% of Gross Domestic Product (GDP) – well up from the sub-20% levels before Covid.
Debt to GDP is expected to inch up before tracking down, but remaining above 40% of GDP for next few years at least. The books are expected to return to surplus in 2027/28, by which time the Government can start paying debt down, rather than just renewing it.
McLiesh said it was up to the Government to decide how to trim spending, while supporting economic and productivity growth.
However, Treasury had long advocated for the introduction of a capital gains tax and a slimming of New Zealand Superannuation.
“With an ageing population, we’re seeing an increasing share of government transfers going to the wealthy, because of course, we have an increase in population of the over-65s, and some of those are in the higher income categories.”
McLiesh wouldn’t be drawn on how she would change the superannuation system.
However, she acknowledged lifting the age of eligibility above 65 would leave some groups worse off than others, while means testing would be administratively difficult.
While National and Act are supportive of lifting the age of eligibility for superannuation, National agreed with NZ First that it wouldn’t make the change. Labour is also opposed to lifting the age.
As for a capital gains tax, Finance Minister Nicola Willis opposes this, despite international organisations like the IMF and OECD highlighting it as a gap in New Zealand’s tax system.
What about selling down state assets to pay off government debt?
While this isn’t on the Government’s agenda, it’s working with Treasury to review whether state ownership of entities, like Kiwibank, is fulfilling its purpose.
McLiesh noted New Zealand has quite high levels of state ownership of commercial entities compared to other countries.
She said “asset recycling” happened all the time on a small scale, as governments rejigged their investments.
“It is appropriate that over time, we look at that on a broader scale as well. There are choices and trade-offs, including political sensitives around asset recycling that are rightly the prerogative of Government to deal with.”
Asked whether she thought the state owned too many assets, McLiesh said, “We know we have an infrastructure gap. We know we have relatively high levels of public ownership. There may be options in the future to look at how to structure the Government’s balance sheet differently...
“It’s not something we’ve been asked to advise on.”
While McLiesh is proud of Treasury’s agility in responding to a series of crises in recent years, including the pandemic, Cyclone Gabrielle and the fallout from various geopolitical conflicts, it’s difficult to ignore the costs incurred.
In addition to government debt shooting up, inflation has been above target for three years. Dramatic interest rate fluctuations have affected asset prices and contributed towards putting New Zealand into recession.
McLiesh acknowledged there were a number of Covid-related policies that weren’t “temporary, timely and targeted”, as Treasury recommended.
She didn’t want to specify what she believed were the least effective economic policies, but pointed to those that were ongoing, as well as some infrastructure work the Auditor-General took issue with.
McLiesh believed the wage subsidy, which was the most costly Covid policy, was the most successful, as it met Treasury’s temporary, timely and targeted criteria, and effectively gave businesses the confidence to keep people employed during a time of enormous uncertainty.
McLiesh was cautious about commenting on the money printing done during the pandemic, or more specifically, the Reserve Bank’s Large-Scale Asset Purchase programme.
While the programme is directly expected to cost the Crown $11b, McLiesh said one had to consider what would’ve happened if the Reserve Bank didn’t intervene in the bond market at the time and/or use the programme to help suppress interest rates.
Treasury hasn’t done a detailed analysis or tried to calculate the costs and benefits of the programme, which was underwritten by the Crown.
Asked whether Treasury had been vocal enough in advising politicians on how to manage the Crown’s finances, McLiesh said yes, noting the department had to strike a balance between its stewardship role and helping implement the policies of the government of the day.
She said it had to provide free, frank and sometimes unwelcome advice, while maintaining strong relationships with ministers to influence decision-making.
McLiesh believed Treasury also struck the right balance between doing so behind closed doors, as well as publicly, via lectures and research papers, for example.
“I think a great strength of the New Zealand system is the transparency of information. Coming from Australia, that was sometimes confronting, seeing that Treasury advice, or Cabinet advice, had been released immediately after meetings in many cases.”
Asked what she hoped her legacy would be, McLiesh said, “Any leader wants to leave things better than when they came. I am really proud of the way in which Treasury responded with so much agility to such an extraordinary time…
“When things are going well, you always want to keep going and do more. When there are things that you see that still need to be done, you kind of want to jump in and fix them.
“It’s a very hard decision not to seek renewal of the contract. I really have enjoyed my time here. It has been a privilege to be in this role.
“I leave with gratitude for all the wonderful colleagues I’ve been able to work with.”
Treasury’s deputy secretary Struan Little will be secretary pending a permanent appointment.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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