Tuesday’s disastrous Treasury forecasts reveal that, in the next 15 years, a New Zealand Finance Minister will be forced to adopt Argentinian President Javier Milei’s playbook, either to avoid or recover from economic catastrophe.
The question for Nicola Willis is if she wants to be our Milei,and be remembered as the leader who prevented calamity, or whether she prefers her name to be appended to those of Grant Robertson and Sir Bill English as the trio who caused it.
In June 2009, New Zealand’s net core Crown debt was just $17 billion, despite the previous year’s spendthrift election campaign and the Global Financial Crisis. That was just 9% of GDP.
Gross debt, which drives the Government’s finance costs – the equivalent of interest on a mortgage – was just $43b, or 22% of GDP.
Like Robertson would later do with Covid, English reached for the taxpayers’ credit card to deal with the Christchurch earthquakes in 2011, but – also like Robertson – never cut spending back again.
In eight budgets, English ran eight cash deficits and just two small operating surpluses – putting over $40b on the taxpayers’ credit card before handing over to Steven Joyce, our only fiscally responsible Finance Minister since Sir Michael Cullen.
After his two prudent budgets in 2018 and 2019 delivered two operating surpluses and one cash surplus, Robertson was of course even worse. Despite his good start, net debt exploded by $118b over the Ardern-Hipkins’ Government’s six years, and gross debt by $88b.
Christopher Luxon’s Government is now forecast to outdo them.
In its first five years – assuming it wins a second term – Treasury estimates net debt will increase by another $59b, with $94b more gross debt charged to the taxpayers’ credit card.
Over the 20 years to June 2029, the English, Robertson, and Willis trio would have increased net debt over 13-fold to $234b, and gross debt over six-fold to $270b. It goes without saying our economy won’t have grown that much.
By 2028/29, the trio’s borrowing would be costing us $12b a year just in finance costs, 20% more than we will be spending on our entire school system.
After that, everything gets worse.
When Treasury started warning in 2006 about the disastrous fiscal outlook after 2030 caused by the ageing population, it thought future Finance Ministers would be as prudent as Ruth Richardson, Sir William Birch, Winston Peters, and Cullen, working to slash any deficits as soon as possible, paying off debt and then putting surplus cash away for a rainy day.
By 2021, after English and Robertson had done the opposite, Treasury knew better. Nevertheless, perhaps naively, it still thought we’d enter the 2030s with net debt of just 42% of GDP, before it would rise sharply until it reached Argentinian levels of 100% around 2050.
On Tuesday, Treasury revealed we’ll be starting that journey from net debt of over 45% of GDP. An Argentinian-style default would happen earlier, sometime in the 2040s.
Even that relatively rosy outlook depends on Willis keeping to her historically low allowances for new spending of just $2.4b in each of her next four budgets, from which she has already made cheeky withdrawals.
No one believes her allowances would survive a year of tight polls, a close election race, and coalition negotiations, regardless of whether National or Labour prevailed.
Argentinian President Javier Milei. Photo / AP
In contrast, facing an economic and fiscal outlook similar to what our forecasts suggest we should expect in the next two decades, Milei cut Argentina’s government spending by a third and abolished half of its ministries.
That’s the equivalent of Willis cutting the $139b spent in Robertson’s last year to around $93b in 2024/25. Instead, she has increased core spending by over 4% to $145b for this year. It’s forecast to rise another 12% to $163b in 2028/29. Far from halving the number of departments, only one has been abolished, the Māori Health Authority.
Union bosses, the Labour Party and far-left activists call this austerity. In fact, it’s the opposite, with the Luxon Government taking the title off the Ardern-Hipkins lot as the most profligate in New Zealand’s history.
To partly pay for it, tax revenue will increase by 25% over Willis’ first five years, from $121b in Robertson’s last year to $151b in 2028/29.
But not even that is enough to bridge the operating deficit. Under the Obegal measure the Treasury has always used to report the operating position, the books are now forecast to remain in deficit permanently.
Only under the Beehive’s preferred new measure, Obegalx, which excludes ACC’s revenue and expenses, is there ever forecast to be a surplus again.
There’s nothing dodgy about this. There are some technical justifications for using the new measure when making policy decisions, and the old one won’t be excluded from future budgets and economic updates. But don’t be fooled that it does anything to address the underlying debt track.
Wherever we were heading using Obegal, we’re heading towards exactly the same place on exactly the same timeframe using Obegalx.
Evidence continues to grow that Milei’s more serious attempt to turn his country around is working quickly. His budget is already in surplus and debt being paid back. While New Zealanders learned this week that our economy shrank again by 1.0% in the September quarter, Argentinians learned theirs grew 3.9% in the same quarter.
In Argentina, real wages are growing, and the poverty rate, which jumped from the already horrendous 40% to 53% immediately following Milei’s cuts, is set to fall again.
The quick turnaround is despite Milei and his Finance Minister Luis Caputo taking office two weeks after Luxon and Willis.
While cutting spending and closing departments, Milei and Caputo didn’t waste time setting up a Ministry for Regulation, instead implementing over 670 regulatory reforms on their own initiative in their first year – nearly half of them immediately upon taking office.
Crucially, Milei – like Caputo, a former economics professor rather than a corporate bureaucrat or parliamentary staffer – has maintained very high public support for his Government and its reforms by earning and sustaining a reputation for straight talking.
Whereas Luxon seems unable to communicate more than that Dove is good and Palmolive is bad, Milei has been able to confide in Argentinians that he had a genuine plan to revive their collapsed economy, but that it would cause pain, particularly in its first six months.
It certainly has. Yet, while Luxon hopefully spends summer asking himself if he is up to the job and Willis ponders whether she is prepared to emulate Milei and Caputo to fix things once and for all, voters might reflect on whether six months of the trauma of serious reform is better than another 15 years of slow decline – to be followed by the even more brutal reforms that will then become necessary.
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.
