Nicola Willis’ mini-Budget and Treasury’s Hyefu show something’s going to have to give to get books back in shape

ANALYSIS

Something is going to have to give.

This is the message that resonates through the Government’s mini-Budget and Treasury’s half-yearly economic forecasts.

The state of both the economy and the Government’s finances deteriorated by more than expected throughout the year - election year.

Indeed, the decline occurred as former Finance Minister Grant Robertson committed to spending more in 2023/24 than most economists considered prudent during a period of high inflation.

The deterioration also occurred as National, Act and NZ First campaigned on cutting taxes and continuing major investment in infrastructure, all the while improving the state of the Government’s books.

In a nutshell, major trade-offs are needed to achieve all of the above.

The Coalition Government has committed to providing income tax relief from July 2024, and reducing taxes imposed on residential property investors.

Finance Minister Nicola Willis conceded the Government may need to cancel or delay some infrastructure projects on the back of major cost blow-outs, and given capacity constraints in the economy (which are admittedly abating).

The question then is: Will the Government be able to find enough cost savings to ensure its books return to surplus by 2026-27, and so that it can start paying down debt?

Willis came out strongly today, saying there is “urgent need” for a cultural change in the public sector to cut spending.

She stood by her pre-election promise to get government departments to cut spending by 6.5 per cent, going further by saying she’d ask agencies whose staff had grown by more than 50 per cent since 2017 to cut spending by 7.5 per cent.

However, she hasn’t yet identified where these cost savings will be found.

Willis’ “mini Budget” is more a scene-setter than a Budget, as it doesn’t include new information or tax/spend commitments.

We know what Willis wants to achieve, but we don’t yet know how she will achieve it.

What we do know is that the task will be tougher than expected a few months ago.

The Treasury’s Half-Year Economic and Fiscal Update (Hyefu) paints a weaker picture of the economy than its Pre-election Economic and Fiscal Update (Prefu) did.

Because the Treasury finalised its forecasts on November 24, it didn’t factor in the impact of the coalition agreements. Nor did it factor in Stats NZ’s significant downward revisions of the gross domestic product (GDP) growth through 2023.

So, the real state of the books is likely to be bleaker than the picture the Treasury painted.

To make matters a bit worse for the Government (but better for beneficiaries), it doesn’t expect to save as much money from indexing welfare to consumer inflation, rather than wage inflation.

Because inflation is higher than expected and unemployment is expected to rise, the Government will (in the near-term at least) pay beneficiaries more than what it hoped.

Willis’ next big update will come in March, when she will indicate how much she plans to increase (or decrease) operational and capital expenditure by in the Budget.

Until then, traders in financial markets can expect the Treasury to issue $7 billion more in Government bonds ($136b) between now and 2027 than was forecast at the Prefu.

Trade-offs will be required to enable the Government to start paying off debt, rather than simply rolling it over.

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.