Matthew Hooton column: Can Act support a Budget that borrows and spends more than Labour?

Christopher Luxon, David Seymour, Winston Peters and their parties are talking up coalition unity but tensions are growing, Matthew Hooton writes. Photo / Mark Mitchel

OPINION

The three Coalition party leaders insist the Government is absolutely united and collegial. But when that’s true, governments don’t go around saying it. They only say it when it’s untrue.

Tensions are growing between National and Act in particular, and to a lesser extent between National and NZ First. The National backbench is also showing its first signs of nervousness, not quite sure if the leadership has a clear agenda.

Across all three parties, recent polling has been unsettling. For MPs able to read and interpret economic numbers, the outlook is worse.

The Government’s claims that Labour left a fiscal shambles are absolutely true. If anything, they’re understated. Perhaps that’s why the Government’s own policy response indicates no real understanding or concern of what lies ahead.

It may well be a Prime Minister’s job to bounce around talking up their country’s economy. But, to the middle class, Christoper Luxon’s enthusiasm seems out of touch with their experiences. Those whose job is tracking economic data just think he talks a load of rubbish.

Government debt-servicing costs are now higher than expected even when Finance Minister Nicola Willis produced her Budget Policy Statement in March.

Lenders are now demanding yields of 5 per cent on 10-year government bonds, up from 4.5 per cent at the beginning of the year.

But Willis’ cost of borrowing is going up by much more than that.

On Wednesday week, for example, $14 billion of Covid-era government bonds mature, which were paying a coupon rate of just 0.5 per cent, or $70 million a year.

Let’s say they were refinanced at 5 per cent, not unreasonable given that’s the 10-year government bond yield, then the cost of servicing that $14b will leap tenfold, costing taxpayers another $630m a year.

It then gets worse.

Between now and the next election, Willis has another $15.1b of bonds maturing at 2.75 per cent, $4b at 2 per cent and $9.3b at 0.5 per cent.

Even if Willis ran balanced budgets next year and every year in the future – which she had explicitly ruled out until 2027/28 at the earliest – the cost of servicing existing debt will rise rapidly for the rest of this decade.

According to Treasury’s now too-optimistic Half-Year Economic and Fiscal Update in December, debt-servicing costs were expected to rise from $6.2b last year to $11.5b in 2027/28.

Those numbers will be worse when the Budget comes out in four weeks. Willis needs to borrow more just to pay the interest.

Unfortunately, the Government’s cost-cutting programme probably won’t generate much more than a billion a year, and much of that – according to the Prime Minister – will now be spent rather than used to pay off debt or fund tax cuts.

Ministers are demanding extra spending for health, education, housing, law and order and vulnerable children, and the Prime Minister keeps confirming those areas will indeed receive more funding next year than ever before.

On Wednesday, Foreign Minister Winston Peters joined in, saying he wants the Ministry of Foreign Affairs and Trade’s budget increased “massively”.

He has a case given the current international environment and Luxon demanding more mojo abroad, including to deliver his campaign promise of a free-trade agreement with India before the next election.

Peters, Defence Minister Judith Collins and Act are also arguing for greater operational and capital expenditure on the military. To reach the Nato guideline of 2 per cent of GDP – the minimum for New Zealand to remain part of our current security networks – defence spending will need about $5b a year more.

The Government could deliver its promise of better roads, water-pipes and other infrastructure by taking projects off balance-sheet through public-private partnerships. But that’s not an option for defence equipment, for which Willis will need to borrow.

Finance Minister Nicola Willis has indicated this year's Budget will include "revenue measures" to balance the spending. Photo / Mark Mitchell

Willis is not entirely unaware of the fiscal danger. She indicates the Budget will include new “revenue measures” – code for new taxes or higher user-charges – to bridge the gap.

She also hopes some of the $15b for tax cuts will be saved rather than spent, arguing unconventionally that tax cuts may be deflationary rather than inflationary.

National’s original tax-cut plan would have delivered $33.50 a week to a household with two children and two parents earning $70,000 a year each.

Willis will be right if they all use that extra $33.50 a week to pay off their mortgage faster rather than spend it on groceries and household bills.

Sadly, if Willis is wrong, the family will get their $33.50 a week but end up paying higher interest rates for longer.

Willis would also end up paying even more to service the Government’s gross debt, forecast to reach at least $167b within eight weeks.

The Budget won’t finally be signed off by all three coalition partners for another 17 days, or - if things are going really badly – on Monday, May 27.

Possibly, Treasury now picks a rosier outlook than the Reserve Bank, bank and consultant economists, and the Government itself.

Or perhaps Willis has a surprise new “revenue measure” no one expects.

Another option is her promising no more extra spending in her next two Budgets, plus much more serious spending cuts. That would be bold since one will be presented just months before the next election.

More likely, Willis will reveal total government spending continuing to rise, in dollar terms and as a percentage of GDP, at least in the short-term.

That means the fiscal deficit will be wider than forecast before the election and surplus at least one more year away.

If so, Willis will need to announce that debt and debt servicing costs will now be higher than previously admitted.

Act has failed to make much progress on its proposed Treaty Principles Bill. It is uncomfortable with the potential for corruption from Chris Bishop’s Fast-track Approvals Bill giving ministers the power to decide what projects get resource consents and which don’t.

Its Ministry of Regulation and charter schools aren’t yet fully in place.

While still healthy, its polling is going the wrong way. It is at risk of supporting a Government that will never put the books back in order.

If Luxon and Willis seriously plan to borrow and spend more than Jacinda Ardern and Grant Robertson, how on earth could Act not walk out of the Cabinet room and move to the crossbenches when the Budget comes for signoff in a few weeks?

Everyone in the Government knows what is at stake. And now you know why everyone in the Beehive is so keen to talk about how unified they are.

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.