OPINION
Finance Minister Grant Robertson was hoping $13.3 billion in tax would come rolling through the door in May to keep Labour’s re-election strategy on track. Sadly for him, only $11.1b turned up.
Robertson also spent a couple of hundred million more in May on core Crown expenses than forecast in his Budget Economic and Fiscal Update the same month.
Things already looked bad when Robertson received the April accounts, showing tax was $1.4b lower for the first 10 months of the year than planned. Back then, Treasury still hoped for a last-minute catch-up. In the May accounts, all hope is gone, with the nation’s bookkeepers finally conceding that the wider-than-forecast gap will persist through to the end of the financial year.
In cash terms, the picture is horrifying, or even Muldoonist.
On Budget Day, Robertson hoped for an annual cash deficit of “only” $19.4b by the end of May. Alas, it was $23.8b, over 6 per cent of GDP, and already more than the $22.4b forecast for the whole year on Budget Day.
After accruals, the number is smaller, with a deficit through to the end of May of just $6.5b, but that is still nearly 50 per cent worse than forecast just seven weeks ago.
The good news is that May’s unexpectedly low tax take suggests the recession may be deeper and longer than Stats NZ yet thinks, so interest rates will not go higher, perhaps bringing forward the joyous first cut.
That won’t be next week, but Labour strategists hope against hope for the Reserve Bank to surprise with a cut in its official cash rate review on August 16, the last before the election. At the least, they’ll want some encouraging words to highlight from its quarterly Monetary Policy Statement scheduled for the same day.
That requires some good news on July 19, when Stats NZ does its last inflation update before the election, and living with some bad news when its last pre-election GDP report comes out on September 21. Labour would rightly see that as a price well worth paying if it meant banks cut retail mortgage rates just ahead of the start of advance voting on October 2, now just 87 days away.
Everything otherwise looks grim for the ruling regime. Robertson was hoping to have net debt, under his more flattering figure, down to $71b by the end of 2022/23 but that’s a pipe dream.
The upshot is that Robertson will now have to cut a couple of billion dollars from Labour’s planned election bribes or admit his fiscal strategy has failed.
It’s not just a problem for Labour.
Act leader David Seymour blames the worsening books on Robertson’s reckless spending, citing the $531 million wasted on expiring rapid antigen tests. Seymour says the fiscal outlook will improve only if the Government reduces spending, taking pressure off inflation and interest rates.
National’s Nicola Willis broadly concurs, saying more floridly that “businesses are drowning under a tidal wave of new costs [and] worsening inflation, and these are weighing the economy down”.
But neither Act nor National is proposing a radical re-shaping of fiscal policy. Act promises to cut $9.5b a year in wasteful spending and $9b a year in taxes, but a $500m fiscal turnaround is barely a rounding error in the context of Wellington’s $135b annual profligacy.
National’s position is more opaque. Willis promises to release a fully-costed alternative Budget ahead of Treasury’s Pre-Election Economic and Fiscal Update on September 12. Officially, National still remains committed to tax cuts but these would be eccentric in the face of massive cash and operating deficits.
Roger Douglas may have believed in supply-side tax cuts when he inherited a top tax rate of 66 per cent from Robert Muldoon, but National never has.
Confronted with a similar hospital pass from David Caygill in 1990 to what Robertson is chucking at Willis, Ruth Richardson never cut taxes despite her predisposition towards a smaller state. The similarly fiscally prudent Bill English cancelled his second round of tax cuts after the Christchurch earthquakes.
Willis can’t make a Rogernomics-style supply-side argument given that today’s top rate is just 39 per cent. In any case, she has already ruled out the top rate for immediate attention. Any National tax cuts would be targeted at the middle class, but these would need to be matched by clearly defined spending cuts to be credible and non-inflationary.
If Act has the intestinal fortitude to propose only a net $500m fiscal improvement, there’s no hope for National. It doesn’t help Willis when her leader, Christopher Luxon, is susceptible to spending demands from lobbyists, evidenced again this week by his unanticipated announcement to pay for a brand-new medical school at the University of Waikato, rather than just radically lifting the cap on places at the existing world-acclaimed Auckland and Otago institutions and letting them partner with the regional hospitals they think most make sense — presumably including Waikato.
Luxon’s Waikato University surprise follows the embarrassment of National’s uncosted but surely multibillion-dollar law and order policy he released a fortnight ago.
There will be — or should be — a premium this election not just on fiscal transparency of the sort National has so far failed to deliver, but on policies whose gains come from ideological shifts and spending reallocations rather than splashing new cash.
The exemplar was National’s education policy, written by Erica Stanford, promising big gains in educational performance through a back-to-basics curriculum supported by proper teaching plans and resources, as opposed to the Ministry of Education’s unrelenting insistence on radical left-wing pedagogy.
Compare New Zealand’s still-unfolding economic, fiscal and inequality catastrophes with what is happening in Australia.
There, the Government’s cash surplus for the year to May was A$19b, massively ahead of the A$4.2b forecast in its Budget, the week before Robertson’s. It has so far escaped a post-Covid recession, labour force participation is at a record high, unemployment is close to a 50-year low and wages are growing. According to its Reserve Bank, inflation has passed its peak and is now falling. Its official cash rate is just 4.1 per cent.
Australia’s Government – and voters – now have choices about how to invest their growing surpluses in infrastructure, hospitals, schools, tax cuts and defence. In New Zealand, Robertson has already chosen how to spend our cash, and wasted it mainly on policies and projects that have failed.
Any election bribes, by any party, should be cancelled or derided until the books improve.
- Matthew Hooton has previously worked for the National and Act parties and the Mayor of Auckland.
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