OPINION
We learned last week that the average New Zealander became progressively worse off through 2023.
On Wednesday, Treasury’s Half-Year Economic and Fiscal Update (Hyefu) forecast we will continue becoming poorer right through 2024 and into 2025.
That would be the most sustained period of falling GDP per capita this century, longer than the blips after the Global Financial Crisis and the first Covid wave.
Worse, we are largely alone in the developed world in getting steadily poorer in the current international environment. That means we can’t blame global factors like Covid, the Russian invasion of Ukraine, the Hamas attack on Israel or any Chinese sabre-rattling in the South China Sea for our poor performance.
Nor are commodity prices to blame. The global dairy trade price index has been fluctuating as usual but has sat around its long-term average.
Over the past year, as so often before, our decline in living standards was cynically hidden by record net migration. According to the Hyefu numbers, finalised before the new Government was formed, net migration will continue playing that political role, staying historically high through 2024 and into 2025.
Don’t take my word for it.
Treasury calls itself “the Government’s lead economic and financial adviser and steward of the public sector financial management and regulatory systems”. It says its “vision is to lift living standards for all New Zealanders”.
According to Treasury Secretary Caralee McLiesh, any growth this year and next will be driven “almost entirely by population growth”.
That’s an admission that, contrary to her “vision”, the country is going through a period of falling living standards, plus extraordinary financial mismanagement, including that revealed by the Auditor-General’s shocking audit report of Labour’s $15 billion New Zealand Upgrade Programme and $3b Shovel-Ready Programme.
Yet that wouldn’t fix the shambles Finance Minister Nicola Willis has inherited.
Much of it she knew before the election, or should have, thanks to the Pre-Election Economic and Fiscal Update, but the Hyefu revealed a further deterioration.
The true numbers will be much worse again since both documents were prepared before last week’s disastrous GDP result.
Everyone accepted government spending needed to blow out because of Covid, and core Crown expenses jumped from $87b in 2018/19 to $126b in 2021/22. But spending never fell back to business-as-usual levels afterwards, passing $140b this financial year and forecast to reach $156b in 2026/27. It risks doubling in the decade from 2018 to 2028.
The coalition partners backed National’s promised 6.5 per cent cut across most of the central bureaucracy. In just a few weeks, Willis and her colleagues found the first $7.5b that can be cut without affecting public services. But this can only be the start.
Either we go down the high-tax Scandinavian model and trust our bureaucracy to spend the money as well as those in Sweden and Denmark, or we need to radically right-size the state.
Promisingly, Willis has a new process for her first Budget. Usually, most of the focus is at the margins. Ministers make bids for new spending and are encouraged to offer up savings. The process is focused on what bits of spending are going up and what might be going down, which is how the media usually reports Budgets too.
Willis’ process is much more top-down.
She is starting by offering ministers capped fiscal envelopes they have to work within. The idea is that each minister is then encouraged to look at the totality of their portfolio budgets and Willis at the full $145b or so she is currently forecast to take from us in 2024/25 and then give back to us.
Even to stop the $145b going up, let alone get it back closer to pre-Covid levels, Willis knows she won’t achieve anything trimming here and there.
Whole departments and government functions will need to be abolished. Some of these exist under the law, but Willis has made clear that is no excuse. If an activity isn’t consistent with the new Government’s agenda, departments have been told that Parliament will happily change the law so it can legally stop.
By pulling the plug on the Cook Strait ferry fiasco, Willis has also made clear she is not afraid of sunk capital costs. What matters is not what has been spent this year or in the past, but how much more is likely to be spent next year and beyond, and what taxpayers will get for it.
The trifling $7.5 billion over four years is no more than the first element of phase one. Some senior officials admit privately that, far from limiting herself to single figures, Willis should aim to slash at least 25 per cent from the central bureaucracy, with the knife likely to get through the fat and risk reaching true flesh at about 50 per cent.
That money, and more importantly the people and effort it represents, can then become available to the private sector and boost per-capita GDP. Willis is relying on Regulation Minister David Seymour to deliver the same scale of cuts to red tape.
Pathetically, Labour has lamented Willis stopping funding to the previous Government’s comical “Industry Transformation Plans”. Like the Key-English Government’s equally ridiculous “Business Growth Agenda”, these are brochures written by bureaucrats, lobbyists from Wellington peak organisations, union bosses, iwi and local government.
Over the past 20 years, such committees have earnestly provided advice on what goods and services should be produced in certain regions, including – I am not making this up – one that Steven Joyce signed off, surely only reluctantly, that there should be more chickens in the Manawatu.
Beehive strategists say there will be no more of that sort of nonsense. For the first time this century, we have a Finance Minister who seems to understand that markets know best how many chickens or whatever else should be produced in a particular region.
Willis rightly sees her role as reducing the size of the state, encouraging Seymour to limit regulation to that needed to promote competition, smash privilege and protect health and environmental values, and then collect tax from a thriving private sector to fund better schools and social investments, the law-and-order community and the military.
Sadly, the Hyefu reveals Willis starts tens of billions of dollars behind. Time, then, for her also to do a few polls to see if she can safely postpone her tax cuts without losing public trust.
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 Mayor Brown.
Liam Dann answers reader questions on economics.