Craig Renney: How Nicola Willis broke her election promise

Finance Minister Nicola Willis during her appearance before the finance and expenditure select committee in February. Photo / Mark Mitchell

OPINION

I want you to follow me with some basic accounting. Let’s assume all your income goes into one bank account. All the spending you need to do comes out of that account too.

Some spending is good (insuring the house), some not so good (that gym membership you never use). It’s how most people manage their day-to-day money.

The Government faces the same reality. The good spending (healthcare, education, housing) gets mixed up with the bad spending (flag referendums).

Sometimes the Government doesn’t have the money it needs. So, it borrows and hopes the future will be rosier.

Westpac economists now reckon the Government will need to borrow about $15 billion more than we had expected just a few months ago.

Finance Minister Nicola Willis has said that our debt levels were already too high and that a round of cuts was necessary, like cuts to programmes tackling climate change, the Department of Conservation, or policies supporting public transport.

Paradoxically, the minister also wants to reduce the income the Government receives by introducing about $15b of new tax cuts.

The reduction in income caused by these tax cuts is about the same size as what the Government is planning to borrow. You don’t need to be a financial genius to see what the problem is here. Put simply, if the tax cuts weren’t there, we wouldn’t need the $15b in new borrowing.

If the Government was really determined not to borrow, it could choose to not make the tax cuts while still making the cuts to spending, but that would still involve significant cuts to public services and a massive gap in infrastructure investment.

But if it chooses to go ahead with the tax cuts and keeps its promise not to borrow, it will need a further $15b of public sector cuts on top of those cuts already made. That would be impossible - public investment and services are already seriously undermined and would be severely compromised if that level of reduction was further imposed.

This is also the view of economists Cameron Bagrie and Shamubeel Eaqub.

Bagrie said: “They’re borrowing because they’ve got a mismatch between expenditure and revenue and tax cuts give you less income. It’s not hard maths to work out”.

Eaqub said: “It’s the same pool of money. You only have to borrow when your expenditure outstrips your revenue. The reason you borrow money is because you haven’t got enough money to fund your expenses and the net effect is what matters.”

All of this might be okay, if the Finance Minister hadn’t been so sure that the numbers in her financial plan all added up. The minister said in August last year: “There’s three things you need to know about our tax plan; first, it will put no pressure on inflation. Second, it requires no additional borrowing, and third, we can deliver it regardless of the state that Labour leaves the books in.”

Many economists, including those at the International Monetary Fund (IMF), think that the proposed tax cuts might well be inflationary. Now we also find that additional borrowing will be necessary to pay for the cuts.

The minister can’t blame the previous Government because these cuts were possible “regardless” of any of its actions. She has broken her election promise.

We are only seven weeks away from the Budget and the Cabinet will probably discuss the final Budget package next Monday.

The minister could decide not to borrow and not deliver the tax cuts. They could follow the advice of the Treasury and others and decide to generate new revenue from a capital gains tax. That would help solve their accounting problems and provide a stream of new revenue for investment.

The minister could decide that with a weakening economic backdrop, higher future unemployment and according to the Infrastructure Commission, an infrastructure gap of $104b and rising, now is the time to invest in making New Zealand a more productive economy and a more secure society: investing in research, science, innovation and the physical fabric of Aotearoa so that when growth returns, it can happen sustainably and without simply causing future inflation.

That would require a farsighted government. Sadly, this Government has already decimated science and innovation spending. It’s cutting public spending at a time when the population is rising at a record rate. It’s taking money from beneficiaries and those on the minimum wage.

It’s not too late to change. But time is rapidly running out.

United States President Joe Biden said: “Don’t tell me what you value, show me your budget, and I’ll tell you what you value”.

The true value - or cost to New Zealand - of delivering these tax cuts will become all too clear soon enough.

· Craig Renney is economist and director of policy at New Zealand Council of Trade Unions. He is also on the Labour Party’s policy council.