100-day plan, tick. Eyes now turn to Budget, potential for broken promises

With its 100-day plan complete, the Government’s focus now turns to the Budget, with Budget Day set down for May 30.

But key details will be revealed in a fortnight, as early as March 27, when Finance Minister Nicola Willis will publish her Budget Policy Statement, setting out operating and capital allowances - Treasury language for the amount of new money to be spent on day-to-day activities and long-term investment.

Questions are swirling around what those numbers might be. National’s fiscal plan - essentially a draft Budget that it put out before the election - promised trims to Labour’s operating allowances. Back then, National proposed an operating allowance of $3.2 billion in the next Budget (versus Labour’s proposed $3.5b) and allowances of $2.85b in next year’s Budget, followed by $2.7b in the next two Budgets.

In total, National promised those cuts to new spending would save $3.3b over the four-year forecast period.

That operating allowance promise is serious. Each year, the Government increases funding for public services to keep pace with the rising cost of those public services. Finance Ministers make impossible trade-offs between instilling spending discipline through setting tight allowances and ensuring there is enough new money in the kitty each year to adequately fund the growing cost of delivering existing services.

That is why so much attention was placed on fiscal plans during the election: was Labour really going to start reining in spending and could National be believed when it promised to adequately fund public services?

Currently, Willis is not committing to this fiscal plan, despite it being endorsed in clause 11 of the coalition agreement with Act and clause 10 of the agreement with NZ First as a policy of the coalition agreement. That makes it a coalition policy and not just an election promise to be jettisoned as soon as the parties formed a government.

When asked whether she was committed to the allowances laid out in her fiscal plan, Willis told the Herald: “I absolutely celebrate and encourage the NZ Herald in its interest in the Budget Policy Statement. It is fantastic to have such interest in the Government’s approach to its finances. I am very excited about confirming the answers to these questions on the 27th of March [Budget Policy Statement day].”

Willis said she applauded the Herald’s efforts to try to be the first to get the size of the Budget, but that there were “significant conventions at play here, where we make sure that the Budget Policy Statement is revealed at the same time to all media”.

This is not, it appears, an attempt to wriggle out of that coalition promise, but to preserve the tradition of not announcing the Budget ahead of when the Finance Minister wants to.

“This is us just being conventional about the way these things are managed,” Willis said.

A spokesperson for Willis said the coalition Government remained committed to delivering its tax commitments. The coalition agreement committed the Government to National’s $14b Back Pocket Boost tax plan, although it said the Government would explore using Act’s tax policies to achieve that same tax relief - with the proviso that everyone would get at least what they were offered under National.

Act’s policy differed from National’s in that it envisaged a flatter tax system and a greater use of tax credits to ensure every taxpayer was better off.

Willis confirmed to the Herald there would be no repeat of the Key-English zero Budgets, that included no new spending.

And when asked about National sticking to its fiscal plan commitment of funding health sector cost pressures at $1.43b this year, followed by $1.37b next two years, Willis said: “We still intend to take a multi-year funding approach.”

Labour Finance spokeswoman Barbara Edmonds. Photo / Mark Mitchell

Labour is unimpressed and wants to make sure Willis sticks to the fiscal plan commitment, arguing that any trimming of operating allowances will put pressure on public services.

The allowances are meant to fund both political goodies and cost pressures, and force very difficult trade-offs between funding new election commitments and finding new money to keep the lights on. Treasury told Willis in its briefing to the incoming minister last year that between 2018 and 2023, cost pressures ate up between 50 per cent and 90 per cent of Labour’s operating allowances.

Treasury also said that the allowances Labour bequeathed National were only “broadly sufficient to meet critical cost pressures that are not already funded”.

This poses a challenge, given National’s plan does not anticipate sticking to those allowances, but cutting them. This already means funding increases this year may not be enough to meet cost pressures. Further cuts would make this problem even worse.

“Prioritisation will be required to fund new initiatives above this, manage pressures within agencies and generate savings to fund new priorities across Government,” Treasury said.

Labour’s Finance spokeswoman Barbara Edmonds said the National part of the Government was struggling to both cut taxes and fund public services at the same time.

“When you get to a coalition agreement when you have committed to a large number of initiatives which are fiscally negative - where do you find that funding from?

“Looking at our [Labour’s] allowances last year: we were looking at a 70 per cent cost pressures budget... where are you going to find the rest of the money for your initiatives,” she said.

Edmonds said she “quite frankly” did not believe that the Government could follow through on its tax cut plan whilst also funding services adequately.

She pointed to research from the Council of Trade Unions, published last week, that New Zealand may need to spend between $7.9b and $19.9b on public services over the years to 2028 to keep up with the rising population. That research modelled recent population trends and concluded the current population track envisaged by Treasury, and the spending levels the Government had attached to it, were unrealistic. It recommended additional spending to keep pace with population growth.

One thing we may see in the Government’s Budget Policy Statement is a return to the old style of measuring debt. The Government is setting its fiscal rules at the Budget Policy Statement. Willis has been publicly critical of the previous Government’s decision to change the previous “net core Crown debt” metric to “net debt”.

The new metric includes assets like the New Zealand Super Fund into its calculation, which makes the overall net debt number look smaller. Willis’ remarks suggest she might switch back to the prior metric. Treasury’s last forecasts forecast New Zealand’s net core Crown debt at 43.5 per cent for the year ending June 2024, compared with 23.2 per cent under the net debt metric.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.