Finance Minister Nicola Willis at the release of the Budget Policy Statement. Photo / Mark Mitchell
Finance Minister Nicola Willis at the release of the Budget Policy Statement. Photo / Mark Mitchell
ANALYSIS
After this week’s dreadful poll, which saw the three governing parties down by a collective five points, the Beehive’s panoptic gaze fixed itself on May 30, Budget Day, hopeful it might break the cycle of bad news and negative sentiment towards everything, including the Government itself.
It’s not unprecedented for a government to fall behind early in its term, but the precedents that do exist are not ones the Government would wish to emulate. Dame Jacinda Ardern fought off National poll leads in the first and last years of her first term. There was a good chance she might have been a one-termer, but for the pandemic response.
Prime Minister Christopher Luxon will be hoping for an easier road back to the ninth floor, starting with a “Budget bump” in the first polls after May 30.
He might be waiting a while. The post-Budget poll pump is a bit of a myth.
A survey of polls taken by the same company before and after Budgets shows the last Labour Government only enjoyed one post-Budget poll bump (in 2020 - when the bump probably had little to do with the Budget and more to do with the pandemic).
The last National Government had only slightly better luck. Across nine Budgets, it enjoyed just three post-Budget poll bumps, in 2014, 2015, and 2017.
There is further reason to be sceptical, and that is the content of the forthcoming Budget itself.
National went into the election with a specific fiscal promise that can be broken down into three clear constituent parts: to lower the tax burden on workers, particularly those with families; to fund that tax relief through a mixture of “back-room” spending cuts and levy increases; and to ensure that the tax promise was not paid for by borrowing more than Labour planned to. In fact, National’s promise was to lower spending increases over the course of the Parliament to borrow less than Labour’s plan, meaning smaller deficits, less borrowing (but not no borrowing) and likely less inflation.
The promise was an enticing one.
Salary and wage earners are seeing an increasing share of their pay packets gobbled up by bracket creep. Employers have been offering large pay increases during the post-Covid inflation spike, but for these workers, 30 cents of every dollar of that tax increase is taken in tax (for the median Aucklander or Wellingtonian it will be 33 cents).
It’s little wonder economic sentiment is so negative - not even a relatively large, well-earned pay increase will get you ahead.
Wind the clock back to the last time brackets were reset, in 2010, and a median income earner getting a pay rise would have seen just 17.5 per cents in every dollar taken in inflation.
Workers’ total tax burden was low too. Including tax credits, a median income earner after those changes (earning $41,000), would have paid about 14 per cent of their income in tax (including a key tax credit). In 2023, a median earner ($66,000) paid 19 per cent of their income in tax.
For families with young children, the promise is greater, with the addition of up to $75 a week in tax credits for Early Childhood Education (although this comes at the expense of Labour’s extension of 20 hours’ free ECE, which the Government has axed).
Depending on what you make of public spending cuts, the tax cuts on their own have merit, returning money to households at a time when they’re stretched - though they are incredibly modest compared to historical tax cut pledges. Labour and National both offered more in 2008, in nominal and real terms.
Where the Government has a problem is in the other two legs of the promise: that it would be funded mainly by levy increases and backroom cuts, and that overall, it would contribute less to inflation than Labour’s plan - not more. Those two legs are looking increasingly shaky.
Prime Minister Christopher Luxon, flanked by Finance Minister Nicola Willis and Deputy Prime Minister Winston Peters. Photo / Mark Mitchell
The cuts that will pay for it
There are plenty of good reasons to cut public spending, but some of the arguments rolled out in favour of these cuts don’t always match what the government is doing.
A government could be spending so much it simply cannot afford to continue, or the spending might not be delivering much value to the public and should be stopped and returned in the form of a tax cut.
Almost everyone seems to have got their wires crossed about these cuts. Some think that cutting public spending will help fight inflation.
Throughout 2022 and 2023, National warned that public spending levels were leading to inflation. They had a point. A recent Treasury paper said about a third of the inflation spike could be attributed to a difficult-to-pin-down basket of issues, which included Government spending.
The Government’s spending cuts, however, will not reduce inflation in the form they currently take.
Cutting government spending would contribute to bringing inflation down, but only if those savings were banked by the Government to reduce overall spending levels and new borrowing, and this commitment looks like it is wavering.
The $1.5 billion annual savings of these cuts will go straight back out the door to pay for the roughly $3.6b cost of National’s tax plan.
So at very best, the Government’s spending cuts will have no net effect on inflation. A dollar is saved on one side of the ledger so that it will be spent on the other. The only thing that’s changed is who is doing the spending.
There’s nothing particularly wrong with that if the Government can prove that the cuts are justified and won’t hit public services; however, recent cuts have suggested the cuts are inching closer to the front line, if they are not already there.
Things get worse when we unpick the final leg of National’s pre-election fiscal plan, which was to have no additional borrowing. The reason this promise is so important to the plan is that it amounts to a pledge to take inflation more seriously than Labour, ensuring the already modest tax cuts are not eaten up by a wave of inflation.
The current debate over whether the Government is or is not borrowing for tax cuts is a bit cute.
The deficit is so large and intractable that every party went to the election promising to borrow for something. Even Act’s highly contractionary plan included continued deficits throughout the Parliament.
Labour, the only opposition party to release a fiscal plan, would have “borrowed” for its GST cut policy, and its fiscal plan forecast borrowing $3.4b more than National over the four-year forecast period.
The question that was asked during the campaign is whether or not parties could put up fiscal plans that promised to borrow less than the status quo - not whether they would stop borrowing completely. On that score, National’s plan had slightly more merit than Labour’s - it still promised borrowing, just less than Labour.
It’s worth remembering why this leg of the promise is important. It’s the borrowing part of a Government’s promises that is inflationary. If National wanted to promise tax cuts without having them fuel more inflation than Labour’s plan would have done, the party had to fund them in a way that resulted in no additional borrowing.
The party managed to do this by having an internally consistent tax plan that funded itself through cuts and levy increases - and then outside that tax plan, the party’s fiscal plan promised a slightly more contractionary fiscal plan, meaning overall the party’s plan promised lower taxes and less inflation than the status quo.
That promise is now under severe threat for three reasons.
The first is that National and its partners are now the status quo. No one cares whether its plan promises less inflation than Labour, they only care that the Government brings down inflation as much as it can.
The second threat is that the economic status quo has now changed. This isn’t the fault of any one political party, but it is a problem for whichever party is unlucky enough to be in Government to deal with it. Preliminary forecasts released with the Budget Policy Statement show a worsening economy, which bank economists think could see $10b-15b more debt issued just to stand still.
It means even if National delivered on every policy pledge in its fiscal plan, it would still borrow more than planned before the election, essentially breaking the promise to fund a more contractionary fiscal policy than Labour outlined before the election. Of course, had Labour won the election, it too would have faced the same problem and probably have borrowed more to avoid cutting spending. Nevertheless, that’s not Labour’s problem right now - it’s the Government’s.
The third challenge is all the Government’s own making. Almost all of the “more contractionary than Labour” promises made before the election came from reducing operating allowances this year and each year of the Parliament. The operating allowance is the new money added to the Budget each year to fund cost increases and new initiatives.
This year’s allowance would be reduced from a proposed $3.5b to $3.2b, saving $300m. Sharper cuts next year and in subsequent years would reduce allowances by a cumulative $3.3b over the forecast period.
This promise appears to be under threat. Instead of confirming her campaigned-on operating allowance at the Budget Policy Statement in March, Willis promised only to set the allowance at “less than $3.5b” with no comment on future allowances. The comment made no mention of her own pre-election allowance, and hinted the Government will basically take the parameters of Labour’s fiscal plan as its own.
Allowances are cumulative, so setting an allowance closer to $3.5b than $3.2b allowance will mean a $1.2b drop to those promised $3.3b of savings - more than a third. If future allowances are increased (this is doubtful - governments love trimming forecast spending only to increase it when the spending actually falls) it would mean the new Government’s fiscal track looks basically identical to Labour’s.
That leaves only one of the three legs of National’s pre-election promise still standing.
It will lower the tax burden on households, particularly those with families, but the second two legs of the pledge are looking shaky. The spending cuts are getting very close to the front line, and the borrowing pledge is close to collapse - and that is bad news for getting on top of the inflation problem that looks like the root cause of the unpopularity plaguing both this Government and the last.
From what we know so far, there’s the fiscal equivalent of a cigarette paper separating Labour’s pre-election fiscal track and what the current Government is looking at.
It’s little wonder the Government is struggling to out-poll the Opposition. The fiscal fundamentals have barely moved from when the Opposition was itself in government.
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.
