ANALYSIS
Neither major party emerged victorious from Tuesday’s battle over Treasury’s Pre-election Economic and Fiscal Update (Prefu) forecasts - it was a draw.
Labour gets to claim that despite governing through a term that reads, in retrospect, like a chapter from the Old Testament, complete with plagues and floods, a surplus is still in sight, and only one year later than forecast, in 2027. The economy will grow at an average of 2.6 per cent in the next four years and wage growth will rise by an average of 4.8 per cent a year, outpacing CPI inflation.
But there’s plenty for National to crow about too. The surplus has been delayed yet again. It was originally forecast for 2025, then pushed back to 2026, and now forecast for 2027. Each Treasury forecast has revised upwards the amount of borrowing we will be doing in the next few years. In the Half Year Economic and Fiscal Update (Hyefu) 2021, net core Crown debt was $138 billion by 2027.
The 2022 Budget Economic and Fiscal Update (Befu) revised the same number up to $146b, Hyefu 2022 revised it up again to $156b, Befu 2023 revised it yet again to $181b, and now, at Prefu, just a couple of months later, it has been revised up to $193.3b.
Finance Minister Grant Robertson has said the Government remains committed to its fiscal rule of delivering a forecast in the forecast period of the next four years. But National is, quite reasonably, beginning to ask whether promising to deliver a surplus in four years’ time means it will never actually arrive.
It’s beginning to look like the fiscal equivalent of St Augustine’s Prayer: “Lord, give me chastity and continence - but not yet.”
Drilling down into the numbers, there are serious questions for all political parties.
For Labour, there is the fact that most of the cost of Auckland Light Rail and the Waitematā harbour crossings are not included here. That means just how Labour intends to pay for $14b in light rail and $35b to $44.5b of harbour tunnels needs to be added on to these already-high debt figures.
The lack of surpluses means they have no room for a “rabbit out of the hat” election-winning policy in the weeks ahead of early voting. Former Prime Minister Helen Clark recently drew a comparison between this election and 2005.
Where the comparison ends is that then, Labour had surpluses so large Finance Minister Michael Cullen was almost embarrassed by them - and the fact they were often even larger than forecast. It wasn’t hard to turn these surpluses into election bribes.
It’s Robertson’s misfortune, both as a result of the pandemic and cyclone and the spending decisions of Labour these last six years, that he does not have surpluses to fall back on.
There is an even bigger problem buried in the numbers, which is that for even this relatively gloomy scenario to stack up, governments have to be incredibly disciplined for years to come - essentially assuming no spending on the sort of fun giveaways we see in elections.
The fiscals also assume that the Government runs tiny Budgets for at least 15 years. In August, Robertson shaved about $1b from the “new spending” in Budgets 2025 and 2026, known as the “operating allowance”. This factors into all Budgets going forward. Budget 2027 is assumed to be $3b and each Budget after that is assumed to have an operating allowance only 2 per cent larger than the last.
This means that for the next 15 years, the Government will run operating allowances smaller than the last Budget, which had an operating allowance of $4.8b and smaller than the average allowance over the last term, which was also $4.8b.
Labour has a habit of increasing its allowances and spending significantly more than signalled. Treasury implicitly called them out on this in the Prefu, warning that “[i]f this trend was to continue and there was no corresponding offset from either an increase in revenue or a reduction in expenses, there would be an adverse impact on the fiscal outlook”.
It warned that the allowances in the Prefu were really only enough to keep the lights on - with little space for anything else.
“[A]s well as meeting cost pressures in the future, Budget allowances are expected to manage the fiscal impact from new policy decisions made by the Government,” officials warned.
“Based on past analysis, the remaining Budget operating allowances should be broadly sufficient to meet remaining critical cost pressures not already funded, however, significant trade-offs will be required.”
Illustrating this warning was a scenario that included larger allowances. It modelled operating allowances of $4.5b in Budget 2024, falling again to $4.25 in 2025 and $4b in 2026 and then rising 2 per cent a year from 2027.
This would still mean that each Budget until 2036 would include a smaller operating allowance than the average for this term.
The consequences of that scenario would be disastrous. The Government would never return to surplus and deficits would get bigger each year until they reach 2.3 per cent of GDP by 2037. Net debt would be more than double where it is currently forecast to be. On those numbers, New Zealand would be on the road to bankruptcy.
Which is of course why they will never come to pass. That scenario is more of a thought experiment. But what it illustrates is that at some point a government will need to choose between some serious spending cuts or hiking taxes to maintain current levels of service. Eventually, of course, they will need to lift income tax brackets or face fiscal drag creating something close to a flat tax system.
Eyes now move to National, which has promised to release its fiscal plan - essentially a draft Budget - before early voting begins on October 2 (one would hope this is before overseas voting begins on September 27).
The forecasts also present a challenge for National, which will struggle to fund everything it promises to deliver while also returning the books to surplus faster.
It cannot claim on the one hand that Grant Robertson is the worst finance minister in history (National’s ban on personal attacks seems to have lapsed) whilst on the other not promising to radically alter the current fiscal programme.
But radical alteration would require quite serious cuts - something National appears to have little appetite for. These come on top of the Government’s two $4b rounds of cuts announced in May (which were less severe) and August (relatively severe), and on top of cuts National has already announced to fund its tax plan worth $2.4b.
Combined, we’re already at $10.4b in savings this year - can any more be found without seriously harming service delivery? Or perhaps National will look to axe programmes wholesale to make bigger savings. The $100 million screen production grant (film subsidies) perhaps - a risky move for a Wellington-based finance spokesperson.
The numbers are incredibly tight. National has to squeeze its spending plan into the Prefu allowances, unless it wants to spend more than Labour. Labour has begun shifting to “multi-year” funding, pre-committing $1.3b-$1.4b of the next three Budgets to health sector funding pressures.
The next three Budgets have just $1.3b, $1.9b and $1.6b left in their allowances - unless National wants to hold its nose and cut into things like health spending.
These numbers have already thrown a curveball to National. It planned to fund its tax cuts by re-prioritising $1.5b of ETS funding. These numbers show there is just $1b left - leaving a $500m hole National will need to fill somehow.
The other problem anyone vying for the Treasury benches must grapple with is just what is driving this economic growth: high migration, high house prices, and government austerity.
That particular combination seems like a recipe for political and social disaster, with a growing population potentially putting pressure on public services whose funding does not keep up with demand.
Treasury nodded to this fear today, warning “additional demand (eg, population changes)... could add pressure to future Budget allowances.”
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.
Where the Prime Minister will be on national day is unclear.