National Finance spokeswoman Nicola Willis alleges there's a hole in the Government's accounts. Photo / Greg Bowker
ANALYSIS
Winston Peters has not lost his ability to shock.
In a three-line press release delivered on Wednesday afternoon, he alleged, via a question (it’s not clear of whom Peters was asking this question), asking if the State Services Commissioner Peter Hughes “met with heads of ministries yesterday to address a $20 billion hole in Government revenue?”
Peters went on to allege that the “purpose of the meeting was for all ministries to find and claw back cuts of 10 per cent of Core Crown Spending to the Consolidated Fund”.
Translation: there is a $20b hole in the books, and the Government wants cuts of 10 per cent to fill it.
An email isn’t exactly a winebox. Peters didn’t even get the names right. It’s the Public Service Commission now, not the State Services Commission. Peters actually voted for Chris Hipkins’ bill to change the name in 2020, but it was a busy year, so he can be forgiven - leviOHsa... levioSAH, and all that.
But the allegations were serious and deserved further investigation, particularly as members of both major Opposition parties were aware of allegations similar to Peters’.
The Finance Minister’s office denied all Peters’ allegations in the press release when it was put to them.
But when faced with evidence that aspects of the story were correct, Robertson has had to front up to the whiff of truth behind the PR.
Public service bosses did meet - they were not called in to a meeting. The meeting was with Robertson, the commission was by the by.
The meeting was not Tuesday, as the press release alleged, but earlier that day on Wednesday.
The Herald has also confirmed that a second meeting last week, alleged later in a press release by David Seymour, also took place.
Robertson acknowledged the original meeting in the House last night and again in Question Time on Thursday, saying it was part of a “fiscal sustainability and effectiveness programme”, something announced in Budget 2023.
At both meetings, public service bosses were urged to restrain spending. The Herald has not been able to confirm whether a number was put on this restraint, and if so, what that number might be.
When National’s Nicola Willis put a figure of 2 per cent to Robertson in Question Time, he neither confirmed nor denied the figure.
That leaves two substantial allegations open to question - the $20b hole, and the request of 10 per cent cuts.
In a later press release, Seymour alleged the hole was as large as $30b.
Willis also put out a statement saying she was aware of the public service being asked to restrain spending across a number of areas, but she declined to put a number on the restraint.
There is an obvious “hole” in the Government’s books, the deficit.
It’s been with us since 2020 and will not go away until 2026. That “hole” is also currently getting worse, thanks to a slowing economy.
So there is a “hole”, there have been meetings with public servants about spending restraint, but we do not know what that amounts to and whether it should be considered unusual, or whether it’s just part of running the economy. Neither National nor Labour can point the finger when it comes to deficits.
Fiscal hole
Robertson and the Prime Minister both pleaded innocence to the charge of a massive hole being blown in the books.
The “hole” format in which both Act and New Zealand First presented their figures is one beloved by politicians, journalists and the commentariat, and usually refers to an error of arithmetic. If your three policies cost $1 each, but you say they will fit within a $2 budget, then you have a fiscal hole of $1.
Outrage.
Treasury doesn’t do holes. It does surpluses, deficits, and debt.
New Zealand has been in deficit since 2020. We’d been forecast to go into deficit that year anyway, but it was Covid-19 that blew a hole in the books. Revenue fell a bit, and spending exploded - we spent $22b more in 2020 than we did in 2019.
That year, there was political consensus around most of that spending. In fact, at points, Labour was more conservative than National.
Between then and the time we are scheduled to return to surplus, our deficits will have totalled $55.4b - paid for by borrowing.
It’s kind of a hole, but it is also fairly normal, not new, and not secret - the figures are from the Budget forecasts which are so un-secret you can see Robertson photographed with them.
Not a hole, but a problem.
... this is the problem
The Reserve Bank is choking off the economy’s supply of cheap credit. The housing market, the engine room of New Zealand’s consumption-crazed economy, is on the floor. Businesses (some businesses) are hurting.
Less than 50 days after the Budget was delivered, Treasury published its monthly Crown accounts.
These are a bit like a monthly bank statement. They show you how much revenue has come in, how many expenses have gone out, and how much debt we have.
Treasury helpfully measures these against the forecasts, so we can see how the economy is tracking.
Since Covid-19, this has meant a monthly good news story for the Government.
A growing economy and solid wage growth meant that revenue would come in above forecast as people and companies earned more and paid more tax (and spent more too - paying more GST).
With fewer people unemployed than expected, expenses like unemployment benefits were often lower too.
The gap between those two numbers meant the Government’s books for months on end were often far better than forecast.
That all changed in July, when Treasury published a shocking set of accounts.
The accounts took in the 11 months to May 2023. They were published on July 5.
They were compared against Treasury’s Befu forecasts, the fiscal component of which was finalised in April and published in May at the Budget, meaning they were only a little over two months old.
Because the forecast was completed so recently, the accounts should have shown the books were more or less tracking exactly in line with the forecast.
This was not the case. The accounts showed a deficit of $6.5b - $2.1b more than forecast just a couple of months earlier.
The culprit was company tax, paid by firms on their profits, which had come in $2b (10.7 per cent) lower than forecast. That’s a concern for the economy because it suggests businesses are in trouble - they’re not paying much tax because they have smaller profits to pay it on.
Robertson told Parliament on Thursday, when asked about the meeting of chief executives, that they were “aware” of those May accounts, and what they contained.
“Public service chief executives are aware of the need to make efforts to meet the Government’s fiscal rules and return the Government accounts to a more sustainable fiscal position following the significant investments required to deal with the events of the global pandemic,” Robertson said.
If the deficit is a hole - the question is whether it’s a problem
Treasury is putting together its next set of forecasts - the Pre-Election Economic and Fiscal Update (Prefu), which will be released on September 12.
Robertson acknowledged today that May’s shock will feed into that. What this means is that the next set of forecasts will likely show a worse fiscal position than the last set of forecasts published in May.
That could mean bigger deficits, and being longer in deficit before New Zealand posts a surplus. Bad news.
Economists debate furiously about the ideal size of surpluses and deficits, but it is generally believed that a small open economy like New Zealand should avoid prolonged periods of deficits. This is money borrowed that is not invested in things like hospitals and schools, but simply to keep the lights on - because the Government has been unable to balance what it earns with what it spends.
If New Zealand is in deficit for longer, it will mean the longest period of deficits since New Zealand switched to modern accounting methods in the early 1990s.
Treasury currently forecasts deficits totalling $18.2b from the end of the 2023 year (which ended a month ago) out to 2026.
If those forecasts get worse - and no one doubts this as the economy is clearly weakening - this could possibly equate to a $20 or $30b “hole” over the next few years between what we make in revenue and spend: Peters and Seymour possibly vindicated.
A “hole” of $20b to $30b in a single year seems outlandishly large. The forecasts are already quite bad ($18.2b of deficits is a lot) so getting worse by $20b to $30b also seems unlikely, but more plausible than a deficit that big being booked in a single year.
The Government may have to signal it will issue more debt.
It has already told the market it plans to borrow much more than expected. In May, it signalled it would borrow $20b more than it said it would borrow just six months earlier.
It’s not so much a “hole”, but it is not good either. It means New Zealand still cannot pay its way.
Politics... as always
There is a political dimension to this too. Nicola Wills in Question Time on Thursday suggested the Government had been rushing to make spending cut decisions and minute them so that those spending cuts could be booked in the Prefu forecasts, making them look better than they actually are.
If Cabinet quietly agrees to nip and tuck spending, Treasury needs to adjust these into the forecasts, although the time for doing this ahead of the Prefu forecasts being locked down is narrowing.
Whose fault is it?
Deficits are normal. We’ve booked 11 years of deficits in the 30 years of our current accounting framework.
This does not make them a good thing, and all modern finance ministers have sought to avoid them by restraining spending and keeping tax at prudent levels.
The charge levelled at Robertson is that his recent three Budgets have been excessive.
Excessiveness is in the eye of the beholder, but this term’s Budgets have certainly been large - and they have been billions of dollars bigger than Robertson promised to spend in his “responsible” fiscal plan, published at the 2020 election.
That election, he promised four years (the forecast period is four years, not three years like a parliamentary term) of Budgets, which each added $2.625b to overall spending.
Cumulatively, this works out to be quite a lot of money.
Increasing operating spending $2.625b by Budget 2021 means you have to increase all the following Budgets by that amount too, because you don’t just get rid of the things you spend money on after one year. If you hire a nurse in 2021, you need to pay the cost of that nurse in 2022, and 2023, and beyond.
This means that by Budget 2023, annual spending due to Budget decisions this term was set to be $7.875b higher than it was at the start of the term - increasing $2.625b in 2021, by another $2.625b in 2022, and again in 2023.
The central allegation made by both Willis and Seymour is that Robertson broke this plan - and broke it at his first Budget this term, which had an operating allowance of $3.8b, more than $1b higher than promised.
This was followed by a record allowance of $5.9b, and an allowance this year of $4.5b.
This means that annual spending as a result of Budget decisions this term is about $14.5b, not the $7.875b promised in Labour’s fiscal plan. That increase excludes things like the Covid-19 fund.
That is a fairly large sum of money. It’s 10 per cent of all spending that is forecast this year.
New Zealand has very low borrowings, meaning we can absorb shocks like earthquakes and pandemics. But the large increase in operating spending means the accounts do hit a wall when there is decrease in revenue, as there has been.
Robertson told the Herald he made “no apologies” for increasing spending above what was promised.
“As you will know, since the 2020 election New Zealand has dealt with two major Covid-19 outbreaks [Delta and Omicron], supply chain constraints, the war in Ukraine and two major weather events.
“The Government supported lives and livelihoods through these events, I make no apologies for supporting Kiwis through difficult times.
“Budget allowances are used as a tool to help meet the Government’s fiscal objectives. I stand by our record in delivering in areas such as net debt where we have had results consistently better than the Treasury forecasts on which our Fiscal Plan was based,” Robertson said.
He’s correct on those points. No one really keeps to their fiscal plans (which is what makes fiscal holes such a circus).
Each Budget responds, as it should do, to the conditions of its moment, not the conditions of an election year in the past.
As the books got better this term, Robertson banked the improvements and spent additional money - as finance ministers past have done when conditions have improved (every time you hear “found $X behind the back of the couch” at Budget time, this is what is happening).
Core Crown expenses at 32.5 per cent of GDP are significantly higher than what New Zealand is used to (this measure fell below 28 per cent in the last years of National), but it it’s not exactly a blowout.
His point in terms of support during Omicron is also a fair one. Both National and Act have made calls for spending in the last three years - although it’s likely they would have spent less, we’ll never know whether it would have been significantly less, or whether the social aspects of spending less would have been worth the fiscal benefits.
The question hanging over the “hole” is whether the Government spent up too large in the good times and baked in expenses we will have to borrow to fund during the bad times.
Both sides of the House will remember this as the argument behind the “decade of deficits” line used so effectively against Labour by National when it took over in 2008.
So what do we know for sure?
For all the fuss and denials, surprisingly little of the facts of this story are contested.
Both sides agree the books are in the red. The Government even acknowledges that recent accounts mean they are a deeper shade of red than their recent forecast.
The Government acknowledges one meeting took place. The Herald understands the second meeting also took place.
The Government also acknowledges the meeting was about spending restraint to put New Zealand on a sustainable footing come election year.
The specific numbers thrown around - $20b, $30b, 10 per cent - cannot be substantiated. It is unclear what they even refer to, let alone whether they are accurate or not. Not even Ruth Richardson managed cuts of 10 per cent (she restrained spending growth, spending roughly the same ($29b-$30b) amount in all her Budgets).
A story everyone agrees on apart from the fact that everyone disagrees?
Must be election year.
Happy fiscal hole hunting.
Where the Prime Minister will be on national day is unclear.