Following Treasury’s report to Willis in March, the cancer drugs policy drops off the Government’s plans for health funding initiatives and was absent come the release of Budget 24 in May.
The omission prompted widespread backlash from cancer patients and advocacy organisations and the resulting pressure prompted the Government to commit more than $600m of future spending to increase Pharmac’s budget in order to fund up to 26 cancer drugs, including the 13 National promised or ones that were better.
Treasury’s report cited how Willis had requested money saved from reinstating the $5 prescription co-payment, which the previous Labour Government had removed, was used to fund the cancer drugs commitment.
Officials said the $116m saved from the co-payment reintroduction would fall well short of funding National’s promise as the cost “would likely be well beyond the $280m provisioned in the manifesto commitment”.
“We recommend this initiative is approached with caution.”
Officials also pointed out holes in National’s policy, noting just seven of the 13 drugs were being considered by Pharmac, New Zealand’s drug-buying agency which acted independently to government.
The report said the policy would undermine Pharmac’s independent model and would prioritise treatment of cancer patients over others suffering from the likes of mental health issues and diabetes.
If the policy was proceeded, Treasury recommended the Government give the $116m to Pharmac to preserve the entity’s “integrity”, while acknowledging it wouldn’t fund all 13 drugs.
Health Minister Dr Shane Reti had stuck fast to National’s commitment, repeatedly assuring journalists ahead of the Budget it would be honoured but it didn’t appear come Budget day.
In Budget-related documents released today, the cancer drugs policy is absent in correspondence following Treasury’s report.
Tax package cost concerns
A document from February presented three options for trimming the cost of National’s election manifesto tax package by $740 million to $1.6 billion. These were all eventually overruled although the implementation of the policy was slightly delayed.
The options were to delay the implementation of the plan to October, reducing the expansion of the Independent-Earner Tax Credit (IETC) eligibility or completely dropping IETC from the package altogether.
Officials supported the objectives of National’s tax plan, but recommended Willis “consider progressing scaled personal income tax options”, alongside delaying the implementation of the tax package, and scrapping the IETC changes altogether.
That last change is hardly surprising - Treasury has a longstanding aversion to the IETC, and nearly succeeded in having it abolished in 2017. Nor is it surprising that Willis kept the IETC changes she had promised, which gives people earning $24,000 and $70,000 and don’t receive other support, up to $10 a week, given it was central to the tax package’s claim to boost incomes for middle income earners.
Treasury analysed other possible changes but did not explicitly recommend them. These included lifting the higher tax brackets but retaining the bottom ones. This would have meant higher earners getting smaller tax cuts and people earning low incomes getting nothing. Unsurprisingly, this idea does not appear to have made it very far, despite it saving $1.16b.
Treasury also looked at reducing the whole tax package by 10% at each threshold, which would have saved $810m, and halving the changes for the $70,000 threshold, which would have saved $750m and meant people earning above $70,000 getting smaller tax cuts.
Treasury wanted even less Health funding
Willis warned any further cost pressure funding for the health system will be limited to “extraordinary and significant” events like another pandemic, given the “current constrained fiscal environment”.
About $16 billion was allocated in new Health spending in the Budget, but the increase was spread over multiple years.
In an April letter to Health Minister Dr Shane Reti, Willis reiterated there would be a “very high threshold for reopening the cost pressure arrangement ... with such instances likely limited to extraordinary and significant pressures or events in terms of scale and unpredictability, for example a pandemic”.
She believed multi-year cost pressure funding was a decision “not [made] lightly” in a “constrained fiscal environment”.
“In return for the certainty provided by this arrangement, it is my firm expectation that Health New Zealand will manage its activities within the funding provided, show increasing fiscal discipline, and progress against the Government’s priorities,” she said.
It was in March when Health NZ and the Government became aware of what Reti has described as significant financial mismanagement on the part of Health NZ’s board, leading to the resignation of several board members and the introduction of a commissioner to replace it.
A report from the Treasury to Willis in March showed she was advised to provide less cost pressure funding, recommending a spend of almost $500m less through Budget 24 than what was decided.
Officials suggested Willis’ proposed level of funding would be “challenging”, particularly in the current financial year, and could be exacerbated by the “current performance concerns with Health New Zealand”.
In a letter to former Health NZ chairwoman, Dame Karen Poutasi, Willis said the Government could have provided a lower cost pressure amount given revised inflation forecasts and as such, emphasised “any headroom” go towards delivering the Government’s five health targets.
Willis proposes larger spending cuts than Treasury
Various documents show Willis kept looking for ways to cut government spending right up until Budget Day on May 30.
On March 4, Treasury suggested Willis commit to increasing the Government’s operational (day-to-day) expenditure by $3.5 billion in 2024/25, then another $3.25b in 2025/26, and another $3b in each of the following two years.
It warned that if Willis wanted smaller allowances, she’d need to be prepared to scale back “significant” parts of the Government’s commitments, or implement “significant” further savings.
On March 27, Willis released her Budget Policy Statement – a document that previews the Budget. Controversially, she didn’t indicate how big her operating allowance would be in 2024/25, only saying it would be less than $3.5b.
By April 23, Willis was in a position to go to Cabinet to propose an operating allowance of $3.2b for 2024/25, and $2.4b for the following three budgets.
Treasury had warned her that allowances of $2.4b in outer years would “increase the delivery risks you will face in future Budgets”.
Willis told Cabinet, “Allowances at this level will be significantly lower than those set in recent years and will require ongoing attention to efficiency and reprioritisation.”
Nonetheless, she stressed that she wasn’t committed to getting the books back to surplus by 2027/28 (the year forecast by Treasury) “at all costs, especially if doing so would impact critical frontline services”.
She said the Government’s commitment to return to surplus by this time would be reconsidered if there was a significant decline in revenue due to factors outside of its control, including big changes to economic forecasts.
Other changes she identified were significant shocks and revisions to the economic outlook that couldn’t be easily addressed by the Reserve Bank’s monetary policymaking.
A separate email warned that there were already significant pressures on the allowances for future Budgets, hence Treasury’s recommendation to retain the settings where they were.
“With significant demands on outyear operating allowances, we’re recommending retaining the current operating allowances (unless small reductions are required in outyears to achieve surplus in 2027/28). Cost pressures and Government priorities deferred from B24 are significant and likely more than the operating allowances can fund” they said.
The official added a “a reasonably ambitious Phase 2 savings programme will still be required”- using the Treasury term for a spending cut.
Apprehension over tax calculator crashing website or being inaccurate
A document prepared for Finance Minister Nicola Willis shows the Treasury was a bit apprehensive about creating a tax calculator that members of the public could use to see how various tax changes would affect them.
Officials warned making a calculator was very resource intensive and would add to an already large workload staff were contending with.
“It is also not possible to give the absolute reassurance that the calculator will work perfectly once live,” Treasury warned.
“The tight timeframe means the calculator will be subject to less thorough testing, which raises the risk of inaccuracies.”
There was some discussion over which website would best be able to handle an influx of visitors without crashing.
Treasury concluded the Budget website should be able to cope, “but there is still a risk to the overall performance of the website due to higher than usual internet traffic”
Officials wanted debt target set much higher, creating $40b in headroom over current target
Officials at Treasury recommended Willis set a significantly higher debt target, equating to about $40b of additional borrowing if it were all borrowed today. It warned the more stringent target Willis opted for might constraint investment in essential infrastructure.
The target is a ceiling and not a goal and should not be interpreted as Treasury suggesting Willis actually go out and borrow the money.
Finance Ministers set the Government’s debt strategy, which often involves targeting a certain percentage of GDP as an appropriate level of debt. Willis said she wanted debt to reduce to between 20-40% of GDP. At the Budget, debt was about 43.1% of GDP and is forecast to be above 40% for the four year forecast period.
Officials said this was a “more binding debt objective than recommended” they warned this would be” more likely to create a tension between the fiscal strategy and a stable pipeline for capital investment” and instead recommended a ceiling of 50% of GDP, about $40b higher in today’s terms.
“Treasury considers that a ceiling for net debt of 50%.... is consistent with the PFA [Public Finance Act] requirements to maintain prudent debt levels,” the paper said.
The paper said Willis’ desire to change the target reflected “a concern that debt could ratchet up beyond the Treasury’s recommended debt ceiling as future Governments fail to bring down debt down fast enough”.
They said this approach " would have the benefit of providing greater certainty that the Government will have sufficient balance sheet capacity to increase debt in response to significant economic shocks, such as a financial crisis or following natural disasters related to climate change”.
Treasury was critical that Wilis’ debt range “could create additional pressure to offset capital investment with increased forecast operating surpluses” - in other words, the Government would not spend enough money on long-term investment because it was too worried about the debt target.
“A more binding debt ceiling may also make it more difficult to maintain a stable investment pipeline, with pressures to reduce capital investment increasing if OBEGAL deficits rise in response to economic shocks (assuming that the debt objective is not suspended),” they said.
‘Sooo late’ - Officials’ Teams chat reveal Willis wanted to set Budget parameters earlier
The release included a series of Microsoft Teams messages explaining one of the more curious Budget decisions: not to include allowances in the Budget Policy Statement (BPS)
A BPS is typically released in December, but can come late following an election. It tends to include “allowances” which are the amount of money set aside for new spending. However, despite the new Government’s March BPS being “sooo late” in the words of one official, it did not include allowances, which led to some head scratching from Treasury watchers at the time.
Willis later trimmed her allowances, reducing the amount of money by which spending would increase in the next few Budgets thus making the overall fiscal picture better for the Government.
Teams messages from officials reveal why. One official noted in late March that the Government had been considering trimming allowances in the BPS in order to forecast a surplus by 2027/28. They warned against this noting that if the forecasts changed between now and the Budget, that forecast might evaporate leading to a political loss for the Government.
“[W]e framed it as ‘don’t announce at BPS a reduction in your allowances to a level that based on current forecasts delivers you a surplus in a particular year because those forecasts could change before BEFU’. It did evolve into ‘don’t announce an allowance at BPS”.
An official suggested Willis wanted to set allowances but was persuaded not to.
“[B]eing honest she wanted to set them, we persuaded her not to,” they said.
Officials wondered whether this breached the Public Finance Act, which sets out what must be included in a BPS. They were relieved to discover that setting allowances was a convention, rather than a rule.
Another official questioned whether this was wise, noting that in a typical Budget cycle allowances are set in December at the BPS and “roadchecked” in March, when the allowances have often been increased.
This official noted the December step had been skipped and there was no real “roadcheck” in March.
“...with the BPS being sooo late I don’t really see any benefit in deferring.
“How do you design a budget package if you haven’t decided your allowances,” the official said.
Officials not keen on “Welfare that Works”
Treasury officials did not support spending new money on the Government’s Welfare that works policy, saying any new costs should come from existing budgets.
The Ministry of Social Development had requested funding as part of Budget 2024 to expand youth support, seen as the first step towards the Government implementing the Welfare that works policy, which was part of the National party’s campaign manifesto.
Officials raised concerns in a March 15 document about the existing employment programme, He Poutama Rangatahi, that would be expanded as part of this first step.”We have now received more information on the programme, which shows limited effectiveness: beyond twelve months, programme participants are not statistically more likely to be in employment, education, or training than comparable young people.
“Further, we remain concerned that providers’ capacity to take on more young jobseekers is untested.”
Ministers agreed funding would not come from Budget 2024 but through reprioritisation in the first year, “likely at a lower level than originally intended
Savings came from cutting arts funding
Millions of savings in the education sector came from cuts to cultural, arts, and wellbeing programmes that were deemed to be low priority for the Government.
Among them was the Arts Coordinators/Arts Online service from 2024/25.
“This service is no longer required because arts teachers have largely migrated to better alternatives such as the Ministry of Education funded Networks of Expertise, as well as informal groups on social media platforms (e.g., Facebook),” a Cabinet minute on April 29 said.
The Creatives in Schools programme, established during the Covid pandemic, will also be chopped after 2024/25, saving $12.772 million.
“It is not clearly linked to the Government’s education priorities, and the majority of funding went to the arts sector rather than education.”
A further $309,000 came from cutting the Data for Wellbeing – Te Rito Kaitiakitanga Group project, and stopping the Prime Minister’s Vocational Excellence Award from 2024/25 saved $4.368m. “The Award has not been evaluated.”
The Ministry of Education also flagged $5.040m in savings from reducing travel and meetings “that are not essential in delivering the Government’s priorities”, while $148.29m is being saved from fewer full time positions at the ministry as it looks to “work more efficiently”.
Low participation was cited to justify moving $21.95m from the Te Kawa Matakura programme, which supported rangatahi to strengthen their mātauranga-ā-iwi, while cutting an annual Services Academy National Hui (providing professional development for 50-60 schools and New Zealand Defence Force staff working in Services Academies) saved $124,000
Treasury warns MSD cuts poorly costed and might not shift people off housing benefits
Treasury officials recommended the Government not go ahead with cuts to the way emergency housing support was paid, saying they were doubtful of the way the Ministry for Social Development had done its costings - and that the cuts might just shift people into other forms of support.
The Government has a funding line to help people who need rapid emergency housing, typically a motel. The test for funding has prioritised speed more than eligibility. The Government proposed “tightening” eligibility. This would have meant fewer people in emergency housing, which would result in a big saving for the Government.
MSD officials said that if the change occurred there would be a significant increase in another payment, Emergency Housing Special Needs Grants (EH SNGs), as people moved from one support to another.
Treasury said it had “concerns” about the methodology MSD had used to forecast the amount of money it would save, which MSD reckoned at $712.554. Treasury said that it should be trimmed to 60% of that figure, which was the final figure that was eventually put in the Budget.
Treasury officials said these tighter rules lacked detail - and ministers had not even agreed to what the new rules would be by the time the Budget went to Cabinet. Cabinet decisions on the policy were expected only after Budget 2024. This meant the savings were booked before details of how the money would be saved had been worked out. The idea had some merit, Treasury thought, in addressing the perverse incentive motel-owners had to get as much emergency housing revenue as possible.
Just under $99m of the cut has been reinvested in support services to ensure people stayed out of emergency housing. Treasury was sceptical, however, that this would work. Saying there was no evidence yet it would keep people out of emergency housing.
Treasury also said MSD had not adequate considered how the cost effect of offsetting as people moved from one benefit to another.
Treasury raised concerns about another savings proposal for housing support, which eventually made it into the Budget.
The first savings idea is to reduce the amount of housing subsidies by factoring in the amount of money people receive from those subsidies they get from any borders they have living with them. Previously, income from boarders was not factored into the amount of money someone could receive from accommodation Supplement (AS), Temporary Additional Support (TAS), grand parented Special Benefit (SpB) or Income Related Rent Subsidy (IRRS).
Treasury was keen on parts of the idea noting the status quo is inconsistent and that in some cases the boarder and the person they board with can be receiving subsidy.
“[W]here boarders also receive a housing subsidy, the government can be paying two subsidies for the same housing cost,” Treasury said.
However, officials warned “it could discourage some lower income households from taking on boarders (compared to the status quo), although many boarding arrangements reflect family responsibilities (e.g. adult children or elderly parents), and such arrangements may be more likely to continue regardless of changes to housing subsidies than market-based arrangements
Winston wins reprieve for MFAT
In another document, Treasury notes its scepticism at Deputy Prime Minister Winston Peters’ desire to effectively exempt it from the Government’s savings exercise, which was meant to cut backroom spending from across the public service.
“There is not a clear rationale for exempting MFAT from the savings process and treating it differently to other agencies, many of which have not seen comparable recent baseline increases but have a greater direct impact on living standards,” officials said.
There also appears to have been a tussle between Willis and Peters over whether to subject the aid programme to cuts.
“We recall MoF [Minister of Finance] saying that she didn’t think savings should come from aid programme expenditure, as the Minister is proposing here, but we were unclear whether MoF held that view personally or whether it was something she didn’t think the Minister would find acceptable to put forward as a saving option,” said an official.
Justice cuts could impact services - officials
Cuts across the justice sector for Budget 2024 may impact the quality of services in the Serious Fraud Office and the Office of the Privacy Commissioner, while access to legal aid has been narrowed, and police will be “sweating some vehicles for longer”.
These are all are outlined in a March 19 Treasury briefing on the justice sector proposals.
A $3.144m cut to legal aid services over four years came from making it harder to get legal aid, which creates “equity risks around access to justice”, according to the Treasury.
“The Ministry proposes to reduce grants for criminal legal aid where the maximum penalty is less than six months imprisonment. This will be achieved by applying greater scrutiny to these applications to determine whether they meet the ‘interest of justice’ test, which is expected to reduce grants by 10%.
“The Ministry expects the policy change to be limited to fine sentences, but if the mix of sentences changes, this proposal may create costs for
Corrections management of community sentences.”
The Government also cut $18.868m over four years from the legal aid budget, “following lower demand for certain initiatives”. Treasury’s reservations about this are redacted.
A $2.124m cut over four years to the Office of the Privacy Commissioner’s (OPC) budget “may risk OPC’s ability to respond to major privacy breaches and undertake litigation or prosecution of key privacy issues”, though Treasury considered “these risks to be manageable”.
Reducing the costs of data storage, travel, and use of its prosecution panel amounted to savings of $1.6m in the Serious Fraud Office, half of which was chosen because it would “have the least impact on operational capacity”.
“SFO considers there is a risk of service degradation and inefficiency and some longer-term implementation risk, as data storage cost savings are
expected to diminish over time as the cost of this service increases with technological advancement.”
Meanwhile the $28.74m in more operating money and $33.97m in capital funding over four years to renew the police vehicle fleet is still short of the optimal amount, with police “sweating some vehicles for longer and not replacing some fleet as it reaches end-of-life”.
Less than optimal funding for asset management was also identified to save $68m in Corrections.
“The primary risk associated with this initiative is the risk to asset availability due to lower levels of maintenance. There may also be an impact upon frontline staff who work in these environments. These risks have been determined to be manageable.”
The savings drive in Corrections also saw the scaling back of the Hikitea mental health and addiction service at the Waikeria Prison, which could that some reduction in reoffending won’t happen.
In Courts, a $4.658m cut to the “lifting cultural capability” risked “an adverse impact to the Ministry’s ability to develop effective and
sustainable policy and its ability to foster meaningful and enduring relationships with Māori communities”.
There was also a proposal to cut $16.822m from Crown prosecution services, but this was rejected because it risked “a significant impact on the overall
performance of the justice sector through lower quality prosecution services and a reduction in court timelines”.
There was also a cut to a range of initiatives to support victims in the justice system, but the amount is redacted in the document.
“As these initiatives have not been implemented, returning this funding has no impact on users of the justice system. Given the funding is in a tagged contingency, it is not a baseline reduction but has been submitted given the difficulties for the justice sector to meet its target and deliver Government expectations.”
Earlier:
Further details of what is included in the papers will be published in this story as the documents appear on the Treasury website.
Each Budget is followed by a proactive release day, colloquially known as a document dump, where papers detailing the priorities of Willis and advice from officials are made public.
This proactive release is often anything but proactive. This one has occurred later than most, dropping in September, when others have tended not to stretch beyond August.
The defence of this is that this proactive release is two in one: it includes papers on the cuts undertaken by the Government, as well as the new initiatives put up for funding.
The 2024 Budget was built around a $14 billion tax cut package that adjusted income tax thresholds upwards delivering tax cuts to most working households.
The tax cuts were funded by trimming the baseline spending of most Government departments by 6.5% or 7.5% resulting in savings of about $1.5b over the period of the Budget.
Big winners from the Budget included the Defence and Health sectors. The Government and opposition are in the midst of a brutal argument on health spending, with the opposition arguing the Government failed to fund health adequately, citing the pleas of Health NZ bosses at a parliamentary select committee earlier this year.
The Government says that it has tipped in adequate funding, saying Treasury was happy with funding levels and noting that the multi-year funding given in this Budget is more than what Labour promised in its election manifesto.
A big question looming over the Budget is how hard the Government worked to fund its pledge of new cancer medicines. Some papers on this topic have already been released, but aspects of the plan, including whether National made more than a cursory effort to fulfil its manifesto commitment of funding the medicines this year, are still unclear.
The Government also made some tough political decisions about the future, including dramatically trimming the amount of new spending available for future Budgets to a level Treasury said would not be sufficient to fund existing service levels without further cuts.
The Government has also chosen to de-emphasise some of the “wellbeing” aspects of Labour’s Budget process. The Budget documents may reveal to what extent that changed how the Budget was put together.
