Treasury and Finance Minister Nicola Willis release the Half-Year Economic and Fiscal Update and the Budget Policy Statement today. Photo / Mark Mitchell
Treasury and Finance Minister Nicola Willis release the Half-Year Economic and Fiscal Update and the Budget Policy Statement today. Photo / Mark Mitchell
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.
ANALYSIS
HYEFU forecasts will be published today at 1pm
Treasury and Ministers have signalled they are likely to show a worsening economic outlook.
Finance Minister Nicola Willis will publish her Budget Policy Statement at the same time.
The first document, better known as HYEFU, is a set of economic and fiscal forecasts and is produced independently by Treasury; the second document, better known as the BPS, is the Finance Minister’s chance to set out in broad terms the shape of her forthcoming Budget.
Put more simply, HYEFU tells the minister and the public what’s going to go wrong with the economy and the Crown’s books, and the BPS tells Treasury and the public what she plans to do about them.
There has been an unusual amount of signalling about this HYEFU (even by normal standards). Last month, Treasury’s chief economic adviser, Dominick Stephens, warned it was once again likely to revise downward the outlook for the economy. Stephens warned that “economic activity has been weaker than anticipated in Treasury’s Budget 2024 forecasts”, the most recent set of forecasts to be published before today’s.
Lower growth is bad for households and the economy at large. It is also bad for the Government, which takes in less tax revenue
“Weaker economic growth means a smaller economy and less tax revenue, increasing the challenge for the Government in balancing its books,” Stephens warned.
We got a glimpse of how nasty this could be at the May Budget, when Treasury warned the Government would lose out on $28 billion over the four-year forecast period. A third of that loss was thanks to the Government’s tax cut package, but the other two-thirds were a result of lower economic growth reducing the tax take.
The fact that this is likely to be revised down again barely six months later shows just how deep a hole New Zealand is in – and it’s getting deeper.
Finance Minister Nicola Willis on Budget Day. Photo / Mark Mitchell
Three years ago, in 2021’s HYEFU, Treasury reckoned New Zealand’s GDP in real terms (in 2009/10 prices) would be $291.8b. It’s now not far off $10b lower, at $282.2b.
The Government is caught in the middle of this, squeezed on the one side by inflation-driven increases in the cost of public services, and a desire on the other to balance the books, which Treasury believes is crucial to restoring growth in the economy.
Covid has left little relics of itself throughout the books. In the current year, the Government will spend 2.1% of GDP on debt servicing, a greater share of the economy than at any time since 1999. More than $1 in every $16 of the Government’s spending will be spent on servicing debt. In 2019, that figure was just $1 in every $25. We spend more on finance costs than on defence, law and order, and housing. If servicing costs went back down to 2019 levels, it would cut the obegal (operating balance before gains and losses) deficit by a third.
This is a dilemma afflicting many developed economies – often in a much worse state than New Zealand. Persistent deficits and servicing costs contributed to political instability in France and the unpopularity of the new British Government.
New Zealand’s vastly lower debt levels mean things are not nearly so bad here – but high costs are having an impact by giving the Government less room to move. Debt costs are beginning to squeeze out other expenses.
This looks likely to remain a problem in years to come as interest rates settle higher than their pre-pandemic lows, while the Government’s debt remains high.
This current string of deficits is likely to represent the longest the Government has run deficits since New Zealand moved to modern accounting standards in the 1990s.
Obegal
Willis has promised updates on two reviews that have been playing out in the background since the Government took office.
The Government has backed itself into a corner setting itself a target in its Fiscal Strategy Report, to return to surplus under the obegal metric by 2027/28. Labour tended not to use “point in time” targets for fear they might not be met. The Government has decided to make a virtue of doing the opposite, but it appears it might still struggle to hit the target.
ACC contributed $4.1b to the obegal deficit in the past year – a third of the total. Treasury reckons if Crown Entities were excluded, the obegal would be better off by about $4.6b a year.
Willis told a select committee this month to expect an update at the HYEFU. If the metric is changed, expect the Opposition to attack the Government for “shifting the goalposts” to make hitting a surplus easier (Treasury was against the idea when it was floated in 2021).
The other change could be the end of the multi-year capital allowance (MYCA). This was a tool created under the last Labour Government to reflect the fact that capital spending is often lumpy and it made little sense to allocate annual capital funding when rolling, multi-year funding would better reflect how this money was spent.
Willis argued that in practice, the allowance was topped up by large amounts each year and often depleted, fuelling “gross amounts of spending”. She suggested in Parliament last week that it was not long for this world.
Allowances tend to be signalled at the BPS so if the MYCA were to be scrapped, this would be a logical place for it. Labour may attack the change as an attempt to reduce capital spending on infrastructure in a bid to get on top of borrowing.
Budget Policy Statement
The BPS is when a Finance Minister gives us the themes and potentially the size of the next Budget.
Willis has already hinted this Budget will be about growth. The size of the operating allowance for Budget 2025 was set at $2.4b, relatively tight by recent standards – less than half the size of the 2022 allowance.
In 2022, Treasury warned this was not even enough to manage cost pressures for existing services, meaning the Government would have to metabolise some existing spending to keep itself standing still, let alone do anything new.
Willis could choose to increase the allowance as the last Government did, but this would look hypocritical, given the fact she ruthlessly prosecuted the last Labour Government for increasing allowances.
We may also get details of the second phase of the Government’s fiscal sustainability exercise. Phase one included $1.5b of baseline spending cuts and the axing of various Labour programmes that fed into Budget 2024.
A Treasury paper from June said phase two would be timed for Budget 2025. It will aim to “secure a sustainable fiscal outlook and drive greater value and results from public expenditure”.
“Doing so requires measures to embed a culture of responsible spending, restore fiscal discipline, right-size the Government’s footprint, and improve the efficiency and productivity of spending,” Treasury officials said.
Phase two will involve setting up “performance plans” for departments and “strategies” for expenditure and balance sheets.
Treasury's blueprint for savings. Photo / Treasury
These plans will “bring together information to understand whether and how an agency will manage within set baselines over the forecast period including trade-offs to manage associated risks and opportunities”, according to Treasury.
There will also be “deep dives” into departments’ spending, although how these work has not yet been detailed.
Treasury warned departments against expecting lots of money and intimated some departments would see a return of “zero budgets”, the term used under the Key-English Government to describe budgets with no new spending, and where cost pressures were funded by departments metabolising their own baseline.
“The Budget 2024 Cabinet paper stated that most agencies should expect to not receive additional funding for cost pressures (i.e. zero Budgets),” Treasury officials said.
They also cautioned against expecting miracles from the cuts.
“[H]istoric experience is that successive savings rounds prove harder, as significant one-off efficiencies have been largely exhausted and lower-value programmes not aligned to priorities have already been scaled or ended,” officials said.
