Donald Trump has been sentenced without penalty in the New York hush money case and wildfires continue to burn through Los Angeles. Video / NZ Herald, AFP
Nicola Willis said easing monetary policy will drive low interest rates and support growth into the future.
She said the coming Budget will include increases to the likes of education (health already has a baked-in increase) but most other departments would not see a spending uplift.
At times in 2024, it looked like Finance Minister Nicola Willis couldn’t win.
The year began with accusations her tax cut plan was not as fiscally-neutral as claimed and would be overly stimulatory, causing unsustainable economic growth that would fuel inflation.
Finance Minister Nicola Willis delivering the Budget Policy Statement in December. Photo / Mark Mitchell
“Look, I find it really hard to celebrate when I know that so many New Zealanders have had such a tough year in our economy. I’m very conscious of that and I’m very conscious of the fact that the government books need significant repair.
“Now I can spend a lot of time lamenting how we got here and that is a story is a story we told at the election, but if you pump too much cash into the economy by quantitative easing and expansionary fiscal policy and interest rates get very high in order to cut inflation, then you do have a real clean-up job to do.
“I can spend a lot of time talking about that, but actually my focus needs to be on what is within my control and taking responsibility for those things,” she said.
As for the recession, Willis said it’s essentially a hangover from the recent inflation spike, with the Reserve Bank admitting it was engineering an interest rate-induced recession to bring inflation down.
Willis said the Government’s job was “now to fix it”.
That fix-it job would have a tailwind in the form of the very entity that helped to cause the recession in the first place: the Reserve Bank, which has already cut the Official Cash Rate by 125 basis points and is forecast to continue cutting this year, reaching 3.6% by December.
One of the only amusing parts of the grim 2021-24 monetary tightening cycle has been watching MPs from all sides of the House creatively decide which aspects of the economic mess are the fault of the Reserve Bank and which can be laid at the feet of this Government and the last.
Willis said lower interest rates are “going to start flowing through into the real economy, and forecasters are pretty united in the view that we will now enter a period of growth”.
She said she’s happy the Government “kept the fiscal goals that we said we would in terms of constraining spending, ensuring a lower package of operating spending than the previous Government had committed to, setting tight allowances for the future, and reprioritising money across government”.
Finance Minister Nicola Willis delivering her first budget. Photo / Mark Mitchell
That is all true. Labour went to the election promising new operating spending of $3.5 billion in 2024, $3.25b in 2025 and $3b in 2026.
Willis delivered new spending of $3.2b in Budget 2024 and trimmed new spending even more in subsequent Budgets, with the next three all having allowances of $2.4b — lower than National promised in its pre-election fiscal plan and well below what Labour promised in 2023, even factoring in the recent tax cuts.
However, the surplus National promised for 2026/27 slipped before it even took office. Treasury’s Half Year Economic and Fiscal Update (Hyefu) forecasts prepared just before the change of government pushed the surplus out a year. Further revisions saw the surplus slip even further into the future, to the point it is now only achievable before the end of the decade thanks to the new ObegalX measure, which the Government will use but Treasury is not keen on.
A Zero Budget for many departments
Willis is going to deliver a Budget this year that looks a lot like a slightly more generous versions of Bill English’s 2010 and 2011 “Zero Budgets”, in which no new spending was made available for departments’ increased costs. This means if costs went up for a department, they would need to be paid for by cutting spending elsewhere.
“We will not be expecting to increase funding for the vast majority of government departments and agencies, with some exceptions,” Willis said.
Health has increased funding secured for the next three years and Willis named education as another area that will receive new funding. Other departments will be less lucky.
“The last Government got into a terrible habit of providing continuous uplifts often beyond the inflation rate, beyond what was happening in the private sector, and that creates massive cost pressure,” Willis said.
Increasing new spending by above $2.4b — a figure far lower than the last Government’s allowances, which once nudged $6b — seems off the table.
“If I was to take an approach of having much more expansionary operating allowances, the impact of that would be one of the most prolonged periods of debt increase that New Zealand has ever seen, and actually, we are a small, exposed economy, and we need to maintain prudent levels of debt,” she said.
David Seymour has floated trimming new spending further. Photo / Mark Mitchell
“Of course, that is a choice that we always face, and we will keep looking at our options if there are significant changes in our external environment. If there are significant changes that we have to address, because that is the responsible way to be,” Willis said.
However, she suggested tightening the screws further might stretch the Government’s mandate.
“The way I think about that is in terms of the principles that we campaigned on, which is we do want to make sure that frontline services continue to get good investment, we do want to make sure that the cost of living stays under control, and we also want to make sure that we are encouraging growth, so within that framework, we will always keep looking at our options because it’s the responsible thing to do,” she said.
Willis noted that Seymour, Act and the whole coalition had signed up to the most recent Budget Policy Statement, which included those $2.4b allowances.
She said this path was “prudent” but will “require trade-offs”.
“This is not going to be a period in which we can say yes to every funding request that comes through our door,” she said.
Alongside setting an expectation of no new funding for most departments, Willis foreshadowed two other planks of 2025’s budget savings exercise, which will throw up opportunities for the Government to reduce existing spending.
Agencies will be given performance plans in which they will be asked to “much more closely identify what it is they’re spending on so that ministers can be much clearer about whether that spending aligns with the Government’s priorities”.
“That will throw up significant savings opportunities because there is still work occurring across government, which doesn’t align with our priorities,” she said.
The third plank is a “targeted savings programme”, in which ministers are asked to “find examples of things that they don’t think are driving high value for money, where they think those dollars could be better spent elsewhere”.
The theme of the Budget will be economic growth (most Finance Ministers, if asked, would say their Budgets are also about growth).
Finance Minister Nicola Willis with Winston Peters as she announced a delay on making a decision about the new interisland ferries. Photo / Mark Mitchell
But it is the non-fiscal side of things where the Government hopes to get a lot of growth. Expect to hear much about foreign investment in the next year.
“There’s a lot of money washing around the world. The task for New Zealand is to have more invested here in industries and projects that will drive growth and development,” Willis said.
She hopes resource management reform and the fast-track legislation will also drive growth, arguing the Resource Management Act was “weaponised” against development.
Entitlements
Treasury is keen for the Government to look at some of the many universal entitlements New Zealanders receive, regardless of whether they are wealthy or not.
It doesn’t look like policy is coming on this soon, with Willis saying she was “conscious to keep within our electoral mandate and the coalition commitments that we’ve made — that’s a really important thing for me to underscore”.
However, she said that “in the future” the country is “going to have to be more targeted about where we provide support and entitlements”.
She said the current system was problematic in that many entitlements were claimed by wealthy people and paid for by hiking taxes on workers of all income levels.
“There are a lot of entitlements and support that have crept into the middle and upper class, and I would prefer to have a system where we don’t keep hiking tax rates in order to give people’s money back to them in the form of different entitlements,” Willis said.
She noted that her own family would have been eligible for thousands of dollars of Best Start payments, a $73 a week payment to all parents with children under 1 (the payment is means tested for families of children aged 1 to 3), which was introduced by Labour in 2018 (Willis’ children were born prior to the payment coming into force).
“Is that really necessary when there’s a two-income household?” Willis said.
She said some entitlements were “mission critical”.
These included “having a social safety net with welfare support available for people in times of unemployment, for people who are disabled, that is really, really important in our community”.
However, she said “continuing to add to the layer cake and entitlements at the expense of creating very high tax rates is not the path I want us going down”.
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.
