Finance Minister Nicola Willis during the release of the Budget Policy Statement. Photo / Mark Mitchell
ANALYSIS
An English graduate, Finance Minister Nicola Willis knew April would be the cruellest month.
In March, she delivered a tardy Budget Policy Statement, already one of the latest ever, which did not include figures for operating and capital allowances - an embarrassing omission, particularly given recent finance ministers have all managed to get sign-off on their allowances before publishing a BPS.
In April, the work begins. Those allowances must now be agreed between coalition partners, and the Budget signed-off for delivery in May.
The BPS is a creature of the Fiscal Responsibility Act, which, though repealed, lives on in parasitic form inside the Public Finance Act. Not all BPSs have included allowances, though recent ones all have.
A late election and late Government formation give Willis some cover, but not much. One of her strongest attacks on predecessor Grant Robertson was his habit of setting operating allowances in a BPS and then blowing them in the Budget, a habit emblematic, Willis argued, of Labour’s lax fiscal management.
Willis risks looking a bit foolish if she doesn’t even set operating allowances. Her commitment to deliver new operating spending no greater than $3.5 billion already looks dangerously close to breaking her fiscal plan promise of an allowance of $3.25b - although in fairness to her, Labour expanded the allowances by billions of dollars each budget, creating a vastly bigger state. The difference between $3.25b and $3.5b looks like a rounding error by comparison.
There are many different ways of measuring the former Government’s fiscal responsibility or lack thereof. The fairest is probably looking at Government spending as a percentage of GDP, which is currently about 32 per cent. When the last National Government left office it was 28 per cent of GDP.
That 4 per cent difference equates to about $16b. That’s no small change. It’s a good part of the Education budget of $20b, for example. For all the whinging from party activists about New Zealand’s centrist drift, there is a material difference between National and Labour’s appetite for spending - and it is large.
The question looming over Willis’ Budget - and one her BPS goes some way to answering - is how she writes herself into this story.
The problem for Labour is that the behind-the-scenes disputes, the light-on-detail BPS, and the ugly stories of public service cuts, are potentially where Willis’s woes end and Labour’s begin.
The best thing for Labour would be for Willis to resurrect Ruth Richardson’s era of austerity, a rare breed of politician who weighted ideological purity above political acumen. The work is already part done for them. Willis is only the second woman to be Finance Minister after Richardson herself - too many in the public are happy to make the lazy comparison.
Yet the question of austerity is a fair one, and the comparison between Richardson’s Budgets and whatever this Government might put up is worth exploring, if only for the fact the Budgets she delivered as Finance Minister very nearly made her Government the first one-termer in National Party history. It would be very, very good for Labour, were Willis to follow the path beaten by Richardson.
Unfortunately for the opposition. Willis is just the right amount of Tory. Not too nasty, not too nice - she’s situated herself firmly in the Goldilocks zone of Toryness.
Labour will recognise the feeling well. It’s the centrist space former Finance Minister Grant Robertson occupied during his first few Budgets.
Willis is more like Robertson than Richardson. Her operating allowance of “up to” $3.5b (translation: about $3.49999b) is almost exactly what Robertson went to the election with in 2023.
Adjusted for inflation, it is about the same as the $2.8b allowance Robertson delivered in his 2018 Budget, and larger than allowances delivered during the Key-English era. The $3.5b increase to Government spending mean cost pressures will be addressed (but possibly not met). It will mean one of the more generous right-wing Governments in New Zealand history.
The current round of public sector cuts are brutal, no question, but the plan to shave 6.5 or 7.5 per cent from agency baselines will only save $1.5b a year (this includes the savings booked by the former Labour Government).
Government spending is forecast to rise from $144.7 in the coming Budget to $151.1b and then $161.1b by 2027. Those spending levels will change at the Budget, and probably reduce slightly, as the Government’s savings drive takes effect, but spending will still almost certainly rise year-on-year.
Comparing it to spending levels in previous years shows how far away from austerity this Budget is likely to be. In 1990, net expenditure (the measure of spending used then) was $29.2b, it rose to $30.2b in 1991, before falling towards $28.4b by 1994.
That is what real austerity looks like: spending levels falling in nominal terms, while the cost of delivering services rise. Core expenditure falling by 5 per cent, as it did between 1990 and 1994, is inconceivable in this Budget.
Reducing expenditure like that means nominal cuts to benefits, as Richardson did, rather than increasing them more slowly as Willis will do. There is no question there will be social consequences. The former Children’s Commissioner said the benefit indexation regime the Government has overturned was one of the single biggest things the Government could do to alleviate child poverty. The change will hurt people on low incomes, and official advice warned it is likely to increase child poverty. These changes will hurt people on low incomes no question, but the quantum of pain is on an altogether different scale to the early 1990s.
The outrage and swift U-turn on disability spending is instructive. The Government has a clear idea of what services it wants to cut, and what services it wants to save. The scrambling to save (and increase) funding for disability services suggests the Government has a good feel for what services the public wants kept too. The tussle over how much school lunch funding to save will be the next test of this.
The Budget looks likely to be fairly orthodox, with spending directed towards core services like health and education, and away from things with broader objectives. This will have consequences. MBIE staff have already warned of the ageing IT networks that keep the public sector running. However surgical the Government hopes the savings exercise to be, there is always a risk one ministry will nip an artery. Ministers should prepare to reap the inevitable “unintended consequences” of the savings drive later in the term.
But in the present, the Budget is likely to be boring enough for the Government to survive. It will include tax cuts. People voted for them, and the Government will deliver them - it cannot put the public through the pain of public sector cuts without reaping the dividend.
As Tories from around the Pacific (including former Australian Prime Minister John Howard) gathered in Wellington this week for the IDU jamboree, conversation must inevitably have drifted to the sad example set by the first Budget of Liberal Prime Minister Tony Abbott and his Treasurer Joe Hockey. The cuts were too severe and their only dividend was fiscal consolidation for the Treasurer and Treasury. The Budget fell apart, with key parts of it so unpopular they were abandoned.
If the Government is going to cut, the public needs to share in the reward.
If Willis is able to find moderation, Labour will be the loser. If she can occupy the blueish social democratic space held by almost every National Government gone by, she will be very difficult to unseat.
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.
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