Prime Minister Christopher Luxon (left) and Finance Minister Nicola Willis. Photo / Mark Mitchell
Treasury has warned the Government that a politically toxic cocktail of spending cuts, effective tax increases and even the sale of state assets might be needed to beat the books back into order while delivering on its spending promises.
Prime Minister Christopher Luxon ruled out asset sales in Opposition. His party has kept to that commitment so far. Finance Minister Nicola Willis told the Herald Luxon’s remarks were still the Government’s policy and the Government was “not intending to sell” assets but it was investigating how the current assets were performing.
On November 27, the day Luxon and Willis were sworn in, Willis received advice on implementing the Government’s fiscal strategy from Treasury.
Officials floated “active management of the balance sheet” to create headroom to deliver on the Government’s priorities.
“For example, review of ownership rationales can allow for capital recycling, reducing net capital expenditure, while improving the performance of assets and liabilities can have benefits for the fiscal outlook,” the advice said.
It went on to say the Crown had “$537 billion of assets” and “$345b of liabilities” and “is subject to a number of contingent and implicit risks”.
It said that more “active management”, meaning selling assets that there was little rationale for owning, could support the Government’s fiscal strategy by freeing up capital. Treasury argued for “capital recycling, reducing net capital expenditure” because the money raised from asset sales would be used to fund capital spending in things like infrastructure, instead of having that spending funded by borrowing.
This could be similar to the Future Investment Fund, which was created by the Key Government to invest money raised from asset sales back into capital investment.
The advice also said looking at ownership rationales could improve the performance of state assets by increasing “the return on commercial assets, the financial sustainability of Crown entities, or generating efficiencies in balance sheet management practice”.
Willis said: “Treasury’s advice was simply reflecting the fact that New Zealand’s state-owned assets could be better managed and their starting position for that has been: let’s understand, in each case, why we own it and what it’s there to achieve.”
“I don’t know what that advice will say about what those assets are and how well they’re managed. I await that and I’ve got an open mind to that advice,” she said.
She said Luxon had said “no” to asset sales and there was no current work under way to sell them.
Act leader and Associate Finance Minister David Seymour told Newsroom Pro in February that the Government had, as per Treasury’s advice, looked at its ownership of State-Owned Enterprises.
“We’re doing a very preliminary look at what the Government’s purpose is in owning different state-owned enterprises,” Seymour told Newsroom Pro.
Seymour told the Herald last night that there was “no work under way or plans or policy to divest SOEs [State-Owned Enterprises] or sell down the ownership of any mixed-ownership model company or anything like that”.
However, he added “it’s fair to say that we are working on improving the clarity and the purpose of owning SOEs, but that work I can’t say more about because we’re in the midst of it”.
Seymour suggested he continued to be disappointed in the SOEs’ performance.
“It’s a matter of public record that the SOEs’ returns on equity are low and have been low for some time, then the debate is, is that justified by the fact they fulfil other purposes?” he said.
“At the moment, I am committed to the Government that has no policy of making changes, but it’s no secret that Act has always been at the forefront of questioning what the role of Government is, in particular in owning commercial enterprises.”
Labour’s Finance spokeswoman Barbara Edmonds said the documents were contradictory to what she had been told in Parliament that no assets would be sold.
She said Luxon needed to be “crystal clear” about what his plans were.
In Government with Labour, NZ First’s Shane Jones received advice on rolling the portfolio of SOEs into a single entity, like Temasek, the Singaporean company that owns state-owned enterprises on behalf of the Singaporean Government. The previous Government did not like the idea this company would be free to actively manage the portfolio of SOEs, buying and selling as it pleased, and the idea was shelved.
The Treasury document was recently released along with a suite of documents relating to WIllis’ December Mini-Budget.
Those documents also included a climate risk assessment that showed the Government’s early decisions would see an additional 11.3-12.4 megatonnes of CO2-equivalent emissions, mainly thanks to the end of decarbonisation subsidies for industry.
The advice reiterated what ministers have said: that axing the Clean Car Discount and the Government Investment in Decarbonising Industry (GIDI) fund did not pose a serious risk to the first emissions budget. However the advice added that this could pose a problem to the second and third, “where the initiatives formed a substantial proportion of the modelled emissions reductions from the transport and industry sectors and margins for achieving these emissions budgets are expected to be tight”.
Willis said the Government “remains committed to meeting New Zealand’s climate targets but is taking a different approach to that of the previous government. This approach will be set out in the second Emissions Reduction Plan, which will be published before the end of 2024″.
The documents also included Treasury’s costings of National’s manifesto commitments, which were at least $1b more than National had set aside in its pre-election fiscal plan. Those costings did not include figures for policies that are yet to be agreed and announced, including income tax cuts in the forthcoming Budget. Some policies saved more than National had intended, while others, like the climate dividend and changing the way benefits were indexed, saved less.
In a separate document, Treasury warned that the economic and fiscal situation was deteriorating quickly and the economy and the Government’s books were in worse shape than forecast prior to the election. Treasury warned tax revenue was “cumulatively $1.5b lower in the four years to 2026/27 and $900 million lower in 2026/27, compared to the Prefu [Pre-Election Economic and Fiscal Update, a set of forecasts released prior to the election]”.
The main document offered Treasury’s view on setting the Government’s “fiscal strategy”, the term for how the Government taxes and spends and the impact this has on the economy. It said Willis had two big challenges: freeing up enough money to “fund [her] manifesto” and orienting the Government to “prioritise fiscal discipline”.
It offered three suggestions, all of which seem politically unpalatable. First, to decrease spending through “centrally directed savings exercises”. These would kill specific programmes or impose “top-down reductions to agency baselines [budgets]”.
The second suggestion was to constrain new spending through “sequencing manifesto commitments across multiple Budgets” and adopting what Treasury calls its “Fiscal Management Approach”, which is to force departments to make trade-offs by curtailing the allocation of new spending.
The third suggestion was to increase revenue through “structural reform of the tax system” (in separate papers, Treasury has argued in favour of a capital gains tax or CGT). Another option is by “letting fiscal drag continue to increase revenue raised through personal income tax”.
Fiscal drag is the process by which income earners pay higher and higher effective rates of tax because wage inflation drags them into higher tax brackets. The Government plans to address this by adjusting tax brackets slightly, but it will only capture a portion of the inflation that has taken place since the last adjustment in 2010.
The advice puts the Government in a difficult position because it narrows the options to choosing between new taxes, like a CGT, which the coalition is dead against, or relying on fiscal drag to fund the Government, despite addressing fiscal drag being at the heart of National’s tax policy.
Willis told the Herald she did not believe in the dichotomy between tax reform and fiscal drag and that the Government should first look at whether it was spending money effectively.
As for sequencing, in her Budget Policy Statement in March, prior to the final Budget being agreed, Willis promised tax relief from July. The Government’s Family Boost childcare tax credit scheme will begin to pay out from July.
However, Willis would not confirm whether the Government’s income tax changes would trigger on July 1 as promised on the campaign. When asked on Thursday and Monday, Willis said the answer would be revealed in the Budget.
There has been some speculation payroll systems may struggle to be updated for the change, which would have to take effect almost exactly one month after Budget day.
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.
Expectations tempered around return to surplus in 2027/28.