I think we’re going to be talking about the word a fair bit in the next few weeks as we head toward Budget Day.
Did I say talking? Sorry, I meant arguing.
Is austerity a good thing or bad? Will this actually be
an austerity Budget?
Austerity is a grim-sounding word, although not inherently negative.
It can mean severe and strict, or it can just mean disciplined and unflashy.
But let’s be honest, nobody wants to be described as austere.
It’s not the kind of quality that’s going to get you invited to a lot of parties.
Politicians typically don’t want to be tainted with it.
They prefer to present themselves as fiscally responsible or prudent ... even when they are spending quite a lot of money.
But the next few weeks will be a tricky political balancing act for Finance Minister Nicola Willis.
She delivered a hard-hitting pre-Budget speech last week, which made it clear that there won’t be much to get excited about on the big day (May 22).
“No lolly scramble”, to use her words.
Willis has cut the Government’s operating allowance – the amount of money available for new discretionary spending – from $2.4 billion to $1.3b.
That’s razor thin and effectively means anything new the Government wants to fund will have to come from cuts elsewhere.
That immediately had critics on the left calling it an “austerity Budget”.
Critics of fiscal austerity point out that it often exacerbates economic downturns because it means the state sector is contracting at the same time as the private sector.
They have a point.
There are examples of Governments tightening their finances during times of economic adversity that now look like errors of judgment.
In New Zealand in the early 1930s, the incumbent coalition Government tried to cut spending after the Wall Street crash and global trade war that sparked the Great Depression.
It exacerbated the downturn. Unemployment spiked dramatically, and the public elected the first Labour Government in a landslide in 1935.
That’s the way it was taught in Fifth Form history anyway.
I’m sure that narrative still influences a lot of the political policy thinking in this country.
In the UK, the Conservative Party’s fiscal austerity policy after the GFC (they came to power in 2010) was also widely criticised as slowing the country’s recovery.
I assume our Government was hoping to see a stronger recovery by now that would have given it more scope to focus on balancing the books.
But it seems determined to stay on track with plans to get the Crown accounts out of deficit by the end of 2028/29, even in the face of global trade turmoil that is expected to dampen growth and reduce tax revenue.
Despite that, numerous critics on the right – more concerned about New Zealand’s long-term fiscal outlook – make the point that a Budget which spends more than the previous year isn’t austere at all.
They argue that the Government needs to be bolder with spending cuts to deal with the country’s burgeoning debt before it becomes unmanageable.
Herald columnist Matthew Hooton points out that Willis will still “spend more than any finance minister in New Zealand’s history, beating her own record set this year”.
Of course, it’s not really surprising that the nominal spend keeps rising. The population keeps growing, and inflation reduces the value of each dollar.
A better measure of the relative size of government in the economy is its spending as a ratio of GDP.
In 2019, core Crown expenses were 28.7% of GDP. They blew out to 34.5% in 2020.
The Government has stated its objective is to reduce core Crown expenses towards 30% of GDP.
According to Treasury forecasts in the last half-year fiscal update, core Crown expenses will be 33.9% of GDP in 2025/26.
They are expected to decline to 31.5% by the end of the forecast period in 2028/29.
So Hooton’s argument – that this Government hasn’t significantly unwound the extra spending introduced during the Covid era – still stacks up.
Even that proposed reduction in spending to GDP will be difficult to achieve now, given that it relies on growth to do the heavy lifting, and it is now expected to be lower.
For the record, Willis still seems to be calling this a “Growth Budget”.
At least that was the headline on the published version of the pre-Budget speech last week.
The Government is (somewhat understandably) unprepared to deal with the inevitable political backlash from the kind of cuts those on the right are proposing.
So it is staking a lot on achieving some decent growth in the next couple of years.
The first part of Willis’ speech stuck to the “going for growth” mantra we’ve heard a lot this year.
“The Government’s growth ambition has been front and centre as we’ve put the Budget together,” she said.
But then it takes an austere turn, running through the big ugly numbers on New Zealand’s national debt and highlighting the tariff troubles and weaker economic outlook.
“This is not the time to kick the can down the road,” Willis said.
Who’d be a Finance Minister, eh?
I suspect the last few weeks have been very difficult for her.
Willis well understands the arguments of those on her right and those on her left.
I’m sure she knows this Budget won’t do much to turbo-charge an already lacklustre recovery.
But she is equally aware that after spending our way through Covid, we can’t afford more fiscal stimulus right now.
As Treasury pointed out in a recent research paper, for the time being, that burden must fall on monetary policy and interest rate cuts.
The Budgets we tend to associate with austerity are those like Ruth Richardson’s “Mother of All Budgets” in 1991.
This won’t be that.
But it won’t be much fun either, for anyone, least of all the Finance Minister.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.
