But it will be a false dawn.
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That is an Argentinian-type scenario.
The challenge is that there is currently no consensus within the parties that make up either the centre-right or the centre-left blocs in Parliament on how to address what will very soon become a crisis.
This will come into focus later this year when Treasury presents a revised Long-Term Fiscal Statement.
Treasury set the scenario out in the 2021 Long-Term Fiscal Statement.
At the heart of the issue is demographic change caused by an ageing population and the consequent increased demand for New Zealand Superannuation and health spending.
Forecasts presented at last year’s Budget show spending on New Zealand Super over the next 10 years rising from the current $23.2b to $40.5b a year. Health would rise by a much more modest $2.9b over the same period.
Treasury says Super expenses will increase from 5% of GDP in 2021 to 7.7% by 2061, while health expenditure would increase from 6.9% of GDP in 2021 to 10.6% in 2061.
All up, Super and health currently absorb nearly 42% of all taxation receipts.
Treasury concluded in the Long-Term Fiscal Statement that the gap between expenditure and revenue would grow significantly.
“If this continues, net debt will start increasing exponentially,” the statement said.
“Increases in debt to higher levels will make achieving fiscal sustainability more challenging as higher debt levels put upward pressure on interest rates and subsequently debt-financing costs.”
Treasury offered two possible scenarios to deal with the growing debt; increase taxes or reduce spending, particularly Super and health spending.
But neither side of politics has the political coin to do either.
The Government has no room to move on either of the Treasury scenarios.
It cannot cut Super costs and it cannot raise more revenue.
It has made matters worse for itself with the 2024 tax cuts, which are estimated to cost $14.725b over five years to 2027, contributing to a forecast operating balance excluding gains and losses (Obegal) deficit of $17.317b.
That ups the stakes for Christopher Luxon and Willis and, if they form the next Government, will require that they stare New Zealand First down over its insistence on no changes to Super.
Signs are not good
National went into the last election campaign proposing to gradually raise the Super eligibility age from 2044. Act agreed but wanted to start now.
NZ First wanted no change and in the coalition negotiations, National buckled.
Despite 59 of the coalition’s 67 seats favouring change, National conceded New Zealand First’s “no change” demand, and then doubled down by promising both tax cuts and no new taxes.
Labour also went into the campaign promising no change to Super, though there are now signs it may review that. Some senior figures are even musing about trying to do a bipartisan deal with National.
Willis has said she wants to see Treasury provide the intellectual leadership of the economic policy debate. And under new Treasury Secretary Iain Rennie, with Willis’ approval, it has launched a series of documents, speeches and briefings all pointing to the future fiscal crisis.
This is reminiscent of the lead-up to the 1984 election, when Treasury officials highlighted to a variety of audiences the unsustainable nature of Sir Robert Muldoon’s fiscal policies.
So Rennie and Treasury’s chief economist Dominick Stephens kicked off the debate with an appearance before the Finance and Expenditure Select Committee last December.
“In terms of some of the comparisons we’ve looked at for anything, New Zealand has kept expenditure relatively high compared to many of our comparators who actually unwound that spike faster than we have,” Rennie told the committee.
He was even more explicit in a speech earlier this year, where he directly addressed the interplay between fiscal policy and economic policy generally.
“Simply limiting spending growth in the short term and delivering existing services more efficiently will not be enough,” Rennie said.
“Achieving medium-term fiscal sustainability will require choices by successive Governments, which looks at the underlying policy settings that are the sources of growing cost pressures and transfer[s] spending or considers more sustainable ways to fund them.”
Rennie introduced an extra dimension to the debate, noting that levers to bend the economic curve, such as changes to tax settings or to increase public investment, could have an impact on our ability to bend the fiscal curve.
Explanations needed
So, in an ideal world, Willis would set the scene for these debates in her Budget this year.
That, however, may be a step too far. She will not have the political space to do that.
Already, she will have to explain how she has managed to cut the annual operating allowance from $2.4b – a figure even Treasury said was too low – to $1.3b.
Last August, she told Parliament that the Government had already pre-committed $1.37b per annum against the Budget 2025 allowance to meet forecast demographic and price pressures on Health New Zealand Te Whatu Ora.
And she has promised that there will be increased expenditure on defence, law and order and education.
To accommodate all this, she is promising cuts in existing expenditure – or “reprioritisations”, as she likes to call them.
There is widespread speculation one such likely cut would be the Government contribution to KiwiSaver, which comes to $1.1b a year.
That might get her out of jail this year but the full impact of Trump’s tariffs has yet to be measured – so even last year’s forecasts might now be in question.
The problem is that as the return to Obegal surplus – now optimistically forecast for 2028 – gets closer to 2030, it runs straight into the long-term structural deficits.
Achieving that surplus is a part of the solution to restore long-term fiscal sustainability but it will not be sufficient.
Willis will have to provide that answer when the Long-Term Fiscal Statement appears later this year. That may be the real Budget.
