Debt is projected to increase by $60 to $70 billion over the next five years. Video \ Mark Mitchell
Opinion by Matthew Hooton
Matthew Hooton has over 30 years’ experience in political and corporate communications and strategy for clients, including the National and Act parties and the Mayor of Auckland.
Gross debt is projected to increase by $73 billion by 2029.
Debt servicing costs will rise, with concerns about higher interest rates impacting future government finances.
Treasury forecasts 3% GDP growth by 2027, with unemployment below 5% and inflation around 2%.
Whatever its other merits – and they are few and far between – Nicola Willis’ second Budget at least forces Labour to admit it must introduce massive new taxes if Chris Hipkins returns to power next year.
If Willis fully levelled with us, she’d also have to admit even she’llneed to increase tax if the coalition gets a second term. She can’t expect to find another $2.7 billion a year from something like pay-equity every year to paper over the fiscal cracks.
Those pay-equity changes by Act deputy leader Brooke van Velden have delivered roughly half the $21b Willis has been able to cut to fund new spending in health, education, defence and law and order, plus faster depreciation of new plant and equipment. The rest comes mainly from changes to KiwiSaver, which also are one-offs.
It turns out Act leader David Seymour was right to say van Velden had saved this year’s Budget, along with the women and their male colleagues who now won’t get unrealistic pay-equity wage boosts.
Yet after all that juggling, and the nonsense from Labour about “austerity” and from National about “growth”, everything has got worse again, even when compared with the debt blowout revealed in December that shocked markets.
Using the old Obegal measure happily used by Finance Ministers for decades, the operating deficit has blown out, compared with December, by another $7.9b over the next four years.
It‘s worse under the Government‘s new Obegalx measure, adopted in December against Treasury’s advice, which makes the numbers look a bit better. Karmically, it‘s blown out by $9.8b over the next four years compared with when it was unveiled just five months ago.
Gross debt – the amount taxpayers must service – will now increase by another $73b by 2029, reaching a massive $283b. In its first five years, the Luxon Government will have increased gross debt by over $100b. The Ardern-Hipkins regime only managed an $88b blowout in its fiscally vandalous six years.
Finance Minister Nicola Willis' Budget forecasts a $200 million Obegalx surplus in 2029 but it is illusory given the post-2030 superannuation and healthcare blowouts Treasury has warned us about, Matthew Hooton writes. Photo / Mark Mitchell
Because governments declare things as assets even when they don’t generate revenue nor can be sold, they can argue the net-debt outlook isn’t as bad. It‘ll blow out by “only” $64b in the Luxon Government‘s first five years, compared with $118b over Labour’s six.
The ongoing debt deterioration means servicing it will now cost $3.6b more over the next four years. The Government admits it‘ll now cost an average of $11b a year, reaching $12.7b in 2028/29, more than the amount spent on our entire primary-school, police and defence budgets combined.
But that‘s probably an underestimate.
The whole debt-servicing strategy is based on assumptions, made just after Donald Trump’s Liberation Day, that yields on New Zealand’s 10-year government bonds will fall to 4.3% next month and stay there for the next four years. Yesterday, they were 4.7%, nearly 10% higher.
Unless you think the US and global economies will do a whole lot better over the next four years than anyone believes, it would be prudent to whack another billion a year on to the Budget‘s official debt-servicing forecasts.
Treasury itself says higher current bond yields risk higher interest rates, which would worsen the Government‘s debt-financing costs. For the wider economy, Treasury says higher yields mean tighter financial conditions and higher fixed-term mortgage rates.
Almost on cue, US 20-year bond yields soared past 5% this week for the first time since the Global Financial Crisis. If Willis gets away with borrowing her planned $73b increase in gross debt at just 4.3%, she’ll demonstrate hitherto unknown reserves of luck. Much more likely, the debt outlook will worsen again in the next update in December.
The forecast of a token $200m Obegalx surplus in 2028/29 therefore can’t be taken seriously. To believe that, you must believe the coalition really plans – to give just one example – to confirm in its election-year Budget that it will cut the police budget by $220m in its second term, as yesterday’s documents suggest.
No one at all forecasts there will ever again be a surplus under the old Obegal measure used by every previous Finance Minister this century.
Finance Minister Nicola Willis during her presentation at the Budget 2025 lock-up in the Beehive. Photo / Mark Mitchell
Even if Willis does manage a token $200m Obegalx surplus in 2029, it will vanish immediately given the post-2030 superannuation and healthcare blowouts the Treasury has warned us about for over 20 years.
Arguments between National and Labour about whether we should aim for debt of 40% or 50% of GDP are irrelevant. By the end of next decade, we’ll reach 60% anyway, and be well on our way to 100% a decade later – even assuming no global economic shocks, earthquakes or major floods in the meantime.
More important than those numbers are what our debt costs us, since we already pay higher interest than almost any other country we usually compare ourselves with.
It already costs us as much in debt-servicing to build a $10b motorway as it would for Japan to build a $30b one, and that will only get worse as our debt continues to grow.
If this is bad for National’s electoral credibility, it‘s much worse for Labour.
So far, it‘s difficult to recall Labour agreeing with any of the coalition’s tens of billions of dollars of cuts, or promising to reverse any of Willis’ new spending in health, education, defence and law and order. To the contrary, Labour regularly calls for billions more again to be spent on hospitals and schools and for even more borrowing – and associated debt-servicing – for rail, roads and other infrastructure.
Unless Labour is comfortable with us reaching debt of 100% of GDP even earlier than under current settings, it can no longer fudge the tax question. And it‘s no longer just a few more billion in tax Labour must raise through each Budget cycle, but tens of billions more.
After a quarter-century of nonsense about knowledge waves, step changes, economic transformations and now investment agencies, no political party should get away with claiming their particular form of corporate welfare will boost economic growth and avoid the hard choice between massively raising taxes or slashing the welfare state.
To her credit, Willis admitted yesterday that her new and very welcome “Investment Boost” is projected to increase GDP by only 1% by 2045. More such honesty is needed from everyone in politics.
The fact is that decades of poor choices since the 1970s and particularly since 2008 have left us a poor country. Our economy is insufficiently productive to support first-world living standards and social services. We had better get used to that because, until we do, we’ll keep electing governments that just keep making things worse and worse.
Disclosure: Matthew Hooton has over 30 years’ experience in political and corporate communications and strategy for clients in Australasia, Asia, Europe and North America, including the National and Act parties and the Mayor of Auckland.
