To use incoming Finance Minister Nicola Willis’ words, Labour has wrecked the joint.
Tuesday’s Pre-Election Economic and Fiscal Update (Prefu) took us right back to the horrors of 1984 and 1990.
A similarly urgent response is now needed, certainly before Christmas, or New Zealand faces a permanent structural deficit, leading eventually to a 2009 Greek or 2014 Brazilian-type collapse.
The 1984 snap election wasn’t caused by Marilyn Waring, who was cynically used as a scapegoat by Robert Muldoon.
The real reason was that Muldoon’s centralisation, state control and overspending had so wrecked the economy that he dared not publish a pre-election Budget.
As well as his historic economic reforms, including abolishing farm subsidies and other corporate welfare, Roger Douglas made similarly heroic efforts to control spending and reduce borrowing, with significant success.
His successor, David Caygill, lacked his mettle.
In 1990, the outgoing Labour Government repeated Muldoon’s lies about the Government’s books.
It claimed an $89 million surplus knowing it really faced a combined deficit of $14.4 billion over the four financial years from 1990/91 — around $29.7b in today’s money.
Such flagrant lying about the state of the books is no longer possible, at least by governments, thanks to Ruth Richardson’s Fiscal Responsibility Act.
New Zealand voters and incoming governments can never again say they weren’t warned.
Tuesday’s Prefu forecasts an operating deficit of $27.6b over the first four forecast years, a similar amount in real dollars to what Richardson faced in 1990.
In fact, it’s much worse.
The 1990 numbers assumed the Government would maintain Caygill’s wild spending.
Tuesday’s numbers already have big spending cuts built into them.
Before Treasury finalised the Prefu, Grant Robertson warranted, as required under the Public Finance Act 1989, that he had “ensured all government decisions and other circumstances as at 28 August 2023 of which I was aware and that had material economic or fiscal implications have been communicated to the Secretary to the Treasury”.
The law requires the Treasury to accept its minister’s word, including on future spending plans.
To take Robertson seriously, you have to believe he and his colleagues, after six years of profligacy, are belatedly committed to unprecedented fiscal rectitude, maintaining it to 2026/27.
You’d need to believe Robertson will cut spending, not just in real but in dollar terms, on schools, universities, the police and housing over the next three years, and that he’d slash about $1.9b a year from the Wellington bureaucracy, a quarter of what it spends now.
The cost of the dole would go up by only $500m and health would barely keep up with inflation.
Likewise, despite Labour’s National Defence Strategy released last month, identifying China and climate change as threats requiring big new investments in the military, Robertson now claims that the defence budget will flatline.
On revenue, Robertson’s targets depend on record net immigration of 250,000 over four years, without extra infrastructure, education or health costs associated with the new arrivals.
If Robertson believes any of this, it’s clear Treasury doesn’t.
Pointedly, it blames the fiscal deterioration on unexpected government spending as much as on wider economic factors.
It says that if the next Government increases spending each year by even $1b more than Robertson’s baselines — perhaps by reversing his police, education and housing cuts — then New Zealand will never return to surplus.
The same is true if tax revenue falls by that amount, barely a rounding error.
Either would mean debt servicing costs, already forecast to reach nearly $10b in 2026/27 — four times what Robertson would spend on police that year — would blow out further.
Debt servicing would keep rising every year into the future, with ever more of your taxes going to foreign bondholders rather than schools, until we couldn’t afford it anymore, leading to default.
Unsurprisingly, yields on 10-year government bonds have increased by 25 per cent since May, and now sit above 5 per cent, levels not seen since immediately after the Christchurch earthquakes.
Bondholders are now demanding much higher returns to keep lending us money.
Even Act and the Taxpayers’ Union are reviewing their calls for immediate tax cuts.
No credible government, anywhere in the world, would even be thinking of immediate spending increases or tax cuts when facing a combination of high inflation, rising interest rates and a fiscal crisis. Inexplicably, National still is.
Christopher Luxon claimed this week that he still plans to increase health and education spending every year, by at least the rate of inflation, and for population growth and other pressures.
He promises a so-far uncosted crackdown on law and order.
Before he could do either, Willis would need to find the money to reverse Robertson’s planned cuts in those areas.
National has also tried to sell a lie that its tax policy is fully funded and non-inflationary.
It is neither.
For the numbers to add up, another $23b of foreign cash would need to flow into New Zealand to buy expensive houses and pay the associated new taxes, fuelling aggregate demand when the economy is already at capacity.
Of course, that $23b won’t show up. The most generous credible estimates are that National is billions short of raising the new revenue it claims.
National would therefore need to borrow the difference, on top of Robertson’s $27.6b, despite his spending cuts.
To retain credibility and not wreck the joint next year, Willis must postpone tax cuts to 2025/26.
She then needs to deliver Robertson’s $8b of spending cuts and not increase spending on health, education, police or anything else in 2024/25.
Her own additional $8b of spending cuts must also proceed, but the full $16b must be redirected to reducing the deficit.
All this should be announced in an emergency mini-Budget before Christmas to reduce bond yields and mortgage interest rates.
Even then, debt would still keep rising. Before presenting her first full Budget in May, Willis would ideally find further cuts to bridge it. Cancelling Wellington Christmas parties won’t touch the sides. Deep cuts into entitlements and abolishing whole departments and programmes will be necessary.
Former Finance Minister Bill English aimed for zero budgets. Willis needs to deliver below-zero budgets.
This would cause pain and require political integrity. But, by the middle of next year, inflation would be defeated, interest rates would be falling, the economy would be booming, untold billions in debt servicing would be avoided, and Willis could begin investing in better schools and the tougher criminal justice system she has promised.
The alternative is more borrowing, higher debt, higher inflation and higher interest rates than even Robertson has managed. Her legacy would be worse than his.
- 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.