Fall out expected over fiery first reading of the Treaty Principles Bill and Prime Minister hopes to meet with leaders at APEC summit. Video / NZ Herald
Opinion by Matthew Hooton
Matthew Hooton has more than 30 years’ experience in political and corporate strategy, including the National and Act parties.
Treasury’s Half-Year Economic and Fiscal Update is due on December 17
It will be accompanied by Nicola Willis’ Budget Policy Statement
In May Treasury forecasted growth to be 2.7% this financial year
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.
OPINION
The first report card on the coalition Government’s economic management is outon December 17. In fact, Finance Minister Nicola Willis has probably received most of the grades to appear in Treasury’s Half-Year Economic and Fiscal Update (HYEFU) already. It’s now more a question of how she plans to break them to us and what she will do in response.
This year’s HYEFU would always have additional significance as the first such update covering a full calendar year since the election and the decisions the Government has and hasn’t made since, plus their immediate effects on 2024/25 and what’s now picked to happen through to 2029.
The HYEFU will be accompanied by Willis’ Budget Policy Statement (BPS), outlining how she plans to turn the economic and fiscal numbers around when she presents her second Budget in May.
If, as expected, the forecasts are worse than last December and even against the Budget six months ago, this year’s BPS will need to provide a new and credible path forward.
Finance Minister Nicola Willis has proposed to better capitalise and expand Kiwibank. Photo / Mark Mitchell
In May, Treasury thought headline growth would be 2.7% this financial year and 3.2% heading into the election. Willis would be extremely lucky if those numbers have held up. Much more likely, she knows they’re down materially and is ready to give Labour its share of the blame.
On real GDP per capita, the measure against which Willis wants to be judged, Treasury’s pick in May was a 0.1% decline this year but a historically respectable 1.8% rise before the election. Wages would be rising ahead of inflation by about the same, and unemployment would be back below 5%. Inflation was always expected to be back in the 1-3% target range, and short-term interest rates – including mortgage rates – heading down.
Willis should be able to point next month to progress for the election-year outlook on most of these measures, as well as growth in house prices to please median voters.
She will also want to see a fall in forecast 10-year bond rates, to keep her debt-servicing costs down. Back in May, she was looking at needing at least $10 billion a year, rising to over $12b in 2027/28, more than a third of what the Government plans to spend on health.
Back in 2008, at the end of the Bolger-Shipley-Clark era and before the big borrowing since, debt-servicing costs were approaching zero.
In May, Willis reported a massive deterioration in the deficit and debt forecasts compared with last December. Her cash deficits for this year and next blew out by a combined $11.7b, to a combined $16b, with no cash surpluses in any of the out-years.
Her operating deficit for 2024/25 was meant to be $13.4b, falling to $8.5b heading into the election. The operating balance would return to a modest $1.5b surplus in 2027/28.
Net core Crown debt was picked to be $209.9b by June 30, 2028, $17b worse than believed in December, and over 100 times more than the mere $1.8b at the end of the era of fiscal responsibility in 2008.
Willis will be very lucky if these numbers haven’t worsened.
While early days, the cash deficit in the first three months of 2024/25 was $2.8b worse than expected in May, although some of that can be explained by tax being paid before rather than after the Matariki long weekend. However, the operating deficit for the three months was also $669 million worse than believed in May.
Unless Treasury bets on a big improvement over the next nine months, the forecasts Willis relied upon in May now seem optimistic. In particular, the 2027/28 return to surplus Willis hoped for risks being delayed until 2028/29.
Yet, if Treasury’s longer-term projections come to fruition, that will be the last operating surplus New Zealand ever runs without big tax increases, massive cuts to health and superannuation entitlements, or both.
Willis and Christopher Luxon have ruled out both options, which are probably politically unsustainable anyway. Their solution, they say, is to boost productivity. But apart from Chris Bishop’s promises to fix the resource-management regime and invest in infrastructure, Shane Jones’ commitment to mining and – in the longer term – Erica Stanford’s school reforms, the shape of the coalition’s productivity-enhancing programme is unclear.
Luxon plans to host an investment summit early next year to attract foreign direct investment from the fund managers and others he has met on his travels, but Willis’ focus is competition policy.
For months, she has been asking Treasury to do more than keep the books and worry about political risk and instead offer her even politically challenging options to address the deeply connected productivity, growth, living standards and fiscal crises.
The Finance Minister is much taken by the OECD’s recent report “Revamping Competition in New Zealand”. The extraordinary benefits to consumers and the economy from the entry of 2degrees into the telecommunications market – despite the Key Government trying to protect what were then Telecom and Vodafone – offers hope for other sectors.
While NZ First worries about supermarkets and Act about early-childhood centres, Willis’ first target is the banking sector, which she believes neither innovates nor takes on the lending risks to justify its enormous profits.
The banks’ unwillingness to lend to small and medium-sized businesses except when backed by residential property is well-known and arguably a cause of over-investment in real estate. Along with Fonterra and the farming lobby, the Government also argues the banks are too conservative when lending against farming operations and downstream processing.
Willis has proposed to better capitalise and expand Kiwibank, but she might be well-advised to look also at solutions from the other direction. If the current, largely Australian-owned oligopoly is to be disrupted, those best placed to do it safely are even larger banks in East Asia, North America and Europe.
After everything from Fonterra’s creation, to the Warner Bros deal, to the SkyCity convention centre, to Rocket Lab and now even to the tobacco companies, New Zealand is now well beyond pretending its Governments, red or blue, are hands off.
Luxon backs himself to attract investors to New Zealand. Might he also back himself to offer incentives to some of the world’s biggest and most secure banks to come to New Zealand to take on Westpac, ANZ, NAB’s BNZ and CommBanks’ ASB?
Historically, National was sometimes perceived as in the pocket of the New Zealand Banking Association, protecting the oligopoly. Even if that were ever true, Willis is making clear it is certainly not the case under her leadership as Minister of Finance, and the Prime Minister is also well-placed to help.
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