Finance Minister Nicola Willis drew Labour leader Chris Hipkins and Green co-leader Chlöe Swarbrick into a bitter battle on their fiscal plans on Tuesday morning.
Willis put out a press release on Tuesday morning, proudly touting the news the Government had kept its AA+ credit rating affirmed by Fitch, one of the “big three” ratings agencies, despite significant pressure on the public finances.
“Historically, New Zealand governments have been able to borrow at reasonable rates because of their reputation for being responsible managers of public money, but that is not something that should be taken for granted,” Willis said.
Willis used Fitch’s commentary to launch a broadside on the Labour Party and the wider opposition.
“Fitch warns that ‘evidence of a weakening in the culture of fiscal commitment to fiscal responsibility would affect creditworthiness’,” Willis said.
“That is Fitch telling us that borrowing a lot more, as Opposition parties are proposing, would lead to a credit downgrade.
“That would increase the cost of government debt and also have a flow-on effect to the cost of household and business borrowing, as New Zealand would be seen as a more risky country to lend to,” Willis said.
Labour has not released a fiscal plan, which would detail how much taxing, spending, and borrowing the party plans if it wins the next election. Hipkins has previously spoken about the need to borrow to invest in infrastructure. On Tuesday, he said, when asked by the Herald, that his party’s fiscal plan would chart a path back to surplus.
The Green Party has released a fiscal plan that includes $99.1 billion in additional revenue made up of about $89b in new taxation and the rest in climate taxes. The plan also includes additional borrowing for capital investment and a higher deficit in the last year of the forecast period.
Under their plan, net debt would be about $44b higher at the end of the forecast period, a sum equivalent to just under 10% of GDP.
Fitch’s commentary, calling for a return to surplus and a reduction in debt levels to keep the current credit rating, is inconsistent with the Greens’ plan, which ends up with more debt and a larger deficit. However, Swarbrick said Fitch’s broader social and growth analysis might be more aligned with the Greens’.
In general, Fitch noted that both National and Labour Governments had brought the books back into balance after an economic shock. The agency, warned, however, that recent experience had seen surpluses delayed and this could be a problem.
“Evidence of a weakening in the culture of fiscal responsibility would affect creditworthiness,” the commentary said.
Willis said Hipkins had laid his “stake in the ground” and that Labour was “prepared to walk away” from a “culture of fiscal responsibility”.
“Every New Zealander will pay the price if a Labour-Greens Government puts our fiscal reputation at risk,” Willis said.
Willis said Hipkins had departed from the “orthodoxy” of previous Labour finance ministers like Michael Cullen.
“This is an altogether different path in which he seems to be walking a lot closer to Chlöe Swarbrick and her team of vandals, who want to gaslight New Zealanders into believing that if we just spent more and borrow more, everything would be better,” Willis said.
“Michael Cullen would never allow for the fiscally reckless approach that Chris Hipkins has been signalling,” Willis said.
Hipkins, heading into his own caucus meeting, said Willis’s attack had more to do with the Government wanting to divert attention from a sluggish economy.
He said it was “important that the Government balances its budget”.
“I notice that Nicola Willis has yet to do that. She’ll be on to her third budget next year and there’s not a surplus in sight,” Hipkins said.
Hipkins promised that Labour would set its own fiscal rules in its pre-election fiscal plan, but he confirmed that these would include a return to surplus.
“We do need to get the books back into surplus. No government should be aiming to indefinitely run deficits,” Hipkins said.
When asked whether one of the rules would be returning to surplus at some time, he said: “Get the books back into surplus – yes.”
Fiscal plans, which function like a draft budget for a political party, are not typically released until much closer to an election. Labour says its tax policy is coming later this year.
Labour’s last Budget included a primary fiscal rule “returning the operating balance before gains and losses (OBEGAL) to a surplus and aiming for small surpluses thereafter”.
“This is vintage National Party, when they’re in a hole, and they’re in a very big hole at the moment, start throwing mud at the Labour Party, but the reality is their hole is getting deeper, they need to work out how to get themselves out of a hole without worrying about other political parties.”
Swarbrick hit back at Willis saying that “when these made-up economic metrics, the likes of GDP, are superseding our focus on the wellbeing of people and planet, we’ve kind of lost the plot”.
Swarbrick said that ratings agencies actually took a “more sophisticated approach” in assessing the Government’s finances than the Treasury.
Swarbrick said, “Luxon and Willis’ decisions have seen productivity growth flatline, skilled workers deserting the country and deteriorating infrastructure placed under ever more pressure.
“Ironically, financial markets have a clearer grasp of fiscal responsibility than the Minister of Finance. They reward countries that successfully build economic resilience and punish those weakened by the chronic underinvestment favoured by Willis,” she said.
Pointing to Fitch’s concerns about the housing market and unemployment, Swarbrick said, “The Government’s decisions to withdraw public investment, in turn generating higher household debt and simultaneously increasing unemployment, is very bad for financial stability and debt-servicing.”
New Zealand is one of just 12 countries to have a AA+ or AAA rating from Fitch. The current rating was obtained in 2022, under the last Labour Government and Finance Minister Grant Robertson. New Zealand had been downgraded to AA after the financial crisis and the Christchurch Earthquake
In its commentary on that decision, and subsequent reviews, Fitch has stressed that forecasts show a “fiscal consolidation”, in which the Government runs a surplus and debt declines as a percentage of the GDP.
At the 2023 election, both National and Labour ran on fiscal plans that showed a surplus in 2027. National promised to reduce the amount of new spending each year by a cumulative $3.3b, meaning its 2027 surplus and subsequent surpluses were slightly larger than Labour’s.
Beginning in 2022, the Treasury began slashing its economic growth and tax revenue forecasts. This continued in the months after the election, when new forecasts showed the surplus shrinking, and has persisted to 2025.
The result of this has been lower revenue than expected, pushing the forecast surplus out into the future. This has meant that despite Willis reducing spending growth, on balance, by far more than her fiscal plan promised in 2023, the deficit and overall borrowing levels are far higher.
The Treasury reckons this year’s deficit will be $15.6 billion, more than 10 times larger than the $1b deficit National promised on the campaign trial.
Labour promised an even larger deficit of $1.5b. Given changes to GDP and revenue projections, that deficit would have increased too.
On current forecasts, a surplus, by the traditional measure, is not forecast until the early 2030s.
National and Labour are scrapping over how to fix the mess. Willis, noting the Government’s large deficit, refuses to spend even more on stimulus, which some hope would speed an economic recovery, ultimately restoring the books in the process.
Hipkins, on the other hand, refused to say he would have cut spending to keep to his fiscal promises, had he won the election.
Willis rebuffed calls for more spending to stimulate the economy, saying that this spending would be “the end of interest rate reductions”.
“Treasury has affirmed the best way to stimulate an economy in a downturn is through monetary policy ... I am concerned that without dropping interest rates we won’t see the revival we all wish to see in the construction sector, our business sector, all of the private industries that rely on being able to borrow to generate the growth that New Zealanders want to see,” Willis said.
Meanwhile Hipkins, would not say whether he would have dropped his spending and borrowing commitments had he won the election. Labour’s 2023 plan included just over $3b more borrowing than National’s.
Hipkins did not definitively say he would have made cuts in light of the deteriorating finances.
“What I indicated before the election would have been our priorities, which was looking at how you get more effective spending.
“Take health, more money on preventative healthcare, like free prescriptions and making doctors’ visits more accessible has the potential to save money, because you end up with fewer people in emergency departments,” he said.
Asked whether Labour would have cut its cloth had it won in 2023, Hipkins said, “We need to accept Nicola Willis has made this worse. Increasing unemployment is at least in part because of the decisions that this Government has taken.
“If I look at areas where I wouldn’t have wanted to spend extra money, I wouldn’t have wanted to spend extra money on Jobseeker benefits. I would have rather kept Kiwis in work.”