Labour saved $500m, the coalition spent it

Finance Minister Nicola Willis banked Labour's savings towards the Budget. Photo / Mark Mitchell

In August last year, as the economy hit a wall, former Finance Minister Grant Robertson announced the Government was slashing spending, ordering most government departments to cull 2% of their backroom baseline spending, worth about $500 million a year.

A Treasury paper released to the Herald under the Official Information Act reveals the intention of those savings was to reduce overall spending levels into the future, and therefore reduce deficits and borrowing. However, on coming into office, the new Government booked those $500m in savings against Budget 2024, helping to balance the coalition’s tax package and overall Budget rather than using it to reduce the deficit and borrowing.

The papers reignite a debate that has raged since the election about whether the Government could be said to be borrowing for tax cuts. The coalition has always maintained that it was not borrowing for tax cuts because every dollar of lost tax revenue was balanced by a dollar of cutting or additional revenue somewhere else.

The Treasury paper casts some of that claim into doubt, by showing that $500m of funding for the Budget came from what was effectively banked money – spending money on tax cuts that had been designated for savings.

Finance Minister Nicola Willis defended the decision, noting that while Labour had announced the savings exercise in August, little work was actually done on achieving them.

“We were targeting $1.5 billion of savings from the Budget 2024 baseline savings exercise.,” Willis told the Herald by email.

“This encompassed the $500 million of savings Labour had promised (it wasn’t on top of that), but in fact since Labour never made any actual savings, all of the circa $1.5b baseline savings are attributable to the current Government,” she said.

Robertson’s baseline savings would be permanent and therefore worth about $2b over the four-year forecast period. This would mean less spending into the future and therefore a better fiscal position.

Those departments began to find savings, but did not get far before the Government changed in December.

On getting into Government, the coalition began its own savings exercise, trimming 6.5% or 7.5% from the back office baselines of most departments with the goal of saving $1.5b in spending over the forecast period. As has previously been reported, this savings exercise incorporated what Labour had already announced meaning one third of this year’s cuts are attributable to decisions made by Labour, while two thirds are attributable to the coalition.

A Treasury paper from March noted that the decision to bring that $500m in spending back into play would have a negative impact on the Government’s fiscal position.

Treasury told ministers that in December, it “assumed that the previous Government’s baseline reduction exercise of approximately $500 million per annum would return to the centre”.

“[B]aseline savings reflected in 2023 HYEFU [Treasury’s December forecasts] are now expected to be used to balance the Budget 2024 package, results in an adverse impact to our forecast for OBEGAL [Operating Balance Before Gains and Losses]” officials said.

This had now changed and Treasury judged they would now be recycled to balance new spending, having an “adverse impact” on the OBEGAL position.

Labour’s finance spokeswoman Barbara Edmonds used the fact that forecasts show $12b of additional borrowing over the next four years to argue that the notion the cuts were fully funded was a fiction.

“Nicola Willis said her tax cuts were fully funded, but we know her Budget had $12b of additional borrowing. She has done this when health, education and social services are screaming for more support.

“She’s taken the money that was supposed to get New Zealand back into surplus and spent it on her tax cuts. This was savings that Grant started, and she has tried to take credit for. This is the opposite of good economic management,” Edmonds told the Herald.

The debate over who was is responsible for what borrowing is a complicated one. The current Budget does show a worsening fiscal position, but a Treasury commentary notes that about two-thirds of this is due to the worsening economy and just one third is due to the tax cut package.

Willis has also decided to trim spending increases in the next two Budgets far beyond what Labour promised, meaning that in the future, all things being equal, the Budgets of this Parliament will have less new spending and less borrowing than had Labour implemented its 2023 fiscal plan which included larger spending increases in 2025 and 2026 – although we are now far enough out from an election to consider whether Labour too would have had to alter its plans in light of the economic and fiscal situation.

Willis said the Government is “adhering closely to New Zealand’s fiscal management approach”.

“Under this approach, allowances are a net concept, where spending increases and revenue reductions are offset by savings initiatives and revenue raising initiatives. That is how we have managed, and will continue to manage, fiscal initiatives. As far as possible, all discretionary spending increases, and all discretionary savings, will be included in the allowance. And we will stick to the allowances we have set. I consider that to be a very fiscally responsible approach,” she said.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.