Finance Minister Nicola Willis unveiled $7.47 billion in cuts and savings in her mini-Budget today, part of a drive to beat the books into shape as a gloomy economy weighs on the Government’s finances.
The savings over four years are made up of $2.61b by stopping work on initiatives including Let’s Get Wellington Moving and Fair Pay Agreements, $2.0b from the Emissions Trading Scheme, and $2.8b from tax and benefit changes. It includes $500 million in savings started by the previous government.
On top of these, Willis has committed to annual cuts of $1.5b of annual public service “savings”, which add up to $6b over the four-year period.
Willis said Treasury’s Half-Year Economic and Fiscal Update (Hyefu), released with the Budget, “lays bare the extent of Labour’s economic and fiscal vandalism”, and promised that an “economic clean-up” would begin today with the mini-Budget.
The forecasts are indeed gloomy: a weaker economy since the last update in September has seen the tax take fall by $1.6b over the forecast period, while expenses have grown, mainly because of more borrowing and higher interest costs.
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The Government bond programme has been extended by $7b since the last update in September. The country is expected to enter a real GDP per capita recession, with GPD per head of population going backwards for two consecutive years. The cumulative effect of this on the books is to shrink the $2.1b surplus in 2027 that Treasury forecast in September to just $140m.
The forecasts were finalised as the new Government was sworn in and do not take into account any decisions it has made in its mini-Budget.
Willis said the “culture of fiscal discipline has been degraded” under the last Government, and said there would be new rules drafted for Cabinet spending decisions, and the Public Finance Act, the overarching piece of legislation that regulates how the Government’s books are managed, would be amended.
Not all of the problems in the books can be laid at Labour’s door. Treasury’s costings of a couple of National’s campaign promises have hit a key campaign promise. National had wanted to save $2.3b over the forecast period by indexing benefits to CPI inflation rather than wages. As a result of changes to forecasts of CPI and wages, this policy will now save the Crown just $647m.
Ironically, this will mean beneficiaries do better than under the status quo in the next two years because CPI inflation will be rising higher than the measure of wages used to calculate benefits.
This comes at a cost of $36m over the next two years.
Treasury did not seem convinced the cuts would have a significant impact on the books, saying once the new Government’s tax plan, to be announced in full at the Budget next May, was incorporated “the overall impact” of the new Government’s changes “would be broadly neutral over the forecast period”. Willis cited this as a vote of confidence by Treasury that the tax plan could be afforded, but it could also be read as undermining the Government’s claim to be running a starkly different fiscal policy to its predecessor.
Willis re-committed herself to the coalition’s tax plan, saying she could deliver it. The mini-Budget included the first such measure, returning the Bright Line Test (a form of Capital Gains Tax) to two years. Treasury also warned changes like increasing the prison population could weigh on the Government’s books, although National set aside additional funding for this in its fiscal plan.
Willis was right that this was a “mini-mini-mini Budget”, it was in fact just six pages of press releases, a far cry from the 1800 pages of a full Government Budget.
There are few surprises in the document, the most significant part of which is a list of 16 mini-Budget decisions, which will have an impact on the Government’s books to the tune of $7.4b. This was a list of campaign commitments, which will have a cumulative effect of saving the Government money. Killing industry transformation plans, for example, will save $127m over the next four years; killing the Lake Onslow project will save $64m; ending the RMA reforms will save $302m, and ending Let’s Get Wellington Moving will save $525m.
The biggest saving comes from ending commercial buildings depreciation, promised by both National and Labour, which is set to save $2.311b.
Willis also unveiled her list of fiscal cliffs, something she had been teasing for weeks. This was a list of 21 things which have time-limited funding that expires in the forecast period. The new Government will need to fund these cliffs if it wishes them to continue. The cumulative total of the “cliffs” is $7.2b over the forecast period.
Most of the items on the list were forecast in advance, including the School Lunches Programme, an increase in the Pharmac budget, Covid-19 vaccinations, and film subsidies. Willis drew attention to the Geohazards Science Services funding, a budget line with is crucial for the country’s resilience to earthquakes and other natural hazards.
National has committed to funding an increase to Pharmac’s budget, school lunches, and the apprenticeship boost scheme. Willis also revealed that a “cliff” in funding for Te Matatini - a nationwide kapa haka competition - which runs out in two years, would also be funded.
Treasury’s list of risks to the fiscal forecasts - a list of things that could rock the Government’s books - makes uncomfortable reading. Treasury warns the increased prison population, growing demand for legal aid, and the cost of meeting New Zealand’s international climate commitments could weigh on the forecasts. The Government’s film subsidy regime may also need a top-up.
Willis drew attention to the former Government’s Transport Investment Programme, which had $85b committed, well short of the $288b needed to deliver it.
The economic forecasts made for gloomy reading. Economic growth is forecast to be slow, because of high interest rates. GDP growth is expected to be just 1.5 per cent in 2024 and 2025, rising to just 2.8 per cent in 2026 and 3 per cent in 2027. The country is expected to enter a prolonged contraction in real GDP per capita growth, indicating a decline in living standards. In 2024 real GDP per capita growth will be -0.7 per cent. The decline continues in 2025, with a decline of 0.1 per cent.
Unemployment is set to rise to 4.5 per cent next year, and 5.2 per cent in 2025 well above the 3.6 per cent of 2023.
Inflation is the ray of sunshine, falling to 4.1 per cent next year and 2.5 per cent in 2025.
Labour’s former Finance Minister Grant Robertson said he would dub Willis’ mini-Budget the “Nothing-Burger Budget” and said there was “not a shred of evidence” how National would pay for its tax cuts.
“No one is any the wiser today as to how National will pay for their tax cuts than they were yesterday. She is claiming they are self-funding. There is not a shred of evidence for that in what she’s put up today.
”New Zealanders were told several things about the mini-Budget. The first of those was that they would have certainty about how tax cuts would be paid for. That is not here. We were also told we would know the details of the cuts to public services that were going to be used to fund tax cuts. That is not here either today.”
Robertson also rejected Willis’ claim that Labour was irresponsible in leaving so-called “fiscal cliffs”, saying time-limited funding for various projects was a regular feature of Budgets that governments had used over the ages, including the former National Government.
“I don’t believe Nicola Willis has provided any great revelation today at all.”
Asked if he would apologise as Willis had called for, Robertson said the Government books had been resilient in the face of significant economic shocks over recent years.
“New Zealanders have done it tough over the last few years, including in the cost of living pressures they have been facing, but what these books show is that the previous government stepped up to help them and kept the balance about right.
“I’m proud of what we did as a Government. We navigated through some very choppy seas. We kept New Zealanders in work, we kept our levels of Government debt low relative to the rest of the world. We’ve seen the economy grow by about 7 per cent since Covid began. I don’t apologise for that.”
The Council of Trade Unions economist Craig Renney said the so-called mini-Budget left a lot of questions unanswered.
”Despite calling for clarity on existing spending, the mini-Budget today does not provide any analysis of the tax cut or spending programme of the Government,” Renney said.
”The Government is claiming that it is cutting $1.5b of spending per year. Of that, $0.5b is commitments made by the previous Government. $0.4b is cuts which have already been committed to changing Early Childcare support. So only $0.6b is new. $1b of immediate cuts is money that comes from cuts to the transport budget - which is paid for by fuel taxes.
“The Government has claimed that it is delivering fiscal responsibility but has taken money from climate change to deliver tax cuts for landlords and it’s taking $676m from welfare payments.”
It’s unclear how that will make delivering on the child poverty targets easier or make the cost of living easier for low income families.
”The announcements today leave much still to be explained. There appears to still be a debate within government about when key planks of the tax cut package will be delivered. Yet there is nothing in this package to help with the cost of living. New Zealanders have to wait until May next year to find out what the plan is. The Government should be making this clear today.”
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.
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