Finance Minister Nicola Willis discussing a large deterioration of the Government books.
Analysis by Thomas Coughlan
Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people's stories and explaining the way things like transport and finance touch our lives.
The challenges once dubbed “medium-term” are no longer “medium-term,” he said — they are challenges of the present. The challenges are exacerbated bythe fact the Government has a structural deficit, meaning each year it spends more than it taxes, reducing its ability to respond to these shocks.
“These medium-term headwinds that are already blowing through annual budget processes ... they are just going to get stronger year by year,” Rennie warned.
Staring down MPs from both the Government and the Opposition, he delivered a stern message: “Successful fiscal consolidations tend to go over a number of years … for governments over the decade, it’s going to be a real issue for them.”
Yesterday’s Half-Year Economic and Fiscal Update (Hyefu) from Treasury showed just how acute that challenge will be. Net core Crown debt is forecast to peak at 46.5% in 2027 – far higher than the peak of 40% forecast during the pandemic Hyefu (2021) of 40.1% of GDP in 2023.
That’s important because debt is the reserve the country draws on during a shock. Treasury has previously reckoned a prudent debt level for New Zealand to be able to absorb a shock would be 50 to 60% of GDP –a level the Government is sailing very close to. We need these low levels of debt because our risk of shocks is exceedingly high.
Recent Treasury briefings warned ministers that there’s a 75% chance of the Alpine Fault going in the next 50 years, a 5% chance of a major earthquake in Wellington, and an 80% chance of another Cyclone Gabrielle-scale weather disaster. Expensive challenges are inevitable – and Governments (including and perhaps particularly the last one) have been very slow at rebuilding the books to prepare for them.
In fact, soon, things are going to get worse. Health spending will rise from 7 to 10% of GDP – an additional $12b a year in today’s terms by the 2060s. Superannuation expenses will rise from 5% of GDP now to about 7.6% over the same period.
Treasury has warned repeatedly we need to get ourselves ready for this future fiscal challenge — the problem is, we’re failing to tackle the fiscal challenge of today.
If the Government wanted to fix what’s currently broken, it would need to use tax hikes and spending cuts to plug a structural deficit of about 2.5% of GDP (that’s only the structural part, the actual Obegal deficit is 4.1%) – but that only fixes today’s problem.
It also needs to get ready, over the coming decades, to find 5.6% of GDP more to plug the health and super gap.
It would need to do all of that while running at least some surpluses to rebuild the books to the extent they can afford to withstand the next shock and not do so in a way that makes life so intolerable that people don’t simply flee to Australia.
There’s broad agreement in Parliament that our fiscals are broken (although Labour has been floating borrowing more). What hasn’t sunk in (at least beyond MPs with finance portfolios) is the magnitude of the problem.
Labour could, on coming into office, legislate its 2023 wealth tax and still not close the structural deficit. That tax raised about 1% of GDP, half of what would be needed to plug the deficit (and remember, the wealth tax didn’t go towards rebuilding the fiscals, it went to paying for tax cuts – its net fiscal contribution was zero).
Likewise, the coalition could cancel their tax cuts, worth about $3.7b a year, and still be only halfway to closing the structural deficit.
If a party wanted to close this structural deficit, which would still be about 2% of GDP in 2026, it would need to campaign on a combination of no new spending commitments, a wealth tax, and another round of 2024-style spending cuts. Unsurprisingly, no one is falling over themselves to squeeze that policy prescription into their election fiscal plans. s
These examples are slightly facetious. There is no rule that says we must plug the deficit tomorrow or even by the election. As Rennie told the committee earlier this month, markets have faith in New Zealand’s institutions and believe that over the next few years, there will be some fiscal consolidation. We’re not broke, we’re (hopefully) not going broke, but we probably do need to accelerate the speed of fiscal consolidation if we’re to stand a hope of comfortably dealing with future fiscal challenges.
Rennie said the quality of fiscal consolidation matters too: You could, for example, plug the deficit by halving the education budget, but it’s one of many lines of the Budget whose social merits outweigh the fiscal benefit of cutting it.
In reality, as the population ages and challenges like climate change and earthquakes buffet the books, both sides of the aisle are going to have to make their peace with measures designed to rebuild the books.
The coalition hasn’t touched the new top income tax rate instituted by Labour, it’s kept the top trust rate, and GST on services provided by the likes of Airbnb and Uber. It’s added some small tax changes of its own and kept the last Government’s decision to ringfence rental losses, banning the practice of offsetting these against other income — a political challenge that’s proved toxic in Australia.
The coalition cut income taxes, shortened the bright-line test, and restored interest deductions for residential landlords, but it hasn’t come close to restoring taxation to levels seen prior to the last Labour Government, which took office with core Crown revenue at just 29.7% of GDP (it’s now 31.4%).
Likewise, Labour is likely to bank many of the coalition’s cuts. It’ll likely campaign on more spending in health and education, but it won’t roll back all the cuts seen in the last budget ($3.9b a year in operating savings alone), or the one to come.
Even Labour's wealth tax would not plug the structural deficit. Photo / Dean Purcell
As the decade-long process of fiscal consolidation plays out, you’ll see each side swallow its pride and learn to live with something instituted by the other side.
Labour might get a chance at a capital gains tax, which National might find itself living with in some form; National might lift the age of superannuation eligibility and Labour might keep it (both of these policies have been floated by Treasury as good fiscal fixes). Both sides know something has to change – and both know their side doesn’t have a monopoly on solutions.
There are economic problems in these numbers: Most New Zealand economists are concerned about low productivity growth and the trade deficit, but the biggest problem in these figures isn’t economic, it’s political.
It’s a challenge, but it’s not really an economic one. Where the challenge really lies is in the politics. The challenge is finding a way to shepherd New Zealanders into a period where they’ll be paying higher taxes and getting less in services for them. It’ll be a challenge for everyone.
Labour-led governments won’t be able to save every public servant, or every public service – many cost too much and deliver too little. National-led governments won’t be able to cut their way to sustainability — eventually the cuts cost more in social pain than they’re worth. National governments will need to accommodate some kinds of new revenue tool. As National argued very successfully in 2023, income taxpayers can’t be tapped for even more revenue – it’ll have to come from somewhere else.
European Governments have been grappling with these challenges for more than a decade with mixed levels of success. In the last fortnight, both the French and German Governments have collapsed, in part, because the their Parliaments of Governments simply could not find a way through the cold hard reality that the fiscals had placed on them (in the German case, forced by an unusual constitutional debt tool).
It’s a glimpse of the economic and political gridlock that isn’t our present, but could be our future - a future, which, a lumpy 5.1 magnitude earthquake off the coast of Seddon at 5.39pm reminded MPs might be much closer than we think.
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.
