ANALYSIS
Forget fiscal holes. The incoming Finance Minister Nicola Willis has alleged her predecessor has left her “fiscal cliffs” down which she may tumble.
At the bottom of one of these cliffs, to mix metaphors, is a cupboard. Willis told Newshub that this cupboard is not just “bare” but full of “snakes and snails and all sorts of things”.
All will be revealed at the much-signalled opening of the books in December - an event known as the Half-Year Economic and Fiscal Update, or Hyefu, but which politicians often call opening the books probably because it sounds more dramatic.
One of the reasons politicians prefer “opening the books” to plain old Hyefu is that it implies the books were closed to all but the Government.
That’s partly true. This week, Willis will have sat down with Treasury officials and been given an unvarnished briefing on the state of the books, seeing details and figures that would have been unavailable to her in opposition.
But it’s important to put these things into perspective. It’s against the law to hide most costs from the public. The modern Public Finance Act (PFA) has strict rules forcing the Government to be upfront about the state of the books in its regular Economic and Fiscal Updates (or EFUs). Before the election, the Pre-Election Economic and Fiscal Update or Prefu gave the public a look at the state of the books.
The modern PFA was forged after several governments took office following an election and found the books in far worse shape than the outgoing government had led them to believe. The rules are serious. Former Finance Minister Michael Cullen dobbed ACC Minister Bill Birch into the police when he failed to produce ACC’s annual report by the statutory deadline (it was ACC’s fault, and apparently Birch was furious -although a breach of the PFA is not a criminal matter). Were information to be deliberately withheld from the pre-election update it would require both Treasury and the Beehive to illegally conspire to break the law.
That said, there are a lot of less than flattering things to be found in the Prefu - and some details which the PFA does actually allow Treasury to withhold from the public.
Fiscal cliffs
One of the biggest issues National faces are what Willis calls “fiscal cliffs”. Willis described these to Heather du Plessis-Allan Drive as “programmes that [the Labour Government] had ongoing that they just hadn’t put money into for the future”.
When a Government announces spending decisions in a Budget, it can decide to bake those new spending decisions into future budgets until a government one day decides to stop funding it. This is often, even usually, the case.
A government can also decide to give something time-limited funding. It’s used if the Government wants to pilot a scheme, or if the funding is for something that is designed to be temporary. Things like the Covid-19 vaccine rollout fall into this category. The money was funded to do a specific thing, over a specific period of time.
There is a grey area, however, when the Government gives time-limited funding to something that could be funded in perpetuity - especially if the Government doesn’t go to great lengths to flag the fact that the funding is only temporary.
The lunches in schools programme falls into this category. The former Government could have chosen to fund this programme into the future, but it chose not to, funding it only for a discrete period of time. The current round of funding ends at the end of the current school year. National said it will renew that money, although in its coalition agreement with Act it said it would try to improve the cost-effectiveness of the programme.
Funding programmes like this allowed the former Government, like many of its predecessors, to have its fiscal cake and eat it too by announcing time-limited spending, but play down the time-limited part of it, making the long-term spending forecasts look better than they actually were.
There are a few things funded like this. Some are quite small, like the $8.1 million a year spent on free period products in schools and kura, which will expire next year unless extended.
Other “cliffs” are quite large. The new Government will need $650m to pay for three more years of school lunches unless it trims the programme.
Likewise the Government’s Apprenticeship Boost programme will expire if additional money is not found for it.
A $200m increase in the Pharmac pharmaceutical budget from 2022 was also time-limited and would expire without more money. This is an unusual way of funding Pharmac, which was done because the Government was transitioning to a new multi-year way of funding healthcare.
None of these things are especially secret. They are included in Budget documents and some were included in the Prefu. National clocked most of them and put $650m into its election fiscal plan for school lunches, $420m for the Apprenticeship Boost scheme, and $724m for Pharmac. That plan was endorsed by its coalition agreements suggesting that for all the post-election uncertainty over fiscal cliffs, the largest ones have been discovered and funded.
Expect much pearl clutching at the irresponsibility of such time-limited funding. That’s partly fair enough. The former Government gave an whiff of permanence to these programmes, whilst only funding them for a discrete period of time. However, it would be an almighty stretch to suggest some kind of fiscal conspiracy, however, given all this information is available in Treasury documents.
Fiscal risks
The “opening the books” shtick is more accurate you get to the topic of risks to the fiscal forecasts. These risks are declared, but don’t have specific dollar figures attached to them, at least not in publicly available documents.
Willis also mentioned these in her interview on Newstalk ZB, saying she would soon “declare some massive spending blowouts [the former Government] have had in a couple of very poorly managed projects because I think New Zealanders need to know what’s been going on with the books under Labour”.
In some instances, Treasury is able to get away with not publishing the cost of specific projects. This is often because the cost of that project is commercially sensitive, or because there is no accurate figure of how much something will cost.
In situations like this, Treasury’s update declares the fact that these blowouts exist, but doesn’t put a figure on them. Willis could choose to reveal more information about these projects, although she too would be limited by commercial sensitivity in some cases.
The risks mentioned in the Prefu, the most recent update, include cost pressures in health, potentially including the new Dunedin hospital.
Treasury was fairly scathing about these, saying in Prefu that they were “largely driven by construction sector inflation and insufficient planning ahead of investment decisions for many legacy investments”.
Potential blowouts loom over at Kāinga Ora, where Treasury warned large-scale projects faced “ongoing risk around cost overruns and changes to operating and capital costs given the scale and complexity of the projects”.
There are two other big projects which are likely to be in Willis’ sights. The first is something Treasury calls iRex, which is a rather strange abbreviation for the “Inter-Island Resilient Connection”. Outside of The Terrace, it’s known as a project to replace the ageing Interislander ferries and upgrade the portside infrastructure in Wellington and Picton. The project has been beset by rumours of ballooning costs. At the Prefu, Treasury warned that iRex “cost estimates have increased significantly since the initial funding application”, but did not give an indication of how much.
The project has already run over budget, ballooning from $775m in November 2018 to $1.76 billion in March 2021 - making the two ferries already four times more expensive than the Titanic, which cost $381m in 2023 dollars. Let’s hope we get more use out of them.
The final thing to keep an eye on is the NZ Upgrade programme, an Ardern-era infrastrucutre programme mainly targeted towards road building. One particular road, the Ōtaki to north of Levin road has ballooned to $1.6b, roughly double the cost estimate from 2020. The last Government received advice on trimming the scale of the project, or tipping in additional funding.
National has pledged to build the road no matter the cost. Famous last words. Whatever cost blowout there is will need to come from somewhere.
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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