OPINION
The Government’s ability to bring inflation down, bring the books back to surplus and stick to its debt rule relies on a decade of implausibly austere Budgets, Treasury forecasts show.
Treasury and the Reserve Bank both claim that over the medium to long term, Budget 2023 is contractionary rather than expansionary, meaning it helps to fight inflation, rather than making it worse - more friend than foe, to borrow Governor Adrian Orr’s phrase.
Already the opposition is calling this into question, and for good reason.
The assumptions underpinning those forecasts show the Government running 15 years of Budgets with less new spending than its last two - barely enough to meet cost pressures, which Treasury says will run at $2.8 billion a year for the next few years.
There’s every reason to doubt that any government, let alone this one, would restrain itself to such tight fiscal rules, which would mean it would struggle to afford all but the cheapest new policy initiatives.
National says the spending promises underpinning the forecasts are shaky, and its finance spokeswoman Nicola Willis has been pressing the charge in the House this week.
The forecasts are based on the Government putting together Budgets with less new spending than in almost all of its previous six Budgets, and far less than the last two. If the Government changed the allowances as it has done in the past, and lifted spending in line with its previous Budgets, it would, in most circumstances, add to inflation.
Long-range forecasts released with the Budget show the Government meeting its debt and spending objectives and bringing inflation down, but those forecasts are based on 15 years of relative austerity, with the Government never delivering new spending of the scale delivered in this Budget.
Even Treasury notes this may not eventuate. Its forecasts included the disclaimer the allowances tended to be increased by $600 million on average, between their announcement at the Budget Policy Statement and Budget day itself.
Currently, the Government has promised operating allowances of $3.5b in the next three Budgets, with Treasury projecting allowances slowly trending upwards in each subsequent Budget until the end of the forecast period in 2037, when the operating allowance is expected to be $4.2b.
The allowances are still far higher than the $1.8b National spent in its last Budget in 2017, which would work out to about $2.7b in 2037 dollars, based on long-range inflation assumptions. In Labour’s first term, the operating allowances were $2.8b, $3.8b and $3.3b - although in Labour’s last Budget, it approved tens of billions of dollars of Covid emergency spending which was managed outside the allowances.
In Labour’s second term it delivered operating allowances of $3.8, $5.9b and $4.8b well in excess of the $2.625b promised on the campaign.
This would make the allowance in 2037 smaller in nominal terms than two of Labour’s six Budgets, and smaller in real terms than every Budget bar one that Labour has delivered this term if adjusted for forecast inflation.
Treasury’s Budget Economic and Fiscal Update said that just meeting cost pressures in the near term would eat up $2.8b of the $3.5b allowances - that’s a problem for whoever is in charge after the election. It leaves a meagre $700m left over for funding any new initiatives promised during the election.
The figures are so tight they reopen the question of tax - one way of getting additional money into the Budget, without adding to inflation is to raise it through additional taxation.
Finance Minister Grant Robertson conceded this week that future allowances were tight.
“There’s not a lot of discretionary spending with those operating allowances. I absolutely accept that. As we come off the high levels of Covid spending, this is the direction of travel we’ve got to be going in,” Robertson said.
“I agree, once we account for cost pressures… there is not a lot of discretionary spending there,” he said.
“That is the necessary approach we will take to bring ourselves back to the level of spending that I think is appropriate,” Robertson said.
Asked whether he would stick to the allowances in order to run a contractionary fiscal policy Robertson said.
“In the end, the allowances are what they are and what they do is contribute to the overall indicators which are things like net debt and surplus and deficit and so on,” he said.
The Budget is expansionary in the short term, meaning it helps fuel inflation initially, but reverses out to become contractionary in the long term, meaning it helps put a lid on inflation.
But this claim would be undermined if the Government lifts the allowances as has in the past. It would also need to fund new spending by cutting spending elsewhere or raising new taxes.
Reserve Bank Deputy Governor Christian Hawkesby told the Herald last week that it took Treasury’s numbers for its forecasts and did not create its own independent figures for the Government’s fiscal stance
“We take the Treasury’s numbers and Treasury’s projections. We take those numbers and we have to reformat them and translate them into a way that makes sense for the way that we assess the appropriate stance of monetary policy, but those raw numbers we take them - they feed into our projections,” he said.
“We have a longstanding history of not producing our own independent fiscal projections and there are a number of reasons for that including that we think Treasury is the best place to do that themselves,” he said.
Treasury currently projects inflation, measured by CPI to fall below 3 per cent in 2025, and an OBEGAL (Operating Balance Before Gains and Losses) in 2025. Net core Crown debt falls to just over 30 per cent by 2037, from a peak of 43 per cent in 2024.
There are many ways of looking at the size of the Budget. Two of the most common are looking at the level of total spending, which is about $130 billion this year, or looking at that spend as a percentage of GDP. By that measure, the size of the state flatlines at over 30 per cent, meaning a state slightly larger than recent trends.
The other, and most common way of looking at the size of a Budget is measuring the amount of new spending, known as an operating allowance.
This “allowance” is meant to pay for the increased cost of most public services, and it is also meant to pay for any new policies the government wants to fund like scrapping the $5 prescription charge.
Adding money to an operating allowance is risky business. Increasing the allowance from $4.5b to $4.8b might not look like a big change, but it means the Government has to find $300m every forthcoming year too.
If the Government decides to increase the next year’s operating allowance from $3.5b to $4b, and the next budget after that too, as the government chose to do in this Budget, it means it must find not just $500m in that year, but in subsequent years too.
It is not difficult to see how small changes to the allowances to have a large impact on the Government’s finances.
For this reason, finance ministers of all stripes tend to tell Treasury they plan to spend relatively little future Budgets. This has the effect of making the forecasts, which Treasury compiles independently of the finance minister, look rosier, keeping spending, deficits and debt in check.
When those Budgets roll around, however, finance ministers top up their allowances with additional money, taking them to a more politically palatable level.
This is colloquially known as finding money down the back of the couch.
This is almost always a positive thing - a government’s fiscal prudence allowing it a bit of fun come Budget time.
But in a rare inflationary environment the rules of politics invert themselves, and what was once a positive swiftly becomes negative.
The Resources Minister came to the select committee sporting a Make NZ Great Again hat.