Treasury gave Labour an open goal, somehow they missed it

Labour leader Chris Hipkins and finance spokeswoman Barbara Edmonds. Photo / Mark Mitchell

THREE KEY FACTS

• Deficits are forecast for the rest of the decade, by the old Obegal measure.
• Finance Minister Nicola Willis has kept her $2.4 billion operating allowances.
• Economic growth is flat, but house prices are forecast to increase.

ANALYSIS

Barbara Edmonds got lucky on Tuesday.

The Labour finance spokesperson petitioned Speaker Gerry Brownlee before Question Time for an urgent debate on Treasury’s Half-Year Economic and Fiscal Update.

This is a common tactic used by Opposition MPs to see if they can steal an hour from the Government’s legislative programme to berate some unlucky minister for a failing in their portfolio. Most of these requests are mere theatrics and the Speaker tends to turn them down.

Edmonds, however, had the request accepted by Brownlee. It appeared to surprise both sides of the House, observable in a great deal of paper-shuffling as whips marshalled MPs. Leader of the House, Chris Bishop, gesticulated like a lightning-struck conductor, deciding which MPs would speak.

It was there that Edmonds’ luck ran out. Despite having about two hours from the release of the Hyefu to the commencement of the debate (about the same time the media and analysts have to file their stories), Labour’s response to the Hyefu was flat-footed at best.

There were two obvious problems presented by Treasury: there’s not enough growth in the economy, and the Government is spending too much and taxing too little, resulting in a structural deficit.

The Labour response, both in the debate and subsequently, addressed almost none of this — and where it did, the solution, which involved more government spending to generate growth, seemed to completely ignore the warnings Treasury has been making repeatedly in the last few months that this kind of post-Covid deficit-spending growth was both short-lived and fiscally unsustainable. Eventually, you have to run a surplus.

In the short speech, Edmonds mentioned a need to spend on social services, public transport subsidies, water, infrastructure, and free prescriptions — all important areas of spending, but at no point did the speech mention how these things would be paid for. It was as if Labour was reading the Hyefu upside down - as if the challenge was surpluses too large (a problem that plagued Michael Cullen) rather than deficits.

The only whiff of a plan to fund this spending was a mention of the Government’s allegedly debt-financed tax cuts, which Labour would not have done, leaving a better fiscal position. But that doesn’t quite wash either. Post-Budget, we know Treasury’s opinion is that the tax cuts were funded by spending cuts, not debt, which isn’t just Treasury’s definition of not borrowing for tax cuts, it’s Labour’s.

Labour’s tax plan, which it maintains was fully funded, was built around cutting GST from some food, paid for by axing deductions for commercial property depreciation. National’s plan was funded the same way; in fact, the party used the same cut (commercial depreciation) to fund the tax plan (along with the other cuts).

Labour’s never been able to explain why, when it cuts commercial depreciation deductions, it qualifies as responsible fiscal management, while when National does it, it’s “borrowing for tax cuts” — both policies were the same, but National’s has the virtue of handing money directly to taxpayers rather than hoping an uncompetitive supermarket duopoly would do it for you.

Things got even more awkward the next morning when leader Chris Hipkins stepped up to the plate. Speaking to RNZ’s Morning Report, Hipkins said: “Nicola Willis seems to be surprised that if you put thousands of people out of work, the government tax take goes down and the unemployment bill goes up — she’d be one of the only people in the country that finds that surprising”.

There are two ways of parsing the comment, neither of which quite stacks up.

The first interpretation is that Willis is directly laying people off. Willis’ budget has indeed put public servants out of work. The best measure of this is the reduction in public service FTEs, which have reduced by 1402 in the year to September (a number likely to increase).

It’s cruel to labour the point (they don’t call economics the dismal science for nothing) but even if you assume that none of these people found another job (unlikely) and went on the most expensive benefit, the maths don’t stack up.

The median salary for a public servant is $88,900. If that person were to lose their job and go on a benefit, the Government would lose $19,500 in tax (more if you include other workplace benefits) and be stuck with a maximum after-tax benefit bill of $25,700, plus working for families tax credits worth about $6000 depending on the number of children.

There’s almost no way to make those numbers add up in a way that comes close to suggesting the Government is losing money by reducing the public sector headcount and growing the ranks of beneficiaries.

Finance Minister Nicola Willis during the Urgent Debate over Hyefu. Photo / Mark Mitchell

If that were true, governments would simply hire the unemployment queue into oblivion.

Labour has tried to tar Willis with the brush of Ruthanasia, but if this is Labour’s growth and employment strategy — a debt-fuelled hiring spree — then their 2026 pitch is to ditch Ruthanasia for Muldoonism.

Hipkins might have been referring to the fact that the Government’s relative parsimony is having a contractionary effect on the economy (a volte-face from the election campaign when Labour accused National of running an inflation-inducing expansionary policy), but of course, the real author of that is the Reserve Bank, whose hiking of interest rates has plunged thousands of New Zealanders onto the dole queue.

Labour isn’t responsible for all of that (Treasury said that at the very most, about a third of the most recent inflation spike could be blamed on the former Government), but of course, if you’re trying to induce the Reserve Bank to improve employment by lowering interest rates, opening the floodgates to further deficit spending is just about the worst thing you could do.

The flubs from Labour were more remarkable for the fact that the goal was so wide. This year’s Hyefu is a gift from Treasury to the opposition, forecasting lower growth, higher unemployment, and a pathway back to surplus predicated on running tiny $2.4 billion budgets for most of the rest of the decade and progressively lifting the tax burden on salary and wage earners by a cumulative $3.8b thanks to fiscal drag.

Labour has something of a solution to that: tax changes that would shift the pain of that fiscal consolidation from salary and wage earners to the holders of capital. However, the current leadership team is too afraid to talk about it.

In place of that mostly coherent solution, the party opted for something far weaker. The election is drawing closer. To borrow a phrase, it is no longer looking like the party of Cullen and Robertson.

Both of those finance spokespeople bested their opponents by pledging themselves to some form of fiscal sustainability - and promises that sound credible. Labour deserves some slack - every party has their cake and eats it in opposition. National certainly did.

Next year, the party will begin the tough job of beating it’s pronouncements into a manifesto. That work will be much easier if those pronouncements are coherent.