Treasury warns of years of cuts to come, what’s in it for voters? – Thomas Coughlan

Prime Minister Christopher Luxon will be keen for a polling boost in 2026. Photo / Marika Khabazi

THE FACTS

• Treasury warned of significant spending pressures in coming years.
• A Budget paper, published this week, said some of these pressures could be funded by cuts, but about $8.4b would need to come from elsewhere.
• New Zealand enjoys a good credit rating, but Fitch recently said it was important New Zealand keep its culture of fiscal sustainability.

Treasury didn’t hold back when it briefed Finance Minister Nicola Willis last December about the cost of running departments to the end of the decade.

In 2024, ministers had instructed departments to prepare “performance plans”.

These plans would require departments to work out how much money they planned to spend by the end of the decade. Ministers wanted a better look at “cost pressures”, the annual grinding increase in costs to deliver the same services, adjusted upwards to account for increased wage costs and other inflationary pressures.

Under the Ardern Government, “cost pressures” had become an annual siren call from Treasury to the Finance Minister – one he found difficult to resist. The last Government did what it felt was an adequate job to manage these pressures downwards and not simply write cheques – although ultimately, requests from departments were often met with borrowed money. Former Finance Minister Grant Robertson said in 2023 that 70% of the increase in spending in his second term budgets was funding cost pressures – the added cost of standing still.

Treasury cottoned on to this way of thinking and, from Budget 2022, began publishing a dollar estimate of how much new money would be required in the next Budget to meet these cost pressures.

This figure was published in 2022, 2023 and 2024, but vanished from the Budget Economic and Fiscal Update in 2025 as the new Government took a different approach.

This different approach was an inversion of Labour’s.

As part of each Budget, finance ministers look for savings and reprioritisations, which usually take the form of cancelling, cutting, or otherwise turning the screws on programmes they don’t like. In Robertson’s last Budget he freed up $4 billion in cash from this exercise. In each of Willis’ two Budgets she’s found more than $20b, money that didn’t go into reducing the deficit but into funding existing services (and some big new ones).

There is no longer an expectation that cost pressures be funded to any serious extent with “new” borrowed money from the operating allowance.

This has been replaced with the expectation that ministers fund cost pressures in the “essential” parts of their portfolios with cash freed up by taking the axe to everything else. Core services survive, funded by breaking down a diminishing number of non-core services (or things the Government deems non-core, such as pay equity).

These two lines, cost pressures and reprioritisations, were identified in the plans departments delivered to ministers, who delivered them to Treasury, and which Treasury briefed Willis on in December.

Her office then turned around and, on April 1, briefed Cabinet’s Expenditure and Regulatory Review Committee on the findings of 41 of the plans.

From the 2024/25 fiscal year to the 2028/29 fiscal year, cost pressures in departments are set to come in at a cumulative $27.9b, while ministers believe they can find about $19.4b in savings through further cuts.

That means despite a fairly brutal round of further slashing and burning there remain “unfunded costs” in the language of the Cabinet paper, of $8.4b – the world’s most expensive April Fool’s gag.

The scary thing is that these figures don’t include all government spending, only core department baselines.

What the figures mean is that even with some serious and deep cutting in the years to come, keeping the proverbial lights on is going to be seriously challenging.

Finance Minister Nicola Willis faces having to juggle spending cuts with keeping the proverbial lights on. Photo / Mark Mitchell

It’s important not to exaggerate the seriousness of the crisis. There’s still some money tucked away in the operating allowances each year to dip into for cost pressures – a cumulative $14b-ish out to 2029. While the books are in deficit, that money is put on the credit card.

The paper embodies something Treasury cautioned earlier this year in an appearance before the Finance and Expenditure Select Committee.

There, officials said that for more than a decade (really since the first long-term fiscal statement was presented in 2006, and, less obviously, for years before then), Treasury had been warning that New Zealand’s narrow tax base and costly universal entitlements such as superannuation, healthcare and education, would begin to cause problems in the mid to long term, where there would be a mismatch between service costs and revenue.

For some time it wasn’t clear when the mid to long term would actually begin. What Treasury made clear this year is that the medium term is now. The challenges it has long been warning of have arrived.

What that means for the rest of us is that the proportion of our incomes paid in tax will be a bit higher and the services we get for those higher taxes will be fewer and less generous.

It hasn’t quite sunk in for voters. It violates the bargain politicians make with the public that the more you pay, the better things get. No politician wants to go out on the hustings telling voters they’re going to pay higher taxes for a lower level of services – and yet that’s exactly what’s happening.

After two Budgets of fairly deep cuts, voters are right to expect some kind of a dividend in the form of a better economy or improved fiscal position for future generations.

The Government hasn’t delivered either. The dividend, if any, was the tax cut from later years (a necessary dividend, given 14 years of bracket creep). There’s no appreciable dividend from this year’s cuts, and perhaps not from the ones the Government is working on for next year either.

These will be challenging. Treasury warned during this Budget that the “low-hanging fruit” are mostly gone, making further cuts more challenging.

The deficit is still large, debt is still relatively high, the labour market is weak and public services are under strain.

That is the cost of keeping the lights on while retaining the confidence of international creditors.

The commentary from ratings agency Fitch, which Willis drew attention to last month (and which were echoed at a briefing this week by another ratings agency, S&P), warned the out years were doing a lot of the heavy lifting to rebuild the Government’s balance sheet, though it doesn’t say it, this is because most of the Government’s cuts have not been directed at improving the fiscal position, but at tax cuts and spending. Those out years are predicated on this style of fiscal restraint persisting into the 2030s and beyond – but given the state of polling, there’s a high likelihood this fiscal policy will change, either by the Government capitulating to public opinion or falling at the next election.

For Labour, the problem is the same but in reverse.

The party is planning to announce its tax policy, almost certainly a version of capital gains tax, in the next few weeks.

In the past, Labour has looked to recycle some of the revenue from tax increases into income tax cuts or new public services. This time around, the most sensible thing is for the capital gains tax to fund the cost of standing still – of course, telling voters you’re hiking their taxes simply to keep things the same plays rather less well on the doorstep.

If Labour promises to use the CGT to pay for something new, then the problem of how to pay for existing services doesn’t change, it just has a new service and a new stream of revenue rolled into it.

The Nats and Act have a CGT-style policy in their pocket too: lifting the age of superannuation eligibility. Depending on how the policy is phased in, lifting the super age frees up a significant amount of money, taking the pressure off the rest of the public service to continue coming up with savings.

For things to remain the same, everything must change. That everything is a combination of the tax base and entitlements such as super.

Prime Minister Christopher Luxon, shortly after becoming leader, spoke warmly of a savings project by British Prime Minister David Cameron and Chancellor George Osborne. Cameron was even drafted to speak (over Zoom) at Luxon’s first caucus retreat in 2022 (he got Covid and Osborne subbed in). Years on, Luxon’s fate, despite fiscal restraint on a more modest scale than Cameroonian austerity, seems similar. Cut after cut, yielding not much but low growth, a slack labour market and little inroad into rebuilding the fiscal position.

The Government needs to be able to deliver some kind of dividend for the cuts voters have put up with – the dividend cannot simply be more and deeper cuts.

Next year will be easier. This year, the greatest beneficiary of the cuts was business thanks to the $6b lavished on Investment Boost. If you look at Investment Boost as a tax cut, which it really is, then this Budget was much like the last, cuts to fund cuts – just not for employees.

Next year will be different. As befits an election year, the new spending will probably be more retail. The question hanging over the Budget is whether that spending will be worth what gets cut to pay for it.

After Budgets funding Back Pocket Boost, Family Boost and Investment Boost, the thing most desperately in need of boosting in Budget 2026 is the Prime Minister’s polling.