With the Budget just three weeks away, Minister of Finance Nicola Willis is softening us up for more cuts to public services, some changes to current entitlements, and continued job losses across government departments. This week, it was confirmed hundreds of IT jobs in the health sector will go, so it’s fair to say the government once again has the scalpel in its hands.
Behind the scenes, Treasury been talking about means-testing some policies. Broad benefits such as the $1.1 billion KiwiSaver subsidy or $73-a-week Best Start childcare payments for newborns have not been ruled out.
Willis has also hinted that policies likely to be trimmed are those she inherited from Labour. This is the problem with an economy that has not grown meaningfully for a couple of years. We no longer have the tax base to afford the expensive policies like Best Start, and even with an extensive programme of redirecting money from one programme to another, the National-led coalition is still billions of dollars short. It’s expected to post a $14.1b deficit in the budget, and currently borrows $500m every week to make ends meet. It desperately needs economic growth, so that companies do more business and hire more people, because that’s the only economic growth that can really drive more government revenue (unless, of course, it puts up taxes, which has been ruled out).
So now, Willis is telling us her government will spend billions less during the coming years than was forecast just last December. Part of the reasoning is she simply can’t keep adding to our debt levels. Debt leapt by almost $120b between 2019 and 2024 -- from under $58b to $175b.
In the upcoming Budget, it is expected to go past $200b. It’s a number so big it’s hard for most of us to comprehend, but it demonstrates why debt levels need to be brought under control. That said, although the government will spend less during the coming years than was previously forecast, it will still spend $149.8b this year, which is more than last year, and more than Labour-led governments ever spent in one financial year.
That costs all of us, and we must service the debt. The cost of this has risen from $3.6b in 2014 to $8.9b. These are huge numbers and represent money not available for hip operations, cancer treatments and classrooms.
What else could Willis do? Borrow and spend, which she has clearly ruled out? So, she’s obviously softening us up for one of the tightest budgets in years. We’re now following the austerity movement by focusing on reducing government spending and debt.
As they say in politics, don’t waste a crisis, and Willis isn’t. There are some -- the harshest critics on the right -- who will say it’s about time for this kind of fiscal restraint.
Under Labour, billions of dollars were made available every Budget for new spending and increases to departmental baselines became expected. The government sector got lazy and got used to the money; it wasn’t sustainable and was never going to last. Now, the public sector is being asked to enter its third, maybe fourth, round of cuts, which will do nothing for confidence in Wellington.
Here’s the danger: could further spending cuts, on top of the slowdown expected because of US President Donald Trump’s tariffs, push New Zealand back into recession? With this hanging over us, the tentative economic green shoots that emerged in the December quarter are once again under threat.
Nevertheless, Willis is confident the economic recovery will continue. Lower interest rates help, and jobs are expected to come, but it’s anyone’s guess if austerity measures will work as world economics and trade become more fraught. Trump’s tariffs have created uncertainty, and companies across the world are reconsidering their investment plans.
We need confidence, businesses feeling good about their prospects and inclined to invest and hire for anticipated gains. It’s hard to feel confidence when the International Monetary Fund has warned the chances of a global recession now sit at 40%, up from 25% before Trump’s moves.
I spoke with Minister of Foreign Affairs Winston Peters recently and he downplayed talk about a global recession, saying he doubts things will come to that. But in New Zealand, we’re vulnerable to world events and there is only so much we can do here to move the needle.
Yes, we can lower interest rates now inflation is under control, and yes, we can cut spending. But will austerity drive productivity and growth? There are other costs, too.
Although I get the logic, austerity moves overseas have backfired in some cases. Spain, Greece and Italy all tried cuts and austerity. Political instability, high unemployment and social unrest grew.
Austerity might fix the books, but at what cost to wider society?
