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The challenge for the government seemed impossible. It needed to deliver tax cuts and return the government to surplus – eventually - while spending more on its flagship policy areas of health, education and law and order.
It’s accomplished this partly via the odd broken promise – the cancer drugs National pledged in the election will not be delivered this year; partly via a headcount reduction in the public service, partly via cancellation of a host of spending programmes - but mostly through deft accounting tricks that leaves almost all of Labour’s fiscal and policy settings in place.
You’ll get tax cuts this year! Probably! But they’ll have evaporated by next year: government tax revenue is predicted to keep rising for the next four years of the forecast period. The coalition’s most significant fiscal policy is a sugar rush that will fade away in less than 12 months.
Every year since 2010, New Zealand governments – first National then Labour – have charged every worker a little more tax. It’s done this via the sneaky technique of fiscal drag: as our salaries and wages rise with inflation, they drift up into higher tax brackets, charging us just a little more with each rise. Because PAYE collection is automated – calculated by IRD free of charge – we barely notice. The high inflation of the post Covid era has accelerated this trend, lifting minimum wage earners ominously close to the medium wage tax bracket.
The additional tax has been used to fund the gradual but steady growth of the state. The healthcare system has absorbed the largest amount in dollar terms – politicians are terrified by the staggering sums of money healthcare can take in without delivering better services, but they don’t dare stop pouring more cash in each year. But there’s been a general increase across the board. One of the biggest shifts has been the growth of Working for Families and the increasingly elaborate tax credits, rebates and transfers devised by Labour and National during the fiscal drag era.
When Covid hit, the government responded to the crisis with a huge one-off emergency spend: vaccines, the wage subsidy, the stimulus funds. But there was also an additional increase in the overall size of the state. This was locked in during Labour’s post-Covid budgets, but the additional spending wasn’t matched by an increase in taxes. This created the structural deficit Treasury has been warning about with increasing urgency. It’s the macroeconomic equivalent of buying the groceries with your credit card. The government was just racking up debt that subsequent generations would have to pay back with interest.
This is the first government in 14 years to adjust the tax brackets – but as of next year we’re back to the stealth tax increases, and these will help pay down that structural deficit. The government has also pledged to dramatically reduce its operating allowance – but most of those reductions happen in subsequent years. Labour’s then finance minister Grant Robertson also undertook a solemn vow every year to spend less in future, but when the next Budget rolled around, circumstances always compelled him to spend more.
There are spending cuts, of course – National has identified more than 200 programmes it has cancelled or reprioritised, and some of these are very sensible. The first home grants merely subsidised demand for housing, driving prices up while tricking recipients into thinking the government was helping them. They money has been redirected to build social housing.
There’s another trick in this Budget that delivers deeper spending cuts, again by stealth. Many departments continue to receive the same level of funding without being adjusted for inflation – the reverse of the fiscal drag. Most departments not fortunate enough to enjoy a powerful minister or patronage from a coalition partner will find themselves gently slipping backwards over the next four years.
New Zealand First has done very well out of this Budget – as it always does – and Act has done well on its own terms, finding hundreds of millions in spending cuts. During the question-and-answer period in the Budget lock-up it was revealed that David Seymour tried to sell Nicola Willis on a flattened tax system – presumably abolishing the top rate. She decided against it.
The neoliberal right should be most outraged by this Budget, which entrenches Robertson’s expanded state, albeit by attempting to shift some of the funds from the Wellington bureaucracy to the frontlines of the education and health system. We’ll see how much of that money actually arrives. In its final year in government, Labour quietly attempted similar reallocations on a smaller scale: the ministries and other central agencies were awfully good at clawing back funds intended for schools and hospitals.
The multiple impossible promises required of Willis and her associate ministers meant this could never be a substantive, or transformational Budget. There are optimistic projections of growth, much rhetoric about improving productivity, and of the grand missions to rebuild in the wake of the nefarious Labour government that wrecked the economy. But it’s hard to see any serious change in direction from the course set by Labour. If we were speeding towards a cliff before, we’ve merely adjusted in a slightly different direction, optimistic that a bridge will suddenly appear before we launch into the air.
Danyl McLauchlan is the Voyager Media Awards 2024 best columnist, opinion or critique.
