Yesterday the Prime Minister and leader of the National Party made some rather preposterous claims in his post-Cabinet press conference (as reported here by The Post)
When you read stuff like this from the head of the government perhaps one comes to better understand why senior officials can actively mislead parliamentary select committees and suffer no real consequences. People in power seem simply not to care about the facts, or even a plausible grounding in truth.
Where to start? Well, perhaps here in a chart I ran on Twitter back at budget time in May.
On the IMF’s reckoning, New Zealand had one of the larger structural fiscal deficits of any advanced economy this year. As I noted then “This is from the April IMF WEO but on Tsy numbers nothing in the budget yesterday altered the structural deficit for this year so the chart should still be representative.” There is a variety of other IMF fiscal deficit measures, and New Zealand now shows up poorly on all on them.
Now, the Prime Minister is quite correct that a lot of advanced economies have made no progress in cutting their deficits, but then a) ours are typically larger than theirs (and were in 2023) and b) more importantly, neither has New Zealand. That is so whether one looks as these IMF metrics or if one looks at the New Zealand Treasury’s own structural deficit estimates.
In each year’s Budget Economic and Fiscal Update The Treasury includes tables showing their estimates of the structural deficit (ie the bit not driven around simply be cyclical economic fluctuations, the bit that will only go away with specific policy choices). The Budget is typically released in May, so there is an estimate for the fiscal year just about to end and one for the year just about to start (shaped by the specific concrete fiscal choices and appropriations from the budget being announced).
Here is a summary table for the three budgets to date brought down by this government
In the 2024 and 2025 Budgets the government consciously and deliberately (since they had the Treasury numbers in front of them) chose to increase the structural deficit, and in this year’s budget there was a very slight estimated reduction. Taken together, over three budgets discretionary fiscal policy has not produced any fiscal consolidation at all.
Of course, in the outer years budgets (under this government and its predecessor) almost always show a track in which structural and headline deficits shrink and eventually we return to surplus. Here is summary table showing successive EFUs (PREFU 2023 captured Labour’s stated fiscal policy) and National’s 2023 Fiscal Plan
On both Labour and National’s stated numbers at the time of the 2023 election we’d be in (modest) surplus, on the proper OBEGAL measure, this year. Instead – and of course it is National that has led the government – the deficit for this year was projected to be around 3 per cent of GDP (most of which is structural).
We were promised consolidation, but none has been delivered. None.
A good illustration was reported by the Herald last week, when the proactive release of Budger-related papers finally occurred.
There has been lots of fine talk about public service staffing cuts (it suits National to talk them up as an achievement and Labour to bemoan “austerity” etc) but the numbers so far have not amounted to much in total and (as Treasury reports in that paper) the 2026 Budget was expected to result in a material increase in core public service staffing numbers.
Easy to talk before an election of what you might do after it, but it seems safer for voters to be guided more by what has actually been done. And that has not been fiscal consolidation (or overall spending cuts)
A few weeks ago National came out with its (so-called) Budget Responsibility Rules, which consisted (in effect) of making much the same commitments as they’d run in their 2023 Fiscal Plan: a return to surplus (on the Treasury standard OBEGAL measure) three years’ hence, but few/no credible specifics as to how they would deliver that, and a track record that gives potential voters little reason to believe that they are really serious this time. Why would we? After all, if they win a second term a) things always get harder to do in later terms, and b) on all polling this year, National is likely to be in a relatively weaker position within the government than they are now. Is there anything in how the government has governed in the last three years, or in their specific giveaways promised this year, that would lead one to believe that they will really make the scale of cuts required to deliver a return to surplus?
The government has raised debt (materially – more than at any time in decades outside identifiable crises like Covid or the Christchurch earthquakes), it is relying on fiscal drag (increasing tax/GDP), and it has not cut spending as a share of GDP. The words of St Augustine, “Lord, give me continence and chastity, but not yet” spring repeatedly to mind.
Not, of course, that there is any sign of Labour being much, if at all, better. It was, after all, Labour that bequeathed the government the large structural deficits. Labour too that promised – look, the forward tracks – that in government they’d have delivered a return to surplus by now (with no credible policy basis for believing that promise either). It is, I suppose, good that political parties still feel the need to talk about returns to surplus (I don’t think we see the same language in the UK for example) but neither side seems to feel obliged to actually deliver.
This time, Labour too promises a return to surplus (OBEGAL) on much the same time frame as National and the current government. The problem is that there is no more basis for believing that than there was a) for believing them in 2023, or b) for believing National at either election. Labour says it envisages a higher core level of government spending than National plans (as I guess you’d expect) but…..that means more tax than otherwise to finance that spending. And not only is the proposed CGT forecast revenue fully committed to fund specific additional spending pledges, but that revenues depends entirely on house prices rising but they are still falling (and ideally should keep falling if land use reform is at all serious).
The Prime Minister’s claims are more egregious – and at this point matter more as he is actually the Prime Minister – but there is really no sign of a) any fiscal consolidation to now or b) any real reason to believe that we will see any serious and deliberate fiscal consolidation from either side, whoever wins the election. It will be a decade of deficits, unless something quite fortuitous happens, and then we’ll probably start out on a second decade as the demographic pressures on spending mount and nothing material is done.
We can still take comfort in the level of overall public debt being relatively modest. But debt levels build. It wasn’t many decades since the UK was a low debt country, and now it is at the leading edge of the rise in global bond yields. It isn’t the way New Zealand should be content to go, but there is little sign of willingness by our politicians – notably including our current ministers – to either make hard decisions or to be honest with the public about the scale of the challenges. More giveaways, more bread and circuses….and more debt again seems so much easier for our fiscally feckless politicians.
Thank you for this. I thought National is the lesser evil. But having read this I will not vote for liars, not vote for socialists, and not vote for racists so I will not vote for anyone. Who cares about my vote anyway.
Weshah Razzak, PhD Research Fellow wrazzak@massey.ac.nz http://logec.repec.org/RAS/pra22.htm https://scholar.google.com/citations?user=h_QxFlMAAAAJ&hl=en http://razzakw.blogspot.com PH (+64) 0223055405
LikeLiked by 2 people
As a citizen or resident, you do have some responsibility to consider the options – you can do this from a broader economic perspective by understanding the impacts of governments economic policies. Rather than getting caught up in culture ware arguments about ‘socialists’ or ‘liars’ etc. Leave that for NZ First, Sean Plunket and other culture war warriors and ignore them.
The articles on this site are particularly sharp and detailed – thank you Michael.
LikeLike
Excellent detailed breakdown of the persistent deficit spending in NZ.I’d add that a stagnant economy produces two downsides – lower tax revenues and no/low economic growth – given that growth is a mechanism to lower debt to GDP over time.
The 2024 tax cuts – I don’t know the numbers – but the reduction in government revenue was significant and permanent before any consideration was given to spending cuts. This created an immediate increase in the operating deficit.
If the population is growing at a higher rate than public services and infrastructure, then that is a reduction in government spending. Not to mention keeping pace with the rate of inflation.
Why has the deficit widened? The reduction in tax revenue plus the rising cost of automatic stabilizers like unemployment, pensions and other transfers that increase in a weak economy.
My push back would be that the government has done the correct thing from a macroeconomic perspective. By running a deficit, the government is adding more money to the economy than it removes. This prevents a recession or deeper downturn by smoothing out private sector volatility and, in particular, preventing deflation.
LikeLiked by 1 person
On your final paragraph, I’d argue that they’d have been better to have closed the deficit and left any macro stimulation that was required to the RB (which would probably have cut the OCR a bit faster than otherwise), As it is, now we have a recovery just getting started, the OCR rising, and they have still chosen to run a structural deficit in 26/27
LikeLiked by 1 person
Thanks Michael. I think there is a limit to what low interest rates can achieve in a weak/ contracting economy – like NZ’s is at the moment. An OCR at 2.5% for months on end has done little to stimulate growth and inflation is now out of band and has been for a long time.
The reserve banks job is to manage inflation and financial stability – interest rates alone cannot increase aggregate demand especially in a downturn – that is a well-established Keynesian reality when you look at the data and the NZ economy over the last 3 years.
Governments cannot reduce an operating deficit on a whim because deficit spending is a crucial component of the economy. In reality, most government surplus are momentary and a consequence of strong economic growth – not spending cuts. There are few examples of governments that run a consistent surplus in the data because it doesn’t make economic sense to deliberately cause demand destruction unless you have exceptionally strong growth or a large trade surplus bringing new money into the economy.
The ‘recovery’ I predict will be similar to all the other recoveries that have been predicted for the last 3 years. Whoever is elected to govern in November will face severe fiscal constraints due to reduced tax revenue. This constraint is going to mute growth and recovery in NZ for the next 2 to 3 years given that both major political parties are focused on reaching surplus in that time.
LikeLike
We’ll have to agree to differ on this, but thanks for your comments
LikeLike
Thanks Micheal. In terms of predictions – we can see how things play out in 27/28 for the NZ economy. My comment about government surplus is supported by historic economic data for most modern economies. The big changes in the 1980’s did not remove underlying Keynesians mechanisms that maintain and support economic stability for businesses and individuals in the private sector.
The depth and detail of your articles is exceptional and really challenges me to think about and articulate a burgeoning understanding of macroeconomics.
LikeLike
What do you expect would happen to GDP and unemployment if the government didn’t do this?
“they have still chosen to run a structural deficit in 26/27”
This is something I’ve asked Matthew Hooton as well – what exactly do you think the economic outcome would be if the NZ government cut spending within a few months to match tax revenue? What is the expectation from your perspective in this scenario?
As a Keynesian I struggle to understand how this could lift growth or any positive indicators in the economy.
LikeLike
All else equal, the RB would cut the OCR and in conjunction with that the exchange rate would fall. Both will tend to draw in additional domestic demand to offset the cut in the fiscal deficit (some potential timing differences so ideally – at least in a fairly weak economy – a govt would provide the Bank with reasonable notice of its intentions.
LikeLike
Okay. Yes, with timing I can see this happening, and it does happen in the data from time to time (usually with strong economic growth), but only if the two ‘institutions’ operate together to prevent deflation – part or the remit of financial stability.
The other element to consider is that the government has hard commitments – the automatic stabilizers from earlier – to meet an urgent surplus requirement the government would need to enact law changes to reduce the payment of transfers and maybe remove certain transfers altogether – pensions or unemployment benefits, for example, could be eliminated for all but a very few. Reducing the dynamic component of government spending that these represent.
However, to my thinking, eliminating an automatic stabilizer from the government’s fiscal commitments will lead to a more volatile private sector (deflationary and inflationary swings and much higher levels of unemployment) as was the case before these mechanisms were introduced after the Great Depression.
LikeLike
I don’t think anyone is arguing for weakening automatic stabilisers
LikeLike
This is what NZ did in the 1990’s (Ruth Richardson – I think) and the government did meet a ‘surplus’ literally by reducing transfers directly (plus an export boom) – the trade-off was very high unemployment.
To continuously match spending to tax revenue, government spending would need to be flexible and able to adapt to changes in the private sector business cycles regardless of the consequence.
So, in a weak economy with lower tax revenue the government would need to reduce spending. In a growing economy the government would have some room to spend more but would be wiser to keep spending low and be prepared for the next downturn.
This would require the removal of or at least dynamic transfers that reduce in a downturn and rise in good times – for example. Pensioners and the unemployed would receive payments based on available tax revenue at any point in time – not a fixed amount.
Or the government could furlough a certain number of hospitals and schools to suspend payment of public sector salaries until tax revenue was available to meet the commitments.
This is the only way that I can see for a government to maintain balanced books, consistently, over time and through the business cycle.
LikeLike
That isn’t an accurate characterisation of the early 90s experience. (Also, no one I know argues that the budget should be balanced each and every year, only that “structural” (ie non cyclical) deficirs should be avoided
LikeLike
Sorry – I was being a bit facetious there to make a point about the underlying (and unsploken) Keynesian mechanisms at work in the economy. There are those in NZ calling for permanent, balanced books government spending or, at the very least, creating that impression.
Keynes would agree on returning to surplus with economic recovery and growth, but you do need to ensure a sufficient level of taxation to make that happen and you may need to invest and spend sufficiently to get that growth in the first place.
LikeLike
Michael
I find the many measures of government’s deficit a tad confusing and not really what matters. What I feel does matter is government’s borrowing. Do you have the data for changes in net debt over the last few years and the projections for the next few?
I feel how debt levels are tracking will be a better measure of this Government’s housekeeping and restraint. After all, what matters isn’t just income and spending, it also includes what other capital has been squeezed out of the system.
Tim
LikeLike
General government debt has risen from about 46% to 54% since the govt took office (larger increase over 10 qtrs than at any time for decades when there wasn’t an immediate crisis – GFc/earthquake and Covid.
LikeLike
NZ government debt is low by global standards – it hovers around 40to 50%% of GDP at the moment. The increase in debt under the current government is happening because of several factors – tax cuts that created a massive hole in government revenue, a weak economy delivering low tax receipts and high unemployment increasing the amount of direct transfers the government has to meet. This combination is pushing up the cost of hard commitments that the government can only meet with deficit spending because tax revenue is insufficient.
Both Labour and National have committed to surplus in 3 or 4 years this is likely to stabilize debt to GDP rather than reduce it because of the structural weakness in the economy. Ironically, at least some of that weakness is caused by the drive to reduce government spending.
LikeLike
Government debt is not reduced through ‘housekeeping and restraint’. Economic growth and, ideally, productivity growth, are the engines that lowers debt to GDP – not spending cuts.
When the government reduces spending this directly impacts the private sector – reduces demand, crushes businesses activity and destroys jobs. Exactly what we have seen play out over the last 3 years.
Remember, all government spending happens into the private sector. The government is a net contributor to the performance of the economy.
LikeLike
I checked with Gemini AI for a description of the NZ economy in the 1990’s:
Key Elements of the 1990s Reforms
While the budget surplus was sustained in part by an export growth surge later in the decade, the initial fiscal discipline came at a severe human cost, resulting in sharp increases in poverty, social inequality, and persistent long-term unemployment.
LikeLike