Friday, March 29, 2024

Dr Oliver Hartwich: Luxon's challenge - Fiscal discipline or tax cuts

New Zealanders recently learned about a new feature film. It will be about former Prime Minister Jacinda Ardern – and taxpayers will subsidise it to the tune of NZ$800,000.

Ardern had nothing personally to do with either the film or the subsidy. But her government’s loose spending habits left New Zealand’s public finances in a parlous state. That includes items like throwing hundreds of thousands of dollars at a hagiography for a retired politician.

Ardern’s successors, meanwhile, have their work cut out to clean up the mess. The situation facing the new government, led by Prime Minister Christopher Luxon and Finance Minister Nicola Willis, is dire. New Zealand’s government spending remains well above pre-Covid levels, public debt has risen sharply, and budget deficits loom for the coming years.

The new government has made it clear that the fiscal hole is even deeper than the previous administration let on. Since the election, several so-called “fiscal cliffs” – measures promised for the long run but only funded short-term – have emerged in the fiscal fine print.

To make matters worse, the economy is weaker than anticipated last year. GDP contracted 0.3% in the September 2023 quarter, with the economy 0.6% smaller than a year earlier. This was well below market and Reserve Bank of New Zealand (RBNZ) expectations. Revisions also showed the economy was in a technical recession in late 2022 and early 2023. Strong population growth means the situation is even more dire in per capita terms.

Looking ahead, most economists expect little to no growth in 2024 as high interest rates continue to cool demand. Westpac, for example, is forecasting practically no growth this year and only a gradual recovery from 2025. The RBNZ itself acknowledged in February that the risks to the inflation outlook have become more balanced as the economy slows.

With public finances deteriorating, fiscal consolidation is urgently needed. Core Crown expenses have ballooned from 28.7% of GDP in 2017, when Jacinda Ardern became Prime Minister, to a projected 33.4% of GDP in 2024 – an increase of nearly 5 percentage points in just 7 years.

The absolute numbers are staggering: Where the New Zealand Government spent about NZ$86 billion in 2019, this year it will be north of NZ$140 billion. Even accounting for inflation and population growth, this is a substantial increase in government spending.

Meanwhile, gross Crown debt has skyrocketed from 28.1% of GDP in June 2019, the year before the pandemic, to 39.9% of GDP by January 2024. This represents an alarming deterioration in the government's books in a very short period.

But the challenge is not just to balance the books. It is also about restoring some sanity to public spending practices. For years, procurement, project management, and cost-benefit analyses have been deficient.

For example, just before Christmas last year, the Auditor-General delivered a scathing report on infrastructure spending under the Ardern government. It investigated its NZ$15 billion spending on the so-called NZ Upgrade Programme and Shovel-Ready Projects.

According to the Auditor-General, decisions were made hastily without proper due diligence, despite officials warning of risks like cost overruns and delays. Processes lacked clear records and rationale for some decisions. Some projects had significant cost increases, delays, or were discontinued midway.

Such nonchalance about the use of public funds is symptomatic of a wider malaise. For too long, New Zealand governments have paid insufficient attention to the actual results of their spending. This was especially true under Ardern. Under her leadership, spending announcements themselves were celebrated as if they were the solution to any problem. Far too rarely were there checks on whether the money was making a difference.

While the new government has been vocal, and rightly so, about the fiscal mess it inherited, it has been coy about its own plans to rectify the situation. It even wants to proceed with promised tax cuts. The long-term fiscal strategy of the new occupants of the Treasury benches largely remains up in the air.

Worryingly, the government’s projections so far seem to resign themselves to the fact that spending will remain far above pre-Covid levels and substantial budget surpluses are unlikely to return this decade. The half-year economic and fiscal update in December 2023 forecast ongoing deficits until at least 2026/27. Meanwhile, forecasts for productivity growth remain anaemic.

There is ample scope for any government serious about budget repair. Some positive first steps are evident, not least the welfare reforms of Social Development Minister Louise Upston. Her changes are promising – and sorely needed.

The number of working-age people on the Jobseeker benefit swelled by 70,000 between 2017 and 2023, with around 40,000 more on it for over a year. Sanctions for failing to meet job-search obligations plummeted 58% over the same period. If there is one area where spending reductions are possible and desirable, this is it.

Upston is proposing to increase obligations on jobseekers to look for work, with sanctions for non-compliance. After years of ballooning welfare rolls, even with a tight labour market, this renewed focus on work is welcome.

But there are many other areas too where cuts could and should be made. The aforementioned film subsidy for the Ardern hagiography is a case in point.

Similarly, given the extraordinary growth in public service numbers since 2017, it would be surprising if there was no fat to trim among the armies of communications staff, HR managers, and administrators now on the government payroll. The public service has expanded by nearly 16,000 full-time equivalent staff since 2017. Its workforce increased another 4.5% in 2023 alone.

As just one example, the Reserve Bank of New Zealand recently advertised for a new Diversity Advisor. This is precisely the kind of non-essential spending that New Zealand can no longer afford.

The new government must not dither on fiscal consolidation. There will inevitably be future crises – a natural disaster, a global recession, or even a war – for which New Zealand needs to be fiscally prepared. Running persistent deficits now will leave the country vulnerable and ill-equipped to respond to such shocks.

The Luxon government must be bold and upfront with the public. New Zealanders, once they understand the gravity of the challenge, would probably support a government doing the prudent and responsible thing.

Funding a film about the Prime Minister who helped create the fiscal hole is an irony New Zealanders can do without. Informing New Zealanders about the true state of their country’s finances would be a better investment.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.


Anonymous said...

But Luxon and Ardern are great mates, with the you scratch my back and I'll scratch your back kicking in.

The "uniparty" in action, taxpayers be dammed.

Basil Walker said...

Dr Hartwich, I suggest a NZ Initiative lead report and direction of emphasising the majority of NZ public requirement to demand a moratorium and cessation of the Coastal and Marine court cases . While we are there an exorcet missile magnitude report needs to be directed at the apalling lack of etiquette and understanding by the Courts and judges of their requirement to not meddle with the law enacted by our Parliament .
As to the shovel ready projects (SRP)- Queenstown was the recipient of them and they are uncompleted and a virtual disaster with suggestions that they will remain as uncompleted arterial roading for the forseeable future . The waste in all aspects of design and construction has been scandalous .

Rob Beechey said...

Very well stated Dr Hartwich. Stop dithering Luxon and start cutting a swath through wasteful spending …now. The public has given you a chance, don’t blow it. Be remembered as the leader that turned this ship around and not for re arranging the deck chairs. The Ardern tax funded film budget is totally provocative to every fair minded kiwis. Kill it dead…

Tom Logan said...

Should we assume life to be generally fair or predictable ?

Three things I believe we can safely assume though.

Firstly that if we ask a small group of economists the same question we will get a vast and bewilderingly diverse range of replies.

Secondly no matter what this Coalition Government does about income tax cuts the MSM will be nonsensical in their response, and should Nicola Willis not deliver such cuts they will howl for her head like Romans at the Colosseum.

And thirdly that economists and the MSM regularly forget that tax payers are absolutely entitled to the human dignity of feeding their kids by their own retained wages rather than a welfare payment.

How unusual it is then that a Government should actually honor it's election promises. But that's what you get from a Government like the current one that believes in proper democratic process.

Indeed the Ardern Governments made it a defining principal to enact as much new legislation as possible totally unmentioned in their election manifesto. That's what you get from totalitarian and socialist governments like hers.

We have seen this Government smash to pieces the little which remained of Ardern's legacy that Hipkins hadn't already bonfired. I don't doubt that the Government will be equally as determined in the way it cuts wasteful expenditure in the budget.

I'd personally love to see all future subsidy payments made to the MSM via the Public Interest Journalism Fund suspended until the Government is back in surplus. Wouldn't Tova And Mikey squeal, "how dare the taxpayers demand the right to feed their kids", they would rage.

And perhaps someone could remind Cameron Bagrie that taxpayers like to feed their kids, he's one who seems to have gotten.

Hazel Modisett said...

Come on now. Do you really think they give a damn when they are paying their mates in excess of $2000 PER DAY ! to fix problems that they created. Are they willing to tighten their belts, take pay cuts & give up their obscene benefits ? The problem with politics is professional politicians & a top heavy govt overstuffed with pot licking bureaucrats. Our services are failing because from bottom to top, they are staffed by imbeciles. A drainlayer could run Wellington far better than their current Mayor & a bus driver could run Auckland better also. Why ? Because they at least have 1 life skill that is needed for the position & would employ people that have skills & experience in areas where they lacked expertise, not a bunch of overpriced intellectuals whose only experience is with modelling & statistics, but who lack the knowledge & life skills to feed the models the right data just like during the Covid fiasco. It is insane to believe that more of the same is going to fix the problems in the system, when the system itself IS the problem. Ask yourself you think the country would stop operating if we tarred & feathered the lot of them & threw them off the docks at Lambton Quay ? No, of course not. Things would continue to get done (a lot cheaper & more efficiently), people would have more money in their pockets & communities would come together to solve problems instead of relying on a govt that lacks the ability to even fix problems of its own creation & has historically always been a day late & dollar short to put the Band Aid on the bullet wound. I say kick the lot of them to the kerb & get on with it. We would all be a lot better off.
But that wont happen, because not a single person will stand up & demand "not a penny" be spent on funding a documentary on undoubtedly NZs worst & certainly most despised politician ever.