Michael Reddell: Tougher than that

Thomas Coughlan has a column in the Herald this morning, under the heading “Nicola Willis is just the right amount of Tory”. To this centre-right voter it isn’t obvious Willis is (or sees herself) as any type of Tory, but what Coughlan seems to be suggesting is she is just right if the aim is to hold office, and never mind the large structural fiscal deficit the government inherited from Labour.

It isn’t an uninteresting column, and this post is just about one snippet where I don’t think the author is quite right. Here it is

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The simple maths looks about right: $3.5 billion is 25 per cent higher than $2.8 billion and the CPI has increased by about 25 per cent since Budget 2018 (depends a little on your precise reference point). But that isn’t the right way to look at things: it misunderstands how the operating allowances work. And it doesn’t come even close to meaning that Willis is splashing the cash just like Grant Robertson was doing in his first Budget.

There are two things Coughlan seems to have overlooked. First, a big part of what the operating allowances cover is cost pressures on existing government spending programmes. Some increases, eg to welfare benefit rates, are done automatically by statute, and so don’t count against the operating allowance. But most other things do – new programmes of course, but also many of the spending implications of population growth (very rapid at present) and general inflation.

One way of looking at this is to compare the two operating allowances (2018 and 2023) with the total government (core Crown) operating expenses in the year just ending at the time of each Budget.

Grant Robertson gave himself an operating allowance of $2.8 billion in 2018 against an estimated final level of operating spending then for the year to June 2018 of $81.7 billion (3.5 per cent of that spending). Willis by contrast talks of an operating allowance of (probably just under) $3.5 billion against estimated (at HYEFU) spending in the year to June 2024 of $140.3 billion (or 2.5 per cent of that total). National was very vocal about the increases in spending under Robertson, but they went into the campaign not promising to get rid of many programmes (and needing most of their spending savings to finance promised tax cuts). The programmes still cost, inflation is still a thing, and the population keeps growing.

But this year’s story is even tighter than that simple comparison might suggest. Inflation is not something under control of the Minister of Finance – we have the autonomous Reserve Bank for that – and so from any one year’s Budget perspective inflation (as forecast by Treasury) is just one of those things the Minister of Finance is stuck with. In the early 2010s, one thing that made Bill English’s zero operating allowances less extreme than they might have seemed was that inflation was very very (and surprisingly) low. In the 2018 Budget – Robertson’s first – Treasury forecast CPI inflation for the year to June 2019 at a mere 1.5 per cent. By contrast, at least in the HYEFU the Treasury forecast for inflation in the year to June 2025 was 2.5 per cent (and in the BPS last week that forecast was still 2.2 per cent). Willis faces more cost pressures just from inflation than Robertson did in his first year, and that chews up not inconsiderable amounts of the operating allowance.

So it seems quite unlikely that the room she has given herself (all nominal) will do anything close to justifying Coughlan’s claim that this Budget will be “one of the more generous right wing Governments in New Zealand history”. Core Crown expenses as a share of GDP will almost certainly be dropping.

I’m no fan of this government’s fiscal policy – and the apparent indifference to the deficit, and the spooky scare stories about not being Ruth Richardson or Tony Abbott (both mentioned in the article) – but on the numbers the minister has given herself and the general inflation pressure Treasury is forecasting it hardly looks like being all that generous, even by National Party standards (one could make a case for not in effect being that much different than Steven Joyce’s Budget in 2017). That is neither surprising nor inappropriate coming off the back of six years of very large increases in government spending. And after all in 2018 (fairly or not) Robertson and Ardern were banging on about making up for “9 years of underfunding”, a very different narrative to Willis’s now. But the big difference from Steven Joyce in 2017 is that he was running surpluses, and Luxon/Willis apparently are content to keep running deficits.

But….there is the nagging question of what specifically are ministers deciding they don’t want to spend money on that Labour was spending it on (over and above the savings they are now exacting from departments, but on which the promised tax cuts have first claim). We don’t know. Do they?

Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.