Readers will recall my post last Thursday presenting the IMF’s Fiscal Monitor numbers, which show New Zealand being expected to have the largest general government primary structural deficit this year of any advanced economy. Cutting spending by $1.1 billion will, all else equal, probably shift the New Zealand government to having the second largest advanced country deficit.
If the headline sounded encouraging, reading the full text of the speech left me less encouraged.
First, it sounds as if more handouts are still part of the plan.
If the headline sounded encouraging, reading the full text of the speech left me less encouraged.
First, it sounds as if more handouts are still part of the plan.
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And second, although there is talk of a “significant savings drive” freeing up “billions of dollars”
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there have been no announcements of things the government is going to stop spending money on, or of agencies/departments it is just going to close down. I guess it is still a few weeks until the Budget itself so perhaps something is coming, but there isn’t even a taster in this speech.
And third, it seems pretty clear from the speech that this operating allowance cut is mostly about avoiding yet another fiscal update in which the date for a return to operating surplus is pushed back yet again.
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And note that the small surplus Treasury projected for 2028/29 was on the Minister’s slightly dodgy new ex-ACC measure of the operating balance (one that The Treasury did not endorse). On the more usual operating balance measure, HYEFU showed 28/29 as the 10th year in succession of deficits. From what the Minister said this morning, that is likely still to be the case in the BEFU numbers.
I’m not going to object to the cut to the 25/26 operating allowance – which is a policy lever chosen by the Minister, not something for Treasury to “forecast” – but without specifics we might reasonably be sceptical about the durability of the cuts.
Late in the term of the previous government, the then Minister of Finance was solving his problems with forecast fiscal outlooks by telling Treasury he’d stick to low operating allowances in future years. Willis seemed to be doing something a bit similar last year (Treasury noting the tension between inevitable cost pressures and those headline numbers they are required to use, as advised by the Minister). That really was vapourware. This year’s cut is likely to have more substance to it, since it will directly affect appropriations for the 25/26 financial year.
But without specifics on what the government is going to stop doing or paying for, there has to be a bit of a suspicion that what is effectively going on is across the board (real) cuts, with no real idea as to what the impact or opportunities for durable savings might be. This was the second item in the Minister’s three-point list.
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But we already had one round of generalised savings last year. After the approach of the previous government it was always likely that most agencies would have some fat to cut (while still delivering things the government says it wants/needs). Whether that is still the case must be an open question. No doubt agency CEs – under tighter fiscal rules than, say, the Reserve Bank (see last week’s post) – will ensure that their departments stay within their budget, whatever it is set at. But at what point do inroads start being made in capability? It certainly isn’t as if economywide productivity growth is running at 2 per cent per annum.
It would all be a great deal more reassuring if there were specific announced things the government was no longer going to do. But, for example, all the subsidies in the system still seem to be continuing.
And finally, a reminder of the starting point. In my post last week I included this chart
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As a reminder, this used the 2024 HYEFU and 2025 BPS as the base for the New Zealand fiscal data.
When I was writing that post last week I remembered writing some similar critical pieces in the run-up to the 2023 election, where the numbers were based on the then Labour government’s stated fiscal plans. The October 2023 IMF Fiscal Monitor came out just a few days prior to the election. This was the same chart – for structural primary balances – for 2024, as published in that edition.
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In relative terms, we had the 5th worst structural deficit forecast then and have the worst now (maybe second worst with this morning’s announcement). In absolute terms, the IMF’s October 2023 estimate of the structural primary deficit for 2024 was 3.4 per cent of (potential) GDP. Last week’s new IMF estimate for the structural primary deficit for 2025 was 3.7 per cent of (potential) GDP.
To repeat a point from last week’s post, these are not operating balance measures but rather encompass all (non-interest) spending and revenue. The lines between opex and capex are often very blurry and malleable in government accounts, and not only does it often make sense to look at overall primary balances rather than operating ones even when looking at just your own country, it is only way in which meaningful cross-country comparisons can be done.
The fiscal bottom line still appears to be that things are no better, in structural cyclically-adjusted terms, than they were 18 months ago, and may even be worse. We should no doubt be thankful for small mercies – this morning’s announcement may be one – but the outstanding imbalances are large and do not yet seem to being addressed seriously. Those imbalances are bad, both absolutely and in international comparison terms. They are political choices. Unfortunate ones.
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.
1 comment:
Didn’t understand a bit of what the author wrote, but I take it from the graph that confirms my understanding of the state of economic affairs in NZ that we are in the crap and nobody in Parliament or the administration knows how to get us out. My suggestion is leave it to ordinary New Zealanders by getting rules and regulations off our backs and stop stealing our money through taxes rates and printing money to buy votes.
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