David Farrar: Spending is too high

Jenee Tibshraeny writes:

Five years on from the onset of the pandemic, it is becoming clear the Government’s finances are suffering from long Covid – not just a Covid hangover.

Many Kiwis have taken their medicine – stomached high interest rates and faced job cuts, as the Reserve Bank has curbed inflation and the Government removed pandemic-era spending initiatives.

But still, the Government’s books are not back in shape.

In fact, its debt position is expected to continue deteriorating before it improves.

Treasury is warning the books are in a “structural” deficit.

Spending is at a fundamentally unsustainable level, even once you strip out the ups and downs associated with different parts of the economic cycle.

The reckless spending by the Ardern/Hipkins Government has left the country in a terrible place to be. Rather than temporarily increase spending to help cushion the Covid shock, they permanently increased spending across the board.

In 2017 Labour and Greens promised to hold core crown spending to under 30% of GDP. In 2016/17 it was 28.5% of GDP. They said they would increase it – at most – to 30% – a 1.5% increase.

They left it at 33.6% of GDP for 2023/24. Instead of increasing it by no more than 1.5% of GDP, they increased it by 5.1% of GDP – more than three times as much.

This makes more sense in terms of actual spending. So here is what it means in June 24 dollars:

• Ardern/Hipkins inherited spending of $118 billion
• Ardern/Hipkins promised that spending would not go beyond $124 billion
• Ardern/Hipkins left spending of $139 billion

That extra $15 billion a year is why we have a structural deficit. It has nothing to do with Covid-19 – that should have been temporary spending.

The last time spending was this high a proportion of the economy was in 2011, when we had the Canterbury earthquakes. The difference is that while spending spiked up to around 35% of GDP, it then dropped back down again in the years afterwards. Labour didn’t drop it back down. They used the Covid-19 crisis to increase spending on all sorts of non-covid activities.

David Farrar runs Curia Market Research, a specialist opinion polling and research agency, and the popular Kiwiblog where this article was sourced. He previously worked in the Parliament for eight years, serving two National Party Prime Ministers and three Opposition Leaders