Budget 2024: Entrenching Labour’s big-spending approach to government

Dr Eric Crampton
The Post
31 May, 2024

It would be ludicrous to describe Grant Robertson’s 2019 Wellbeing Budget as austere. Core government spending rose from around $27.50 of every $100 in economic activity to about $29 – a substantial increase.

Earlier this week, the Taxpayers Union showed that for every person who thought Budget 2019 did not spend enough, as a proportion of overall economic activity, more than three people thought it spent too much.

During the election campaign, and at the Budget Policy Statement, Finance Minister Willis was cagey about just when core spending might reach only $30 of every $100 in economic activity – still a much larger state sector than Robertson’s Wellbeing Budget promised.

Today’s Budget, if you believe the projections, shows just how long that path will be.

At the end of the normal forecast period, 2028, core government spending will make up $31.10 of every $100 in economic activity.

To see when spending comes back down to pre-Covid levels, you need to turn to the long-term fiscal model’s projections. And there we see $30.10 in 2033, and $29 in 2038.

Finance Minister Willis promises a larger government sector effectively forever. A return to pre-Covid core government spending, as a proportion of GDP, might happen 18 years after the borders closed.

The Public Finance Act does not say how large the state sector should be. But it does require fiscal responsibility: a government must raise the taxes necessary to fund its desired levels of spending, rather than fund normal spending through debt.

If the Government sticks to its plans, there is a small forecast surplus by 2028.

But believing that requires believing that police budgets will shrink from $2.7 billion in 2024 to $2.4 billion in 2028, that school lunch funding will end after 2027, that a new series of Lord of the Rings movies will not increase the cost of film subsidies after 2026, that Government sticks to relatively tight operating allowances, and that we avoid other downside risks.

National had criticised Labour for similar funding ploys. At least time-limited funding is now more clearly listed.

Finance Minister Willis claims the Government will not be borrowing to fund its minor changes to tax thresholds. How? One set of expenditure reductions is listed against tax reductions; another set of expenditure reductions is listed toward the return to surplus. The distinction is arbitrary.

Worse, the return to fiscal discipline requires continued “fiscal drag”.

The Budget updates tax thresholds to account for a small proportion of the inflation that pulled more taxpayers on low real incomes into higher tax brackets from 2011 through 2024. But it will not take long for inflation to undo that change.

The last National government delivered surpluses from 2015 through 2017 on core tax revenue of $27.50 of every $100 in economic activity.

With the tax threshold changes, core tax revenue will be $28.80 of every $100 in economic activity in 2024, rising to $29.50 by 2028. If inflation dropped to 2% tomorrow, which it will not, the adjustment to the bottom tax band would be undone within about four years. Fourteen tax-ratchet-clicks forward, four steps back. Perhaps the tax bands will be adjusted again in 2038 to partially account for the next 14 years of accumulated inflation.

And perhaps it would have been better to set automatic adjustments to the tax thresholds so governments could not rely on inflation to solve their budget problems.

Finance Minister Willis noted that Cabinet decided a slow path to expenditure reduction was best for Kiwis, rather than faster fiscal consolidation.

She also pointed out how much more difficult the path to surplus is this time.

When Finance Minister English returned the books to surplus after the Global Financial Crisis and Christchurch earthquakes, holding spending fairly steady meant that fiscal drag and economic growth could do much of the job.

Treasury has been warning of slower productivity growth and reduced economic growth. Slow economic growth makes it harder to drive down spending and debt as fractions of GDP by just holding the line on spending.

Given the need to find savings, it was surprising that Budget 2023’s $40 million per year in videogame subsidies will continue. It isn’t much in the grand scheme of things, but did the government just overlook this one, or does it think that subsidising the videogame industry when trying to get the books back in line is a good idea?

It would be unfair to describe Budget 2024 as a Grant Robertson budget. Spending would have remained higher for longer had Robertson remained Minister.

But it is fair to describe it as permanently entrenching a much larger state than even Robertson had promised in 2019.

I wonder how Ministers Seymour and Willis would have described a Robertson 2024 budget that promised a return to pre-Covid spending only by 2038, with continued subsidies for videogames.

To read the article on The Post website, click here.  

Stay in the loop: Subscribe to updates