In Greek mythology, Sisyphus is condemned to spend eternity rolling a massive boulder uphill, time after time, for no lasting gain. Every time he gets it uphill, it escapes his grasp and rolls back to the bottom.

National Party Ministers of Finance, from Ruth Richardson on, could be forgiven for feeling like Sisyphus. Each spent most of their years in office struggling to turn fiscal deficits into surpluses, only to see the next government turn them into deficits.

In her 1991 government Budget, Ruth Richardson (National) took over the work to reduce deficits started by the impressive fourth Labour Government. Her successor, Bill Birch (National) continued that dogged, unpopular but necessary task.

The fifth Labour government (1999-2008) inherited the benefits, running large fiscal surpluses in the mid-2000s. But it ran them down after 2005 through big spending increases.

It took the fifth National Government (2008-2017) most of its nine years in office to turn fiscal deficits into surpluses. The global financial crisis of 2008-2009 and the Christchurch earthquakes compounded its inherited big spending problem.

The fifth Labour government (2017-2023) enjoyed the hard-won fiscal surpluses for a while, only to increase spending much faster than planned even before Covid struck.

"Temporary” Covid spending finished the job of turning surpluses into structural deficits.  The public debt increased far beyond what Treasury had deemed to be a prudent level before Covid. And there it remains.

And now it is the turn of National’s Minister of Finance, Nicola Willis. Her shoulder is to the fiscal boulder that is once more at the bottom of the hill. On 22 May she will announce her updated fiscal plan that is Budget 2025.

Her task is daunting. Two recent developments demonstrate this. The first was the release on 22 April of the IMF’s World Economic Outlook forecasts. New Zealand’s current fiscal imbalances are seriously large.

Blogger and ex-RBNZ and Treasury economist, Michael Reddell, documented that New Zealand’s fiscal imbalances (central and local government combined) were much larger than the average for prosperous countries, on a range of measures.

For example, the IMF estimates that New Zealand’s current general government primary fiscal deficits are at the top end of the range for advanced countries. (That measure excludes interest paid on the public debt.)

Moreover, the prospects of reducing these deficits by increasing revenue are slim. The IMF forecasts very slow national income growth for New Zealand, and that revenue growth will be equally slow.

The second development was the Minister’s announcement on 28 April that Budget 2025 would cut the already tight allowance for new spending from $2.4 billion to $1.3 billion.

This is significant because her December 2024 Budget Policy Statement (BPS) for 2025 conditionally rejected this option. It did so because “it could impact front-line public service” or “constrain growth”. That statement cautioned that this decision could be changed by revised forecasts in 2025.

The updated forecasts are therefore grimmer than in December 2024. At this point we should remind ourselves that so far New Zealanders are lucky. No unforeseen earthquake, epidemic, or global economic shock has yet occurred yet on her watch to magnify her task.

This is lucky because New Zealand’s public debt is already imprudently high relative to Treasury’s pre-Covid benchmark. Moreover, the international situation also looks riskier now. Public debt burdens in many countries are much higher post-Covid and under President Trump the world economic and security order is more unsettled.

The encouraging news, for Willis at least, is that the IMF thinks New Zealand governments are up to the task. In the four years to 2029, it is forecasting that they will largely eliminate large fiscal deficits through spending constraint.

Specifically, the IMF forecasts New Zealand’s general government spending will fall from 43.0% of GDP in 2025 to 39.0% by 2029. That four-percentage point reduction is by far its biggest forecast reduction for any prosperous country. For example, Australia’s forecast spending for 2029 is 37.9% of GDP, just 0.9 percentage points below its 2025 ratio of 38.8%.

It would take sustained political will and staunch voter support to achieve such a reduction for New Zealand. The Treasury’s latest BPS forecast that Core Crown operating spending will fall from 33.9% of GDP in 2024-25 to 31.5% of GDP in 2028-29.

That reduction of 2.4 percentage points is substantial. But it is well short of the IMF’s forecast 4.0 percentage point reduction for all government spending. To achieve the latter would require significant reductions relative to GDP in local government spending and/or Crown capital spending. Neither are obviously achievable.

Budget 2025 needs to show real determination about two things: First, cutting ineffectual spending; and second, effective measures to increase national income through productivity growth. The Minister knows this, but how much progress will Budget 2025 represent? And might the next government just allow the fiscal boulder to roll down to the bottom of the hill once more?

To read the full article on the NZ Herald website, click here.