NZ’s fiscal hole leaves dire mess for Luxon to clean up

Dr Oliver Hartwich
The Australian
13 March, 2024

New Zealanders recently learned about a new feature film. It will be about former Prime Minister Jacinda Ardern – and taxpayers will subsidise it to the tune of NZ$800,000.

Ardern had nothing personally to do with either the film or the subsidy. But her government’s loose spending habits left New Zealand’s public finances in a parlous state. That includes items like throwing hundreds of thousands of dollars at a hagiography for a retired politician.

Ardern’s successors, meanwhile, have their work cut out to clean up the mess. The situation facing the new government, led by Prime Minister Christopher Luxon and Finance Minister Nicola Willis, is dire. New Zealand’s government spending remains well above pre-Covid levels, public debt has risen sharply, and budget deficits loom for the coming years.

The new government has made it clear that the fiscal hole is even deeper than the previous administration let on. Since the election, several so-called “fiscal cliffs” – measures promised for the long run but only funded short-term – have emerged in the fiscal fine print.

To make matters worse, the economy is weaker than anticipated last year. GDP contracted 0.3% in the September 2023 quarter, with the economy 0.6% smaller than a year earlier. This was well below market and Reserve Bank of New Zealand (RBNZ) expectations. Revisions also showed the economy was in a technical recession in late 2022 and early 2023. Strong population growth means the situation is even more dire in per capita terms.

Looking ahead, most economists expect little to no growth in 2024 as high interest rates continue to cool demand. Westpac, for example, is forecasting practically no growth this year and only a gradual recovery from 2025. The RBNZ itself acknowledged in February that the risks to the inflation outlook have become more balanced as the economy slows.

With public finances deteriorating, fiscal consolidation is urgently needed. Core Crown expenses have ballooned from 28.7% of GDP in 2017, when Jacinda Ardern became Prime Minister, to a projected 33.4% of GDP in 2024 – an increase of nearly 5 percentage points in just 7 years.

The absolute numbers are staggering: Where the New Zealand Government spent about NZ$86 billion in 2019, this year it will be north of NZ$140 billion. Even accounting for inflation and population growth, this is a substantial increase in government spending.

Meanwhile, gross Crown debt has skyrocketed from 28.1% of GDP in June 2019, the year before the pandemic, to 39.9% of GDP by January 2024. This represents an alarming deterioration in the government's books in a very short period.

But the challenge is not just to balance the books. It is also about restoring some sanity to public spending practices. For years, procurement, project management, and cost-benefit analyses have been deficient.

For example, just before Christmas last year, the Auditor-General delivered a scathing report on infrastructure spending under the Ardern government. It investigated its NZ$15 billion spending on the so-called NZ Upgrade Programme and Shovel-Ready Projects.

According to the Auditor-General, decisions were made hastily without proper due diligence, despite officials warning of risks like cost overruns and delays. Processes lacked clear records and rationale for some decisions. Some projects had significant cost increases, delays, or were discontinued midway.

Such nonchalance about the use of public funds is symptomatic of a wider malaise. For too long, New Zealand governments have paid insufficient attention to the actual results of their spending. This was especially true under Ardern. Under her leadership, spending announcements themselves were celebrated as if they were the solution to any problem. Far too rarely were there checks on whether the money was making a difference.

While the new government has been vocal, and rightly so, about the fiscal mess it inherited, it has been coy about its own plans to rectify the situation. It even wants to proceed with promised tax cuts. The long-term fiscal strategy of the new occupants of the Treasury benches largely remains up in the air.

Worryingly, the government’s projections so far seem to resign themselves to the fact that spending will remain far above pre-Covid levels and substantial budget surpluses are unlikely to return this decade. The half-year economic and fiscal update in December 2023 forecast ongoing deficits until at least 2026/27. Meanwhile, forecasts for productivity growth remain anaemic.

There is ample scope for any government serious about budget repair. Some positive first steps are evident, not least the welfare reforms of Social Development Minister Louise Upston. Her changes are promising – and sorely needed.

The number of working-age people on the Jobseeker benefit swelled by 70,000 between 2017 and 2023, with around 40,000 more on it for over a year. Sanctions for failing to meet job-search obligations plummeted 58% over the same period. If there is one area where spending reductions are possible and desirable, this is it.

Upston is proposing to increase obligations on jobseekers to look for work, with sanctions for non-compliance. After years of ballooning welfare rolls, even with a tight labour market, this renewed focus on work is welcome.

But there are many other areas too where cuts could and should be made. The aforementioned film subsidy for the Ardern hagiography is a case in point.

Similarly, given the extraordinary growth in public service numbers since 2017, it would be surprising if there was no fat to trim among the armies of communications staff, HR managers, and administrators now on the government payroll. The public service has expanded by nearly 16,000 full-time equivalent staff since 2017. Its workforce increased another 4.5% in 2023 alone.

As just one example, the Reserve Bank of New Zealand recently advertised for a new Diversity Advisor. This is precisely the kind of non-essential spending that New Zealand can no longer afford.

The new government must not dither on fiscal consolidation. There will inevitably be future crises – a natural disaster, a global recession, or even a war – for which New Zealand needs to be fiscally prepared. Running persistent deficits now will leave the country vulnerable and ill-equipped to respond to such shocks.

The Luxon government must be bold and upfront with the public. New Zealanders, once they understand the gravity of the challenge, would probably support a government doing the prudent and responsible thing.

Funding a film about the Prime Minister who helped create the fiscal hole is an irony New Zealanders can do without. Informing New Zealanders about the true state of their country’s finances would be a better investment.

To read the full article on The Australian website, click here.

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