Grant Robertson could not have looked more pleased delivering his 2021 pre-budget speech to the Wellington Chamber of Commerce earlier this week.
For a start, he was speaking to a live audience, in stark contrast to 2020. More than that, he could paint a picture of the New Zealand economy that was unimaginable this time last year.
Unemployment sits at 4.7%, against last year’s dire projections of near double-digit joblessness. The country’s exporters are enjoying strong global demand. GDP growth in the December quarter was down less than 1% compared with pre-pandemic levels. And, though Robertson did not mention it, GDP looks set to grow strongly in 2021.
Despite this rosy picture, there are plenty of fiscal problems for the Minister of Finance to ponder. The latest IMF forecasts to 2022 show New Zealand suffering the tenth worst deterioration in its structural fiscal balance relative to GDP since 2017 out of 80 countries studied.
New Zealand’s deterioration is only partly explained by the massive stimulus programme implemented by the Minister of Finance during 2020. The bigger part of it results from the Finance Minister loosening the purse strings pre-Covid. As a result, Treasury predicts net core Crown debt will have ballooned from a pre-pandemic low of 19% of GDP in 2019 to 52% of GDP by 2023.
Robertson acknowledged that “[a]s a small economy subject to external shocks, it is sensible we look to reduce our public debt as the economy returns to full health.”
Yet in other comments the Finance Minister showed an alarming disregard for the need for fiscal prudence. His speech revealed that Ministers have identified $926 million of savings from Covid recovery spending as a by-product of “better than expected economic outcomes.” Yet rather than bank the savings, Robertson said they would be “returned to the fund” to “aid the recovery.”
But the so-called Covid Response and Recovery Fund was never an actual “fund.” All Covid recovery spending was to be borrowed. With the economy rebounding strongly, fiscal prudence suggests the savings should be saved. Unless the Government makes savings where it can, its fiscal balance will never improve.
Equally alarming was Robertson’s announcement of a new “Implementation Unit” to be formed within the Department of Prime Minister and Cabinet. Reporting to the Minister of Finance, the unit will “monitor and support implementation of a small number of critical initiatives.”
While the focus on implementation is commendable, the creation of a new unit within the DPMC shows a troubling lack of confidence in both officials and ministers. After all, it is their job to implement government policy.
The new unit also casts doubt on the effectiveness of the Government’s once-in-30-year reforms to the public sector in last year’s new Public Services Act. Promoted by State Services Minister Chris Hipkins, this Act promised to create a “joined-up” public service capable of tackling “the biggest challenges facing Governments.” The new implementation unit suggests these reforms have not matched expectations.
As the economy emerges from recession, there has never been a greater need for effective fiscal policy and effective implementation. On neither count is the outlook as rosy as the picture Robertson painted on Tuesday.