I was away in Papua New Guinea last week when the HYEFU came out, and have only just gotten round to looking at the numbers. Quite possibly, what is in this post will be repeating ground others have covered, and if so the post will end up being mostly for my records (good to be able to look back and see what one said at the time).
It was this tweet from a non-partisan analyst that really caught my eye
Three sets of spending forecasts: those for Labour’s final Budget last year, those from last year’s PREFU (and available to political parties finalising their fiscal promises), and those from last week’s HYEFU. They run out only to the year to June 2027, because that is as far as the forecasts done in 2023 went.
Spending on core Crown expenses is as higher or a little higher than in Labour’s last Budget.
It isn’t because interest rates are higher (out of the government’s control); in fact, primary spending is also a touch higher over four years than was planned in last year’s Budget.
It isn’t because of the state of the business cycle: the output gap forecast now for 26/27 is almost identical to that forecast for 26/27 in last year’s Budget.
Overall, core Crown expenses are forecast to be 32.2 per cent of GDP in 26/27, up from 31.5% for 26/27 in last year’s Budget.
And net debt (excluding the – quite variable – NZSF assets) is forecast to be $42 billion higher in 26/27 than was forecast just 18 months ago.
Of course, defenders of the government will note that revenue forecasts are a lot lower. That is partly a matter of pure political choice – tax cuts – and partly a changed view on the potential rate of growth of GDP (not about the business cycle). But when the family’s income estimate are revised quite a bit lower over the medium term it would be usual to adjust future spending plans. But not, it appears, this government.
For all the pre-election rhetoric, the current coalition government seems to be keeping right on with the path adopted by the previous Labour government, which had more or less abandoned (for practical purposes) any serious interest in running budgets in which the revenue raised paid for the groceries. National wasn’t very ambitious in its election campaign fiscal plans, but its numbers now represent deep underperformance even relative to those modest electoral ambitions. Will we see a balanced budget ever under Luxon/Willis. Unless something positive just happens to turn up it seems very unlikely – and with each passing year the ageing population fiscal pressures just keep mounting. If the failure is first and foremost the responsibility of the Minister of Finance, no Prime Minister can ever escape shared responsibility for this kick-the-can down the road approach to fiscal management.
As a reminder of the broader fiscal position, here is Treasury’s chart showing the estimated cyclically-adjusted and structural deficits.
Not only is no progress at all being made at present, but the imbalances are a bit larger than those Treasury was estimating at the time of the 2023 Budget. People rightly criticised Labour’s fiscal excess, and the structural deficits they chose to incur. The coalition’s structural deficits are also pure choice – bad ones. And we can’t have much confidence in the eventual sluggish return towards balance after the next election – as for any government, forward operating allowances are no more than lines on a graph at this point, and the government has shown little inclination or ability to make and sell sustained hard fiscal choices consistent with those operating allowances.
croaking cassandra 
Yet the media including the likes of Bernard Hickey are saying the Government’s austerity is harming the economy!
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Hickey is very left leaning. I subscribed to ‘The Kākā’ for a short period. I enjoyed the data presented but struggled with the interpretation and continual subtle politicising in his commentary. Didn’t renew.
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Truth seems to be at a discount on both sides of politics at present: it suits the left to run an austerity narrative and it doesn’t suit the right to say “no, no, actually we are making no progress in lowering the deficit: in fact fiscal policy has been expansionary this year”.
We really need better all round
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I suggested to the Finance minister that she take a leaf out of President of Argentina Javier Milei book. Full details here: https://www.crisisinvesting.com/p/chainsaw-economics From deficits to budget surplus from his first month in office.
National are too timid to be of any good effect.
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What do you suggest they should cut?
What they’ve done so far is hurting them in the polls and is probably recessionary. Citing trends in other countries, people are saying that inflation was trending down already, so the Reserve Bank interest rate hikes and government spending cuts were unnecessary. I genuinely worry that Willis has started a downward spiral that won’t stop any time soon.
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Without the RB raising interest rates there was a high likelihood that higher inflation would have become an embedded feature of our economy. This year’s recession is mostly on the Bank, which probably held rates too high for too long (how foreseeable that was and how serious any mistake is still an open question )
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What do I suggest they should cut?
I would begin by disestablishing any ministry whose primary focus is race or gender. I would then tell the CEO’s of the remaining ministries that their continued employment depended upon making 10% savings on their budget year on year. The only exceptions being defence and justice including the police. Those are activities Governments are supposed to engage in.
I would defund Government support for the Arts, for Sport, remove all subsidies, remove corporate welfare, grants of all kinds.
Reduce government funding to Universities, stop all student loan support for degrees that guarantee you are only fit for Government employment. Gender studies for example. You can still study these things, just not at the tax payer’s expense.
Make Universities authorise and underwrite student loans. That would likely halve the intake of students and that would be a good thing.
I would raise the age of superannuation.
I would explore time limits for welfare benefits.
No salary increase for Politicians whose Government does not implement and achieve a balanced budget. There endless ways we can get the Government back to its core functions over time.
Here’s the thing. We may not like doing this now, but we will hate what follows if we don’t take immediate action.
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All the tinkering around the edges does nothing; in fact causes more harm than good. Simply look at the top line of expenditure and means-test super. Overnight, that expense line would be cut in half. And bingo, you have a balanced budget. No need for wealth taxes – let those with the wealth keep it but cut their super, they don’t need it. If they end up spending down their wealth to the stage they do need super – it’ll be there for them.
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Yes, means testing superannuation makes sense, along with raising the qualifiying age. As Margaret Thatcher said, “The problem with socialism is eventually you run out of other peope’s money”.
Are we there yet?
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Indeed if you means test it you could actually lower the age for those unable to carry on working due to age-related injury. That would get those folks off ACC and onto early super. More savings.
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As in the past the NZ financial managers are simply relying on inflation to balance the books.
The trouble with this approach is that it does not work.Productivity and saving are both destroyed.
Without supporting the NZD somehow NZ itself will be in big trouble.
Ex PM Key has been agitating for further substantial OCR cuts.This is insanity.
Given the reliance on yield in the past this very small currency is very vulnerable. Orr and his team must be aware of the dangers.Ensuring stability of the NZ currency is the RB reason for being. It is time they did this without fear or favour.
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