There were good things in the Budget. There may be few/no votes in better macroeconomic statistics and, specifically, a monthly CPI but – years late (for which the current government can’t really be blamed) – it is finally going to happen.
I went along to the Budget lock-up today (first time ever), mostly to help out the Taxpayers’ Union with their analysis and commentary.
At least from my (macroeconomist’s) perspective there were two areas to focus on when we were handed the documents at 10:30 this morning:
- productivity and growth-oriented policy measures,
- fiscal deficit etc adjustment
On the former, the government chose to title its effort today “The Growth Budget”. The Minister spoke today against a backdrop emblazoned repeatedly with that label.
You might remember that back in January the Prime Minister made a big thing of the need to accelerate growth in productivity and real incomes, not just on a cyclical basis. The Minister of Finance in announcing the Budget date in late January went further
They did not deliver.
There was a single growth-oriented initiative in the Budget; a provision under which firms will be able to write off 20 per cent of the cost of new investments in the first year, on top of the regular tax depreciation allowances. Whatever the substantive merits of the policy, the best Treasury estimate is that it will lift GDP by 1 per cent, but take 20 years to do so (the forecast gains are frontloaded, but even in five years time they reckon the level of GDP will have risen by only 0.5 per cent relative to the counterfactual). If that looks small, bear in mind that Treasury’s number seem to assume that this measure may actually worsen overall productivity as the Minister’s press release says they estimate the capital stock will rise by 1.6 per cent and wages will rise by 1.5 per cent (at her press conference she said this was because more people would be employed).
And that’s it. This in an economy where there has been no multi-factor productivity growth now for almost a decade (chart from Twitter this morning)
and, where as regular readers know, to catch up to the labour productivity levels of the leading OECD bunch (US and various countries in northern Europe), we’d need something like a 60 per cent increase in productivity.
It is simply unserious.
Things were no better on the fiscal side. Here, for today, I’m largely just going to rerun the notes I wrote for the Taxpayers’ Union and which are already in their newsletter
“This year’s Budget represents another lost opportunity, and probably the last one before next year’s election when there might have been a chance for some serious fiscal consolidation. The government should have been focused on securing progress back towards a balanced budget. Instead, the focus seems to have been on doing just as much spending as they could get away with without markedly further worsening our decade of government deficits.
“OBEGAL – the traditional measure of the operating deficit, and the one preferred by The Treasury – is a bit further away from balance by the end of the forecast period (28/29) than it was the last time we saw numbers in the HYEFU. There will be at least a decade of operating deficits, and even the reduction in the projected deficits over the next few years relies on little more than “lines on a graph” – statements about how small future operating allowances will be – that are quite at odds with this government’s record on overall total spending. Core Crown spending as a share of GDP is projected to be 32.9 per cent of GDP in 25/26, up from 32.7 per cent in 24/25 (and compared with the 31.8 per cent in the last full year Grant Robertson was responsible for). The government has proved quite effective in finding savings in places, but all and more of those savings have been used to fund other initiatives. Neither total spending nor deficits (as a share of GDP) are coming down.
“Fiscal deficits fluctuate with the state of the economic cycle, and one-offs can muddy the waters too. However, Treasury produces regular estimates of what economists call the structural deficit – the bit that won’t go away by itself. For 25/26, Treasury estimates that this structural deficit will be around 2.6 per cent of GDP, worse than the deficit of 1.9 per cent in 24/25 (and also worse than the last full year Grant Robertson was responsible for). There is no evidence at all that deficits are being closed, and the ageing population pressures get closer by the year.
“Some things aren’t under the government’s direct control. The BEFU documents today highlight the extent to which Treasury has revised down again forecasts of the ratio of tax to GDP (which reflects very poorly on Treasury who rashly assumed that far too much of the temporary Covid boost would prove to be permanent). But, on the other hand, the forecasts published today also assume a materially high terms of trade (export prices relative to import prices), which provides a windfall lift in tax revenue. Forecast fluctuations will happen, but the overall stance of fiscal policy is simply a series of government choices. Unfortunate ones on this occasion.
“A few weeks ago the IMF produced its latest set of fiscal forecasts. I highlighted then that on their numbers New Zealand had one the very largest structural fiscal deficits of any advanced economy (and that we were worse on that ranking than we’d been just 18 months ago when the IMF did the numbers just before our election). The IMF methodology will be a bit different from Treasury’s but there is nothing in this Budget suggesting New Zealand’s relative position will have improved. We used to have some of the best fiscal numbers anywhere in the advanced world, but as things have been going – under both governments – in the last few years we are on the sort of path that will, before long, turn us into a fairly highly indebted advanced economy, one unusually vulnerable to things like expensive natural disasters.”
With just a few elaborations/illustrations
First, here is the chart of tax/GDP
Even allowing for fiscal drag, quite how Treasury thought so much of the lift in tax/GDP was going to be more or less permanent is lost on me. They don’t really say.
Second, here is Treasury’s estimate of the structural (OBEGAL) balance as a per cent of GDP, showing recent years, and the forthcoming (25/26) financial year on the Budget announced today
The government seems to have become quite adept at rearranging the deckchairs (cutting spending that they consider low priority and increasing other spending) but they are choosing to make no progress at all in reducing the structural deficit. There were big savings found in this Budget, but none were applied to deficit reduction. Sure, the forward forecasts showing the structural deficit shrinking – never closing, even by 28/29 – but that is based on wishful “lines on a graph”, suggesting that the government intends to cut core crown expenses by a full 2 percentage points of GDP over the following three financial years, when on today’s forecasts expenditure as a share of GDP in 25/26 (32.9 per cent), will be a bit higher than in 24/25, and very slightly lower than in 23/24. The Ardern/Robertson government got by on 31.8 per cent in 22/23.
Finally, a reminder from Monday’s post
Depending on your measure we were (based on HYEFU/BPS numbers) worst or close to worst in the advanced world. Today’s Budget will have done nothing to improve that ranking. It should have.
The Budget is a lost opportunity, both on the fiscal and the productivity front. A couple of journalists at the lock-up asked for a summary label for the Budget. Some people had snappier versions, but mine was simply the “Deeply underwhelming Budget”.
croaking cassandra 
It might not have been mentioned in the Budget, but the Government is getting on with replacing the RMA. Surely that will be good for productivity?
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One would hope so. One problem tho is that it could take a decade or more before we really know, incl around how courts, local govts and central govts apply the new law. Remember that the original RMA was thought of at the time as a liberalising piece of legislation.
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I don’t see how they get that done by the end of their term. If anything, there will be a transitional period of 2-5 years. But, my view is tainted by the sluggishness of the RMA 1991 implementation (for example, Kāpiti’s first District Plan was 1999 and they still haven’t implemented the 2010 New Zealand Coastal Policy Statement). Recall that a Labour government didn’t get it done way back then, and it was a National government that then came in a finished it off.
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I called it a receivership budget. Harsh, but you hit it spot on – where savings were made – none were applied to deficit reduction.
And where they did rearrange the deckchairs – labelling it a “boost” and determining that makes this a “growth” budget is kind of on a hope and a prayer.
I predict further deterioration with no return to surplus in sight.
Gosh, we definitely need better minds at the top.
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If you want to know why the government didn’t go for deficit reduction you should look to Keynes or MMT. Reducing a government operating deficit has the immediate impact of shrinking the supply of new money into the economy. This is contractionary across the board and as we experience last year has a significant downside impact across the private sector.
Willis is being a little less cavalier than she was last year, but I would still expect lower than forecast growth for NZ this year and next.
Some would argue that by not increasing spending to meet inflation and demographic demand this is in effect a cut in spending as government services are forced to meet cost increases within a fixed spending limit.
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It sounds counter intuitive but in a fiat currency monetary system like NZ’s the government creates and spends money first (as decided in the budget) and only after that new money is circulating in the private sector is it taxed or saved as government bonds.
So, if the government suddenly decided to close half the schools and fire half the teachers in NZ to ‘save money’ – those ‘savings’ would be significant in terms of salaries and building maintenance costs and we could all enjoy lower taxes.
However, the loss of income and work in the private sector would hit very hard and most likely plunge the country into recession.
Nevertheless, the government would have reduced its spending obligations and operating deficit significantly in simple number terms.
Government spending is no different than any other spending in the private sector – if you reduce it, you reduce private sector economic activity. There are times when this is a good idea (inflation control) but most of the time it isn’t a good idea.
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Were the govt ever to adopt such a draconian spending approach (without matching tax cuts) you’d expect the RB to cut interest rates a lot, in turn lowering the exchange rate, and in turn “crowding in” more private sector activity/spending.
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Thanks Michael. So, from your perspective deficit spending by the government is pushing up interest rates and by reducing deficit spending (and therefore overall demand in the economy) the RBNZ will lower interest with the goal of stimulating credit growth in the private sector. Am I understanding that correctly?
Falling interest rates and the weaker domestic economy lowers the value of the NZ dollar which makes our exports more competitive and we, therefore, see an increase in demand for those goods and potentially new ones.
This will in turn encourage investment and growth in local export driven businesses in NZ.
Is that the basic idea? To drive the economy through export growth and lower levels of domestic consumption?
I think Milei did something like this in Argentina – but he did it on Meth. Halved the value of the currency overnight and created big trade surplus as domestic demand for imports collapsed.
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This is not a criticism – I’m genuinely trying to understand the perspective of the Taxpayers Union and people like Hooton and others who call for draconian cuts to the government and the obligations of the welfare state to save the country from financial catastrophe.
What do they think will happen should such an approach be taken? What would our economy look like? What is the catastrophe we are heading for?
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Speaking of Matthew Hooton, his oped in The Herald today is interesting. Titled, Budget reveals we’re going broke faster than we knew
first line is: Whatever its other merits – and they are few and far between – Nicola Willis’ second Budget at least forces Labour to admit it must introduce massive new taxes if Chris Hipkins returns to power next year.
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My own view is that the most likely way through the fiscal mess will include an increase in GST at some point. (A CGT wouldn’t raise much revenue, whatever one thinks of the merits of it, and I’d be really surprised if they went with a wealth tax (esp one that raised a lot of money).
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If Labour want to spend more and inject a larger quantity of new money into the economy they will have to tax more to prevent inflation.
Economic reality and historic data suggests Hooton is wrong in his understanding of government deficit spending and government debt bond issuance. Bonds are private sector savings – they are not debt in the same way a bank loan is.
When a bank loan is re-paid money is removed from circulation, when the government repays a bond money is returned into circulation.
This implies government debt is a term deposit (not a loan) from the private sector side of the economy.
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The government doesn’t use the money people have deposited with it in the form of bonds just like a commercial bank does not use deposits to fund loans or other activities.
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Also – Hooton is wrong – Labour can lift the cap on government debt to GDP and make large capital investments in infrastructure – especially with the new fast track bill in place – the socialist possibilities are unlimited.
Co-governance and massive Hydro Damns here we come! Just teasing. Treasury has a permitted an upper limit of 50% government debt to GDP which gives Chippy a lot of fiscal headroom and not a complete reliance on taxation.
Taxing wealth is a tricky one because the intention of taxation is to control inflation by removing money from circulation and destroying it. Wealth is typically already out of circulation and being saved and, therefore, not contributing to economic demand. Taxing it makes no sense – you’d just be destroying private sector savings.
In other words – taxation does not fund and is not required for government spending.
Some wise long-term government funded projects to boost infrastructure, productivity, innovation etc will lead to economic growth and reduction in debt to GDP ratio – in theory – if you’re a Keynesian like me.
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Am I technically correct in making these statements Michael?
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Can you please expand on this one; specifically how does increasing taxation prevent inflation? I thought the rising cost of goods and services equates to inflation. Are you suggesting taking money off workers prevents prices rising because people can’t afford to pay the extra?
“If Labour want to spend more and inject a larger quantity of new money into the economy they will have to tax more to prevent inflation.”
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Thanks Noel. Yes, you are right inflation is rising prices that are rising too quickly. A small amount of inflation is ‘good’ and needed to allow economic growth. The question is then what causes this ‘bad’ inflation – prices rising to quickly?
Inflation can happen when there is too much money circulating in the economy and not enough goods and services to satisfy the demand the new money creates. Prices increase and then wage pressure increases and ‘bad’ inflation kicks in.
Most new money is created in the private sector by commercial banks, but this new money is at least anchored by debt repayments. Debt repayments on loan principle destroys money – the repayment amount cannot be re-circulated in the economy again by the bank.
The RBNZ increases interest rates to cool new loans since new loans create new money and higher interest rates lowers the uptake of new loans. This lowers economic demand – people and business spend less.
When the government creates new money through the RBNZ – the government’s own bank – governments do not borrow from commercial banks like you and me.
It’s important to understand that the government creates new money and spends it first and taxes come after that money is circulating in the private sector. To confirm this look into the operations and mechanics of a ‘fiat currency monetary system’ which NZ has. Michael might confirm this statement as a former RBNZ adviser.
The RBNZ creates new money for government spending but unlike a commercial bank loan – there is no-one in the private sector paying back the principle of that new money when this happens.
For example – schools and hospitals are not loaded up with debt to pay back the money spent on new buildings and salaries. The cost of building and paying salaries is all private sector income but without any private sector loan or debt burden to go with it.
This means that government spending is effectively debt-free new money being spent into the private sector directly and as such it is highly inflationary.
Taxes act to pull back some of the new money in the economy – not all of it – but enough to prevent some forms of inflation from happening.
Savings is also another way to remove money from circulation – term deposits and government bonds act as inflation fighting tools as well.
Note that housing in NZ is not included in the CPI inflation measures and has been allowed to inflate for reasons that are difficult to understand – mortgage debt exposure in NZ is exceptionally high.
I think this is because there is very little actual labor or productive output involved in house selling and buying. You can see a similar thing in the stock market especially in the US – many stocks are valued far beyond fundamentals simply because there is so much money circulating and not enough assets to buy. Gold and Bitcoin are also signs that people have more money than they know what to do with.
Michael – if time permits – feel free to correct or confirm any of this. I’m very much an amateur economist.
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I should add government debt is the total amount of bonds that have been issued and ‘sold’ to the private sector. Bonds are term deposits that the private sector makes with the government – they aren’t really loans in the technical sense.
The effect of the private sector saving its money instead of spending it – is too control inflation by removing money from circulation.
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Great article and a clear statement of support for ‘balanced budgets’ and lower bond issuance by the NZ government. Given Nationals reputation as a low tax, business friendly and low spend political movement why has Nicola Willis held her hand.
My answer is that Keynesian economics has, finally, come to the fore – either from Treasury advisers or more cautious cabinet colleagues.
The consequences of reducing the government’s deficit spending during a downturn are higher unemployment and a smaller and weaker economy – whatever the merits of reducing the deficit might be. Treasury themselves are literally spelling this out in lower growth and tax forecasts. And growth forecasts for NZ have been consistently downgraded since 2023.
This creates a mathematical dilemma for a center-right Finance Minister – restraining and reducing projected government spending to bring ‘revenue’ and spending closer together has the unfortunate side effect of lower growth and lower revenue.
Kind of a Catch 22 of fiscal policy.
The Taxpayers Union consistently calls for lower levels of government spending and a smaller economic footprint from the government. Their perspective is very much, solely, from the individual taxpayer and does not consider the macro-economic outcomes of lower taxation.
I’m interested to understand ‘what are the expected economic outcomes of a balanced budget approach and significant cuts to government spending across the board? Presumably leading to lower taxes and much lower levels of government bonds available to savers.
What will happen to unemployment and living standards in this case?
If Nicola Willis was to significantly reduce the size of government output in the NZ economy to the point that taxes and spending match up and the total issuance of bonds is bent down towards 30% of GDP?
Is there any economy in the world that operates on those figures at the moment? And what does their economy look like?
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Michael, agree raising GST is one way but to my mind, it is a more regressive form of taxation than means testing super.
My thoughts on super is that we likely have the wealthiest generation of retirees that NZ will ever see – right now (boomers and GenX – 1946 to 1980 generations). Many folks at the moment are in (or going into) their retirement with a lot of wealth in assets, be they stocks/bonds, savings accounts and/or property. I’m not much on CGT either, nor on wealthy taxes, but all for those with assets not getting a benefit that was never paid for, but rather a gift to them from the current generations of working NZers.
I wonder how much that would save if we means-tested super pegged to say the 80 percentile of the median value of an upper quartile residential dwelling in NZ. Any asset above that and no super. Spend down your assets on basic living costs during the life of your retirement to below that level and super starts up again.
What do you think – an estimate of what percentage of retirees (under such a scheme) would not therefore qualify for super? At a guesstimate, I’m thinking perhaps upwards of 60% would not qualify to receive the state-subsidised retirement benefit?
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Interesting idea. I suspect you would rule out less than 60% initially (incl because the nationwide numbers are dominated by expensive Akld), Also, are you thinking per couple or per individual – if the latter, many fewer would lose super. But at least as you describe the scheme it would also set up the incentive to drop just below the threshold to regain super payments. Wouldn’t matter for fairly wealthy people, but there would prob be a lot of people who might be incentivised to have an expensive European holiday or two to drop below the threshold and regain access to state super. There are elements of potential regressivity to GST in isolation, but considered by age, it also tends to be a tax on the old (more financial wealth).
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Thanks for the reply. That gives me food for thought.
I hear your point about AKL property bumping up the upper quartile ‘threshold’ – must think a bit more on that. But the idea of wanting to set the bar ‘high’ for those with only a single family home is purposeful. In other words, the threshold intention is to catch those with more than one property; a large savings account and/or a large share portfolio – and to leave the ‘little old lady’ still living in the family home in a leafy AKL suburb still getting her super (you’ll be aware of that common argument against land value taxes for those high asset, low income people). And it was my intention that the threshold relates to couples and individuals. So, a partnership, and an individual – no difference to the threshold be the benefit of the asset in either single or joint ownership. Again, something else to think about.
I hear what you are saying about some choosing to ‘blow’ their savings in order to qualify (position themselves below the threshold), but I think most people with a comfortable level of disposable assets are not likely the kind of folks that would purposefully expose themselves to potential future financial hardship for the small amount of annual income that super is. Always a pleasure to get your opinions. Thanks.
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Suggest doing some more digging on the numbers. I suspect the number of over 65s in that “more than one property; a large savings account and/or a large share portfolio” is a lot smaller than we’d all like to think. Remember the growing numbers these days getting to 65 still with a mortgage.
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For interest, I asked AI a set of 6 questions which ‘on first blush’ suggests these possible parameters and resultant savings should super be means-tested;
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Interesting thanks
Some fairly insuprerable political obstacles but IF one could implement your scheme and raise the NZ age could probably save perhaps $8bn per annum (bearing in mind that NZS is taxed)
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Hi Michael – in case you didn’t see Nicola Willis on Q+A this morning – it was a worthwhile interview. AND she did mention that AUS means-tests super, but that she had determined that our universal super would be sustainable when combined with the rise in Kiwisaver contributions. I don’t know where she gets that idea (didn’t offer any numbers in terms of reasoning), but it was good to hear she had considered means-testing super. I get the feeling she knows it will have to happen.
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hi Michael
thank you for your analysis- my question is: why if inflation is at 2% the economy is growing and social measures like access to prompt medical care are getting better does a government need to have a balanced budget?
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Not much different to the situation facing households: it doesn’t make much longer-term sense to be borrowing to pay for the groceries (altho it might for a house). It is also a good political discipline: if a govt wants to spend a lot more, it should go to the voters and ask for the specific higher taxes it proposes to use to pay for them (or, in reverse, if a govt wants to cut taxes it should be expected to show the expenditure cuts to pay for them). On average over time, small deficits aren’t problematic, but since economies are subject to severe adverse shocks every so often (whether earthquakes or severe recessions) it makes sense to have a balanced operating budget in fairly normal times to leave the flexibility for the heavy spending inevitable crises will require.
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