In his (paywalled) newsletter this morning Richard Harman compares the current fiscal situation, with yesterday’s last minute fiscal announcements, to the 1972 Budget and election campaign, when Robert Muldoon, then Minister of Finance, was reputed to have said that he’d spent it all and there wasn’t anything much left for the Opposition. Surpluses and deficits were measured differently in those days (cash-based and including capex but not depreciation) but the Treasury long-term fiscal tables tell us in 1972/73 the government accounts ended up with a (very) modest surplus, 0.1 per cent of GDP.
The outgoing Labour government’s fiscal policy around its 2008 Budget is also often heavily criticised. And there is plenty to criticise it for, but as I’ve documented here in several posts (here and here) at the time The Treasury was producing forecasts showing that the operating balance would remain in surplus over the entire forecast period (tiny surplus by the end of the period, but still). It wasn’t Treasury’s finest hour, but you can’t blame Cullen and Clark for Treasury’s forecasting problems. Now, by the time of the PREFU that year things had deteriorated quite a bit – the recession was recognised to be underway – and there were no longer surpluses in prospect. But even then for the fiscal year they were actually in – 2008/09 – the best Treasury projection was a balance of 0.0 per cent GDP. A couple of years beyond that date, a deficit of 1.5 per cent of GDP was projected.
In this year’s Budget the operating balance for 2023/24 – the year we are in, the one where the government makes actual specific tax and spending decisions – the operating deficit was forecast at 1.8 per cent of GDP. There is no good case for running operating deficits at all in an economy that is more or less fully employed (Treasury’s 2023 Budget forecasts for the unemployment rate were 3.7 per cent for June 2023 and 5 per cent for June 2024, suggesting an average roughly equal to many NAIRU estimates).
Fiscal numbers for years beyond the immediately current year are substantially vapourware, but never more so than just prior to an election. The Secretary to the Treasury is required to take as given what the Minister of Finance tells her is government policy. If the Minister of Finance decides to cut future operating allowances those new lower allowances will be what is used, regardless of how plausible the numbers are (it isn’t for Treasury to inquire into that in doing the PREFU numbers). But statements of future intentions don’t bind anyone – and this is true of any Minister of Finance, of any political stripe – and need have no regard to actual budgetary pressures. The vapourware character is perhaps especially so when the plausible political allies for the incumbent party, were it to form the next government, tend to be even less keen on fiscal/spending discipline. Something like the PREFU is a good idea in principle, but there are severe limitations to what it is useful for (a few years ago I posed some suggestions that might make it more useful and might come back to those another day).
It is also easy to forget that it was only 15 months ago – last year’s Budget – that the Minister of Finance was touting his new “fiscal rules“, that were to – he claimed – “ensure New Zealand continues to maintain a world-leading Government financial position”. Among them was this
Surpluses will be kept within a band of zero to two percent of GDP to ensure new day‑to‑day spending is not adding to debt
Just a shame there were, and are, no surpluses. St Augustine’s famous prayer (“Lord, give me chastity and continence, but not yet!”) has a certain resonance for current New Zealand fiscal discipline (or lack of it).
The focus of yesterday’s announcement – months after the expansionary Budget, weeks before the election- was on spending cuts. So I took a look at how this government’s spending plans for this year have evolved over the course of this electoral cycle.
Here is (nominal) core Crown expenses projections for 2023/24 for every EFU starting with the 2020 PREFU. The 2020 PREFU forecasts were done in August 2020, after the first and worst lockdown, but at a time when economic projections generally were pretty bleak (back then, for example, they thought the unemployment rate now would still be around 6 per cent).
The last observation takes account of yesterday’s announcement which may have knocked $1 billion or so off this year’s spending.
Even now the plan seems to be to spend $20 billion more this year than they said they intended at the end of 2020.
Now, no doubt the government would respond “ah, but inflation”. That is a pretty shaky argument, to say the least, when (a) you are the government and the central bank is one of your agencies, and (b) there has never been uttered, not once, by the PM or Minister of Finance, any sort of critical word about the central bank’s stewardship, and you went on to reappoint all the central bank decisionmakers when their terms expired, even (in the case of the Governor) when the main Opposition parties explicitly objected when (as the newly-passed law required) they were consulted. Inflation has been savage. (But of course, just the other day Robertson allowed the Bank a huge increase in its own spending with, as yet, no published rationale or justification.)
But set inflation to one side, and focus instead on projections as a share of GDP (again allowing for $1 billion off this year’s spending, per yesterday, but no reduction since this year’s Budget in expected nominal GDP)
In the first EFU of the majority Labour government (December 2020), they said that they planned to spend 30.1 per cent of GDP in 2023/24. In fact, their latest revised plans would involve spending about 32.75 per cent of GDP this year, and even with lots of fiscal drag to help them, still substantial operating deficits. Note that even after yesterday’s announcement, operational spending this year as a share of GDP is still likely to be a bit larger than they told us they’d planned even in the HYEFU late last year, a mere 9 months ago. (In HYEFU 2021 – less than two years ago now – they expected to spend just over 30 per cent of GDP this year and record a small operating surplus. Now, not so much.
It will be interesting to see the PREFU numbers (at least for this year) on 12 September, but it seems almost certain whereas in 1972 Muldoon actually delivered a tiny surplus in his final year, and whereas in 2008 Clark/Cullen went into PREFU thinking that at least the operating balance for their final year (2008/09) would be literally in balance, this year – and notwithstanding yesterday’s announcement – we will again see forecasts of a material operating deficit for 2023/24. That is all on Hipkins and Robertson.
(It will, of course, also be interesting to see National’s plan and numbers. I’m pretty sceptical based on what we’ve heard so far, but we’ll see. But when the operating balance is in material deficit, it is quite depressing to see both major parties competing on who has the best giveaways – be it GST carveouts, extra subsidies for this or that, and whatever tax plans National has – rather than on restoring promptly a record of fiscal balance. There is no good economic reason for running operating deficits this year – it is like a family overspending its income on consumption items in a year when it has been fully employed – but politics seems to say otherwise. Similarly, there isn’t a really good reason for cutting spending because of a cyclical slowdown – there are Keynesian bones in me – when the real point is that a substantial operating deficit shouldn’t have been budgeted this year in the first place.)
Finally, I remind you of last week’s post, in which the OECD numbers revealed that New Zealand has recently had one of the stimulatory of fiscal policies and now has among the largest general government (primary) deficits of any advanced country.
