Over the past few days, Finance Minister Nicola Willis has got the dream headlines she wanted from the PREFU, Treasury’s Pre-Election Fiscal Update. “Less Debt, Bigger Surplus Coming” said Stuff, with a similar message from INews ,while the ODT contributed “Willis gets Pre-Election Reprieve As Treasury Paints Brighter Picture..”
According to Willis, all of the “hard work” – i.e. the random job cuts, the chronic underfunding of social services and the government’s reluctance to borrow and spend in productive ways to build the economy – is now paying off. Really? As if in some ancient Aztec ritual, it seems that human sacrifices have been deemed necessary in order to achieve the Great Good of putting the cosmos (aka the government books) in balance.
Life meanwhile goes on. In June, unemployment hit an 11 year high, and 50,000 more New Zealanders are now unemployed than when National took office. There has been a 10% annualised increase in firms going bankrupt during the first six months of this year, youth unemployment is currently running at 17.2% which is triple the overall jobless rate, over 100,000 children are living in “consistent poverty” and homelessness has sharply increased. Over the last fortnight alone, health services in Pahiatua, in Levin and in Southland have been on the brink of collapse…but hey, hold the front page. If we’re lucky, a miniscule surplus may arrive on the government books in a few years time, a little earlier than expected. Huzzah!
There are three main ingredients to this economic miracle: the revenue coming in, the spending going out, and the chosen method of measuring the balance so that the books might look a bit better. (Willis’s favoured measure, OBEGALx, excludes ACC costs from the equation.) In fact, the brighter outlook is arguably within the margin of error, and the positive numbers have been achieved by means that National should be disowning.
Start with the chances that it might all be an illusion. The PREFU itself concedes (page 7) that there could be somewhere between a one in five and a one in ten chance that the errors in the PREFU calculations will be the same size as the OBEGALx surplus being predicted (fingers crossed) in 2030/31. More on that below.
We also need to keep in mind that Treasury’s predictions have not been able to factor in the impact of the looming El Nino, the rising prices of petrol, diesel and jet fuel, and the boost ( large, or smaller than expected?) these external costs may give to inflation; not to mention the likely impacts on household spending and economic growth of the interest rate hikes that the Reserve Bank will doubtless impose on the economy, in order to dampen down those inflationary fires.
Here’s an example of how dim Treasury’s crystal ball can be: in the May Budget, Treasury rosily predicted that the price of Brent Crude would revert to $US78 a barrel by mid 2027. In the PREFU though, Treasury concedes that it has seen fit to run an ‘illustrative risk scenario’ model whereby the price of Brent Crude stays up at between $90 and $115 a barrel for all of 2027, an outcome that would take all bets off the table:
The end result [if this risk scenario eventuated] is that nominal GDP is around $17 billion cumulatively lower than in the baseline forecast, with a lower level of real activity (both cyclical and trend) and a lower terms of trade partly offset by a higher domestic price level…This sees tax revenues around $5 billion cumulatively lower over the forecast period, while OBEGALx is around $3.0 billion on average lower in each of the last two years of the forecast.
So maybe we should hold the champagne until we see just how much of that worst case combo actually plays out. Moreover, the PREFU authors re-emerged from their risk assessment rabbit hole to observe that because the Iran war has caused “structural” changes to the global oil supply, things won’t be returning to pre-war oil price levels, regardless. Is National warning motorists about this not implausible risk outlook (and petrol price repercussions) on the campaign trail? Hardly.
1.The revenue coming in. Newsflash: this supposedly “No New Taxes” government has been raking in a significantly bigger haul of tax revenue. At page 6 of the PREFU, Treasury says it baldly: “Higher tax revenue is the primary driver of the improved fiscal outlook.” Not virtuous economic growth. Plus, it is only because more tax is being collected that the need for borrowing has been reduced. “The stronger revenue outlook reduces government borrowing, resulting in net finance costs being revised down by $1.7 billion despite increased market interest rates.”
So…we’re paying more in tax, in order to pay less interest on debt. (Peter, meet Paul.) So much so that the increased tax take is more than compensating for the increased debt servicing costs on international markets. Take your pick: would you prefer an extra tax burden or an extra debt burden? Apparently, it is one or the other. All things considered, there seems to be little cause to celebrate that National has reduced the need for borrowing.
As the PREFU also says:
Core Crown revenue is forecast to increase from 30.4% of GDP in 2025/26 to 31.8% of GDP in 2030/31, driven by an increase in tax revenue. Around one-third of this increase reflects fiscal drag, a further third reflects tax policy changes, including planned increases in fuel excise duty and road user charges, while most of the remainder reflects changes in the composition of economic activity towards relatively tax-rich parts of the economy eg, business profits.
Right. Almost every ingredient in that paragraph spells bad news for ordinary voters. Fiscal drag occurs when inflation pushes taxpayer income into higher tax brackets: ie. we then pay tax at a higher rate, even though relative to rising inflation, our net incomes may only be standing still.
The other two thirds of the Crown’s revenue improvement are from (a) significantly higher charges by central government e.g. fuel excise duty, road user charges, electricity charges etc and (b) the higher tax take coming in from business. Again, those higher business tax returns are largely thanks to customers having to pay inflated prices – thereby delivering larger taxable profits to business and higher GST returns to the government. On what planet should voters be celebrating that double whammy?
Add it all up: voters are being asked to applaud Nicola Willis not because she is running a healthy economy – she isn’t, since there are only flickering, highly contingent signs of recovery – but because they are being milked for tax revenue via a combo of avoidable fiscal drag, higher government charges and higher retail prices.
No wonder Willis wouldn’t commit on RNZ yesterday morning to revising the tax brackets again – as she could – to reduce fiscal drag right now. Why this reluctance? Because the entire charade of the “balancing the books” success story relies to a significant extent on fiscal drag continuing to swell the government coffers, and boosting the revenue side of the ledger.
2. Expenditure. This is where the really grim PREFU news can be found. Here’s how it sounds in PREFU speak:
Beyond 2026/27, the fiscal outlook strengthens steadily as [tax] revenue continues to increase as a share of GDP, expenditure declines as a share of GDP, and Crown entity deficits improve.
That phrase “expenditure declines as a share of GDP” is code for further serious cuts to core services – at Health New Zealand, in Kainga Ora housing, at NZTA, at ACC, in infrastructure projects etc etc. Ditto goes for “Crown entity deficits improve.” Similarly, this is code for further job cuts and reductions in the range and quality of public services.
Incredibly, given the dire state of the public health system and our ageing population, which is daily presenting with more complex, more costly-to-treat ailments – amid the mounting cost of new and expensive drugs – the PREFU outlook is for a static to declining level of health sector spending (see the two tables on page 122) from a peak funding point next year. There doesn’t even seem to be an allowance made for inflation. Clearly, Treasury is predicting that further “efficiencies” are to be extracted from our failing public health system.
According to the economist Cameron Bagrie – almost the only economist RNZ could find for comment this week – “the cupboard is bare.” Well…it is bare only if you have internalised the entire sackful of neo-liberal premises: no action on fiscal drag, no new progressive taxes, no increased borrowing for economically productive purposes, a reduced role for government stimulus, and the tolerance of severe social hardship. The fiscal cupboard is bare only in the sense that someone being throttled may experience some difficulty in breathing. It is a deliberately inflicted condition.
Moreover, any surplus delivered towards the end of this decade will almost certainly not be used by the state to invest pro-actively and productively – mainly because, on principle, the centre-right doesn’t believe the state should play that leading role in the economy, not even in a country as small as New Zealand.
On past performance, any surplus achieved so painfully is likely to be frittered away in tax cuts. Just as predictably, the lion’s share of those tax cuts will be soaked up by the relatively wealthier citizens of this country. Tax cuts are a highly regressive form of income re-distribution. (Essentially, they are a trickle up exercise.)
Meanwhile, down at the other end of the income spectrum, the PREFU is predicting (at page 40) that measured as a share of the nation’s wealth, the Crown’s expenditure on benefits will be reduced from 10.6% of GDP this financial year, to 10% by 2030/31.
Footnote One: Don’t tell Winston Peters, but the rosy PREFU forecasts are premised (see pages 24, and 26-27) on a steep rise in net migration; from 17,000 annually in mid-2026 to 40,000 or more annually, by the end of the decade. That net outcome may be highly optimistic. Many New Zealanders currently living and working abroad may find no good reason ( and no good jobs available) that would motivate them to come home.
Footnote Two: There’s been much anguished commentary in the last few days about the looming cost of superannuation. Weirdly, there has been zero commentary about the other elephant in the room. Although the cupboard is allegedly bare, the PREFU takes it for granted (at page 70) that sufficient funds will be available for this bonfire of taxpayer money:
The Defence Capability Plan (DCP) sets out a pathway to lift defence spending to 2% of GDP from the current level of approximately 1% of GDP by 2032/33. The DCP outlines indicative investments over 15 years, with investment of $12 billion over Budgets 2025 – 2028 to ensure New Zealand can respond to the changing global security environment. It is estimated that around $4.8 billion of new funding would be required over the next two Budgets to deliver on the first horizon of the DCP. Based on current GDP expectations, defence spending would need to increase to around $12 billion per annum by 2032/33 from the current levels of around $6 billion per annum to meet the 2% target.
Incredible. Especially in a context where, overall, government spending relative to GDP is being predicted to fall over the forecast period. Yep, lets reduce the net value of our spending on health, education, ACC, science and technology, national infrastructure etc – and in the process, throw more jobs on the scrap heap – in order to double our multi-billion dollar increases in Defence spending.
This perverse extravagance is being indulged mainly in order to buy new frigates in late 2027 that would be of no use in defending this country. The only practical wartime purpose of the new frigates would be to help defend a US carrier fleet against a phantom threat from China. Needless to say, New Zealand will receive no reciprocal defence commitments in return, from the Americans.
Footnote Three: All but lost amid the excitement over the books-balancing fetish has been the sobering news that the PREFU expects unemployment will remain above 5% for most of 2027. As the CTU has pointed out, some 200,000 New Zealanders will continue to languish on the Job Seeker and Emergency Benefit forms of income support for the entire forecast period. Even if the rosier Treasury forecasts come to pass, unemployment is being predicted (see PREFU, p.4) to still be at 4.3% by the end of the decade. Now, that’s what I don’t call success.
Footnote Four: Finally…with regard to the improvements that Treasury is expecting in the bottom line of Crown agencies, there’s a clear social cost involved in heading further down that path. One can read between the lines of the sterile PREFU language about the “asymmetry” involved when inflation boosts the tax take via fiscal drag on one hand, while on the other hand, inflation reduces the net value of government funding. Or, as Treasury blandly puts it:
Higher prices lift tax revenue by increasing nominal incomes, spending and profits, while many areas of government expenditure are determined through fixed Budget allowances and therefore do not automatically rise with inflation…However, higher inflation can also make it more difficult for agencies to operate within existing funding baselines and allowances…
Gee, you think? In essence, Crown agencies are to be strangled in order to enable National to brag about its success in achieving a surplus. On principle though, it is not a sin for governments to run deficits. A deficit can be even be taken as a sign that a competent government has seen the need to invest, in order to meet future needs. Currently though, deficits are being viewed as a malady – but the “cure” being promoted in the PREFU looks far worse than the disease.
United, at the remix desk
As their gigs around NZ in May proved, the North Carolina band Wednesday somehow manage to combine post punk/emo/noise expressiveness with a killer country music sensibility, and do both in the same concert setlist.
“Elderberry Wine” was one of the most country-inflected highlights of their most recent album Bleeds – and yet this remix by DJ Sabrina the Teenage DJ pushes the song, and the band, in yet another direction, this time onto the dancefloor. Who-ever thought of it, putting these two creative, highly divergent forces together was a stroke of genius:
And from a couple of months ago, here’s another in the stream of typically laconic DJ Sabrina cuts: