Nicola Willis seeks to chart middle course through the economic rocks

Tuesday, 3 December 2024

ANALYSIS: Perhaps they saw an opportunity to practice sparring before the Treasury releases some bad economic news in a fortnight’s time.

Or maybe it was a case of Labour’s front bench still being fired-up from their party conference last weekend.

Whatever, the reason, Finance Minister Nicola Willis’ appearance in front of Parliament’s high-powered Finance and Expenditure select committee on Tuesday was an especially impatient, testy affair.

Willis isn’t going to be able to explain away another forecast annual delay returning the Government to surplus next month without liberally blaming the former government for the state and trajectory in which it left the books.

Which, when you are in Labour’s boots, comes across as a lot of unnecessary goading.

Labour finance spokesperson Barbara Edmonds and Revenue spokesperson Deborah Russell sense the opportunity to land a major hit.

Sure, the Government was able to fudge the question in the Budget of whether it had borrowed billions to fund tax cuts.

But that charge will get harder to dismiss after the Treasury releases its Half Year Economic and Fiscal Update (Hyefu) on December 17, which is shaping to be a watershed event in the current political term.

It is probably last chance saloon for the Government to interest the public in blaming the former government for the fiscal sums going further off track.

And it may be first good opportunity for Labour to attempt to convince people the case for tax reform has become inescapable.

The topic of Tuesday’s committee meeting should have been the Government’s accounts in the year to June, but the focus quickly shifted to the future.

So in between the accusations of unanswered questions, patronising answers, a lack of respect being shown for the minister, fake facts and time-wasting, what did we actually learn?

The Government may change the presentation of its accounts and make the deficit look smaller

Despite all the spending cuts announced in the Budget, the Government’s operating (Obegal) deficit was $3.4 billion higher in the year to June, at $12.9b, than the previous year.

More troubling perhaps, at $4.2b, the deficit was also $1.7b higher in the three months to the end of September than in the same three months last year.

One reason for the red ink is a large deficit at ACC.

But Willis hinted the Government was soon likely to exclude the results of major Crown entities such as ACC from its ‘headline’ deficit, and would have “more to say“ on that come the Hyefu.

“I think we do need to consider them differently in terms of the Obegal measure,” she said.

As far as possible, Willis is going to position herself as a centrist

Willis referred to the Government as having three fiscal choices ranging from “blindly baking in unsustainable levels of government spending” to “a dramatic and sudden reduction in government spending to urgently bring the books back to balance”.

Needless to say, it was a ‘third path’ she touted; “the gradual consolidation of government spending”, while relying on economic growth to do the heavy lifting bringing down debt over time.

More ‘user-pays’ arrangements on the horizon

Willis appears to be ruling-in additional “revenue-raising” measures to help balance the books, by which she includes levies such as road tolls.

“By partnering with private capital and creating tolling revenue measures, we'll be able to get new roads built faster,” she said.

Willis cited previous increases in visa fees as another example of the broad policy direction.

Some charities look set to pay tax

An overhaul of the law surrounding charities is in the wings, with the goal of closing supposed “loopholes” that allow organisations whose purpose may not be entirely charitable to avoid tax.

“I've been explicit that there could potentially be additional revenue in that area,” Willis said. “You can expect me to make announcements at the Budget.”

“What essentially we are doing is looking to see whether there are any loopholes that are being exploited that would allow entities which are structured as charities to avoid tax that they should otherwise pay.”

Some charities contributed significantly to their communities, but some were building up their own coffers, she said.

“What I want to work through very carefully is that we don't punish the good while trying to go after the bad.”

An overhaul of the Public Finance Act is coming

Willis complained when the coalition government took power that it had been landed with a series of “fiscal cliffs” in the form of spending that would be required but hadn’t been budgeted for, such as some Pharmac spending.

“That has prompted me to review the Public Finance Act and I intend to introduce amendments next year so that a future government can't get away with that sort of reckless behaviour,” she said.

The snag is every government has fiscal challenges it would rather brush under the carpet as long as it can.

One question is whether and when the coalition Government should be budgeting for some very large likely liabilities related to the country’s international climate change commitments, or to recharge ACC’s coffers.

The climate costs could include buying overseas carbon credits to meet our ‘Paris Agreement’ pledges and a commitment freshly made by developed countries at the UN ‘COP29’ climate conference in Azerbaijan to triple climate change support to developing countries to US$300b a year by 2035.

Willis doesn’t see a need for government to be a bigger slice of the economy

An ageing population and the costs involved in combating and adapting to climate suggest that healthcare, superannuation and infrastructure spending may account for a larger share of economic activity.

Traditionally, these have been largely funded through taxation. But Willis appears to aspire to restrict government spending to a little over 30% of the economy.

It had been sitting around the level for decades before former finance minister Grant Robertson broke what had been a cross-party consensus by sending that higher, she suggested.

Expect her to talk up any positive signs of growth

The Government’s books won’t come back into balance under current fiscal settings without economic growth lifting tax revenues, and Willis has the binoculars out.

“There are a few signs of green shoots across the economy.

“We are seeing business confidence restoring to highs, we are seeing consumer confidence coming back up, we are seeing people increasingly acknowledging that while it's tough now, the future looks a lot better,” she told the committee.