Budget 2024: Nicola Willis takes on the many-headed hydra

Friday, 31 May 2024

ANALYSIS: Nicola Willis’ first Budget was always about satisfying a melange on competing interests. Keeping coalition partners onside, delivering a promised tax package, getting the books on the path to good health and creating a narrative for the still young Coalition Government.

As our front page cartoon today suggests, Willis and the Government are fighting a many-headed hydra in order to put the books back into shape, to try to get the economy back into growth mode in order to pay for what the Government is spending.

It is worth remembering that despite all the talk from both Willis and Prime Minister Christopher Luxon of Government spending addiction, core Crown spending is forecast to rise another $11 billion this coming year, from $127 billion to $138 billion, and total Crown spending will bump up from $161 billion to $175 billion.

Yet of all the talk of smaller operating allowances - that in future years, with lower inflation, should act as a discipline on spending - the amount spent, and that has to be borrowed to spend, has continued to increase apace. According to the forecast that latter figure will be $194 billion by 2028. If that holds true it will be a doubling - in nominal terms - in a decade.

Willis said it was a process of weaning the Government off spending. Spending restraint in all areas is clearly set to continue, albeit with less fanfare.

The tax package is the small political consolation to deliver some modest relief to taxpayers. Since 2010 the tax system has become increasingly reliant on wage and salary earners to foot the bill. If things go well for the Government during this term, it won’t be the last tax cut.

After a $3.2 billion operating allowance for the coming year revealed on Thursday, the new operating allowances will remain flat at $2.4 billion per year.

A worse-than-expected tax take has meant that the Government will have to borrow more than expected to fund what’s already on the books, plus make room for its tax changes.

As KiwiBank put it in a headline to an investor note: “Delivering on promises - just- while standing on quicksand.”

That is because of a mixture of problems that remain entrenched: high interest rates, sticky inflation falling productivity and weaker demand.

This is a Budget that financial markets will test in a couple of years when the fiscal track is revealed to be accurate or not. This is currently a stable Government, but it is a coalition and much can happen in that time, however unlikely that seems right now.

Reserve Bank Governor Adrian Orr and the bank’s monetary policy committee will be early judges about whether the tax package, which comes into force on July 31, and its fiscal impulse, will be inflationary or not.

An extra $12 billion will be borrowed in order to make up the shortfall in the tax take over the next four years. Much of the political debate will be over whether that amounts to borrowing to pay for tax cuts or not.

Politically, the Budget had to achieve three things:

First it had to show that the Government (read, National) could deliver on its tax promises. Tick.

Second, it had to show that there was a credible path to surplus. Tick (well as much as any recent Budget has been).

And third, it demonstrated that this wasn’t a slash-and-burn Government. Definite tick.

But slightly worryingly for the coalition, its forward estimates see it just basically rely on inflation being squeezed out of the system, the economic cycle responding to a bit of tax relief and a slow claw-back on Government spending to get things on the right track.

Basically, it all has to go well, but if it does goes well in those areas, economic activity could increase and deliver a fiscal upside.

In other words, there isn’t much in the way of a short-term growth plan.

This, of course, is deliberate. Centre-right parties tend to argue that growth plans per se are often little more than bureaucrat-directed boondoggles. Instead, they tend to look at economic incentives and general policy settings and being favourable for growth or not.

That’s fine as far as it goes, but based on this Budget it will take some years for the settings to get to where the Government needs them to be.

Aside from fiscal management, it will be the nitty-gritty of microeconomic reform, allowing firms to become more productive, that will help to deliver that. And in the long run, as Nicola Willis told The Post, the education system is key in that regard.

But the mood music of the whole Budget is a grim economic circumstance in which growth per person will continue to be sub 2% for the next four years. In 2024 it is predicted to be a quite deep -2.8%, and will still be negative the following year.

ACT privately thinks it’s pretty weak sauce, but is happy to get along and continue to plug on with what it is interested in, which is on the regulatory space time. David Seymour was keen to point out that ACT ministers had delivered more savings than Willis had required.

NZ First got the things it wanted out of it - a new Regional Growth Fund, more police as well as Defence and Foreign Affairs being spared any significant cuts. Indeed, Defence got over $500 million more.

All three parties know they are bound together by the politics of this Budget and the waiting game to see when and how things improve.

And you could almost feel the palpable relief from the Labour Party - finally, something to get its teeth into. Labour will have to be careful how it calibrates its response, though, in order to get cut-through.

The Greens also will find a lot here for its political products. Climate change in particular has been a focus in the past few Budgets. It decidedly wasn’t on Thursday. It presents an opportunity.

But this was Willis’ day and with Parliament only sitting once through to the end of July, there will be plenty of time to get around the country and explain the plan. By the time Parliament comes back for a decent stretch, we will have a much better sense of what the public thinks.