Willis dials down the new money in pre-Budget warning

Wednesday, 30 April 2025

ANALYSIS: When Nicola Willis turned up at Metco Engineering in Lower Hutt on Tuesday morning she had a message to send, that she was visiting businesses in the real economy, getting on and doing real stuff. In addition to being finance minister, she is of course economic growth minister,.

It was an interesting choice of venue for a Hutt Valley Chamber of Commerce meeting, not least because it was, at times, pretty difficult to hear what she was saying over the top of the medium-level whirr of engineering and fabrication.

Metco is a New Zealand and Hutt Valley success story. It employs more than 80 people and produces everything from domestic trailers to parts for rockets. Two National prime ministers have been there, and Willis did the tour.

Above the din and after the pastries and pigs in blankets for breakfast, what she announced was far more significant. Besides the predictable rhetoric about the Budget not being a lolly scramble, she announced that the forecast “operating allowance” — which is the Budget term for new, ongoing operational spending — will not all be spent for this year.

She herself set the allowance for this Budget at $2.4 billion but has slashed that to $1.3b for May 23. The very clear message from Willis is that the Government will not be spending more than it has to. It could also reflect that incoming tax receipts are expected to be lower than previously expected.

Indeed, the operating allowance, which was a political focus during the Grant Robertson years, is actually of diminished importance for the current Government.

The focus on the operating allowance was always a curious political construction.

Under the previous Government, Robertson essentially decided what was fiscally affordable – or at least “balanced” in his parlance after Covid-19 measures – meant any Budget surpluses were in a galaxy far, far away, and then added it onto the previous year’s spend.

This Government, which has decided that policy efforts in many areas have been misdirected, is instead going about changing the whole focus — and therefore the spending – of many departments. The result is a tighter rein on spending. The obvious downside is that the government will only know when it has cut too close to the bone in certain areas after something breaks.

As Willis put it to The Post, it’s not the top layer but all of the layers of the layer cake of Government spending that really matters.

Under Robertson it was always: how much new money is there going to be? And then, which priorities will get it. Under Willis in the current environment the question is now: is any new money required?

It is also an easier question for National governments to ask and also, crucially, a much easier question for new governments to ask.

There was also a basic philosophical difference: the last Government saw well-funded and staffed public services as good things in themselves, whereas the Coalition views those things as more of a means to an end.

In a Budget which is currently forecast to deliver some $186b in total Crown expenses in 2025, the operating allowance is less that 1% of total spending. And it doesn’t mean that spending it going down — in fact, it will increase in nominal dollar terms again this year’s Budget. On current Treasury forecasts which will be updated on May 2022, the total Crown expenses are set to grow by more than inflation in 2025, and in 2026 they will grow only slightly under the current rate of inflation.

But Willis is setting expectations of tightening the screws. The question will be whether the tightening meets the rhetoric. With a structural deficit and economic growth still sluggish, coupled with whatever policy sludge seeps from the Trump White House, getting the Budget back to some sort of balance sooner or later should be an imperative.

The politics of restraint will also likely be easier this time. The 2024 Budget had a weird dichotomy. On the other hand, inflation was still around and it was far messier to argue on the one hand that Government finances were in an ungodly mess while designing pretty modest but expensive tax cuts and handouts on the other hand.

As far as telling a political story went, it was all a bit disjointed. Tax cuts as a driver of growth is a counter-intuitive and difficult enough argument to prosecute at any time.

This year, it is simpler. Willis has been making the argument for restraint for a long period. Donald Trump’s disruption of the international order focuses the need to get things in order at home, and Labour’s generalised critique of virtually any spending cuts is so broad and scattergun as to be ineffective.

Besides, the fact that the Government is running a structural deficit - ongoing expenses being higher than ongoing revenue - it is already providing a degree of fiscal stimulus into the economy.

Defence will be the big area of new investment (along with health education and law and order getting the other up-ticks) - but that also suits the temper of the times with the memory of Chinese war games in the Tasman still fresh in the mind.

Willis also signalled that there will be modest cost-of-living support as well and growth-based economic incentives. The former will likely have to be targeted to be not too expensive, while the latter could be something around tax treatment of investment or depreciation or something like that which helps firms invest more.

Willis has set the stage. Less will be more, and lead to lower debt over time. The Government is also keen to find more savings or generate more growth than expected in Treasury forecasts. But will it be sufficiently hawkish to fulfil the rhetoric and really test the political constituency for a Government serious about debt and deficits?