Treasury warned Ardern Labour Government about Covid-19 spending

Thursday, 7 August 2025

Then finance minister Grant Robertson and prime minister Jacinda Ardern, in 2021.

The Treasury warned the Ardern Labour Government to pull back and target its Covid-19 spending, as non-urgent Covid spending and the declining business cycle saw the Budget deficit blow out, according to a newly released Treasury document.

In the Treasury’s 2025 Long Term Insights Briefing - a document it is required to produce every three years - said that the response to the Covid-19 pandemic “was a significant motivator for this briefing”.

The general outlook of the briefing revolves around shocks and New Zealand’s preparedness to handle future ones. In particular, the central Government agency called for New Zealand to get its level of debt lower in order to better be able to handle future shocks. It also examines, in some depth, how and when fiscal policy is effective at countering such shocks.

The response to Covid-19, which the OECD has estimated was amongst the largest amongst the OECD, and cost $66 billion, is described at length. Treasury notes that the wage subsidy scheme and interventions “tied directly to the shock” and “accounted for most of the fiscal cost in the early stages of the pandemic”.

Acting PM David Seymour says Kiwi exodus to Australia is a Covid hangover.

“However, a significant component of the response had broader objectives such as stimulating the economy or achieving distributional goals. These measures, particularly increases in Government consumption and investment were notably more lagged.”

In other words, lots of money was spent on things that were not directly tied to the Covid response and was also spent on things where it took time to spend the money - such as infrastructure and ‘shovel ready’ projects.

The Treasury also said that while it supported “prioritising economic objectives above fiscal ones“ early in the pandemic - which means prioritising about keeping economic activity above the cost to deliver it - the agency recommended against fiscal stimulus from Budget 2022 onwards.

“As the economy recovered in the second half of 2020 and into 2021, the Treasury advised shifting towards more targeted fiscal support and recommended against further stimulus from Budget 2022 onwards.”

The Treasury report also covered the broader point of what Treasury called “the challenge of using fiscal policy to respond to shocks and cycles”.

“Many programmes within the fiscal response, particularly those not tied to the shock, had a lagged impact on the economy and proved difficult to unwind in later years.”

Among one of the Covid-19 spending drives was the wage subsidy programme, which essentially paid workers to stay home and isolate.

At the same time as that was happening, the business cycle turned down, leaving, Treasury to conclude that “the combination of these factors meant that the fiscal impact of of the Covid-19 response was much larger than expected, with structural deficits emerging in the years after 2021.”

Minister of Finance Nicola Willis seized on the report to lash Labour for the structural deficts she inherited.

“Treasury’s language is spare and polite, but its conclusions are damning,” Willis said in a statement.

“The report makes clear significant errors were made in the fiscal response to Covid. Treasury is urging policy makers nopt to to repeat those mistakes. This Government will not,” she said.

“The lesson from Labour’s mishandling of the Covid response is that while there are times when governments have to increase spending in response to major events, the fiscal guardrails should be restored as soon as possible.”

The report explores how and when government should use fiscal policy to respond to shocks, and business cycles, and how it can be done in a sustainable way.

In the main, it said that “cyclical management should mostly be left to monetary policy run by an independent central bank.”

It also suggested that one way to make sure fiscal policy is effective would be to “set out clearly when fiscal policy will be used ahead of time, including pre-defined responses, ideally with cross party agreement”.

lt also suggested that a new independent fiscal institution to “scrutinise and report” on the sustainability of fiscal policy might be useful.

Willis had tried to set up a New Zealand version of the Office of Budget Responsibility or something similar for elections, but NZ First and ACT kyboshed the idea in early July.