The Budget time bomb only the Treasury wants to talk about

Saturday, 27 September 2025

Luke Malpass is politics, business and ecnomics editor.

OPINION: When the Treasury delivered its long-term insights briefing He Tirohanga Mokopuna – The Long-Term Fiscal Statement this week, it gave a piece of alternate reality that sits alongside New Zealand’s current political one.

The current political debate is effectively around why the Government isn’t spending, or cannot spend, more on just about everything.

But the reality is as follows: New Zealand is running structural deficits of around 2% of gross domestic product. That means that even stripping out variations in the economic cycle, the Government is spending a lot more than it earns. And that isn’t money it is spending on infrastructure or projects; it’s money being spent on keeping the lights on and meeting its current commitments.

The LTFS takes a long-term view of where the Government’s books are going to be in 40 years. And in order for those finances to be sustainable over the coming years and decades, spending will have to be reduced, or taxes increased, or some mixture of both.

It’s a pretty simple equation. And that is just based on current policies, along with some assumptions about New Zealand getting to, and then maintaining, 2% of the economy on defence spending. That’s keeping spending at roughly similar rates but without any big proportional uplift in spending on anything.

On current projections — which are extrapolations of current policies — net debt is expected to hit 200% of gross domestic product by 2065. As The Post reported, left uncorrected that could mean $246,000 of debt per New Zealander by the same year. If spending remains unchanged, the amount of government spending per year per person will double from about $18,000 to $36,000 (inflation-adjusted).

Despite the current Government’s confused rhetoric on spending — which is that it is being stimulatory and spending more while simultaneously exhibiting fiscal discipline and getting the books back into shape — it is clear that something will have to give over time.

Willis regularly warns of these fiscal pressures, but if the LTFS is anything to go by, the fiscal tightening being pursued by her Government will barely touch the sides.

Higher taxes mean more of a drag on the economy, while lower taxes and budget cuts over time mean less government money in the economy and fewer services — although it should be noted that AI should make delivering government services far more cost-effective over the coming decade, should it be really embraced by governments.

But fundamentally it isn’t systems that cost the Government heaps, although running those more efficiently could certainly deliver savings. It is entitlements themselves: the inescapable and very inelastic costs of running a big health (and especially hospital) system, where both treatments and an ageing population outstrip the Government’s ability to pay.

Think NZ Super, welfare payments, the education system. These are all good things, but they all cost the biggest licks of money.

The question is not really if, but when do cuts and tax hikes come in, what do they look like, and over what time horizon?

There is no slack in the system. Treasury believes that prudent fiscal management means expecting a shock worth 10% of GDP every decade. That means, on current numbers, having headroom for a shock worth $45 billion each decade. Averaged out, that adds up to $4.5b per year, or the equivalent of about 3.2% of this year’s core Crown expenses.

However, the Budget last dipped out of the black and into the red in 2020 when Ardern’s Labour spent up big on Covid-19 (with full support of the House, including the parties now in government), and on the current trajectory it will not get back into surplus until 2028/29. But that is on the Government’s new OBEGALx measure, which strips out ACC from the fiscal bottom line. On a like-for-like comparison, or on a cash basis, there are no budget surpluses currently forecast.

That in turn means that New Zealand will not even be in a position to begin paying down debt until the end of the decade — 10 years after Covid-19.

If it is prudent — as the Treasury suggests it is — to prepare for that shock every decade, then it is clear that New Zealand has simply not been getting back into fiscal health after shocks quickly enough to be in a position to weather the next one.

The story of New Zealand’s debt position since the global financial crisis has been more or less thus: shock, followed by fiscal response (or downturn in tax revenues without similar reductions in spending), followed by fiscal degradation, followed by another shock. Since the end of the Clark-Cullen years it has been the 2008 GFC, the 2011 Christchurch earthquake, the 2016 Kaikōura earthquake, Covid-19 in 2020, and Cyclone Gabrielle and the Auckland floods in 2023.

That isn’t one per decade; it is six in 17 years (with varying costs), with the pandemic in particular requiring a massive fiscal outlay to finance lockdown and stay-at-home policies.

Since the GFC, the only period when the government began to make inroads into New Zealand’s debt was the last years of the English government and the start of the Ardern government.

Leaving aside climate change — over which the government has little control aside from preparedness — this is the single biggest long-term issue facing the New Zealand government.

And given the current political climate, it represents a failure of the political class to come to grips with the demographic and fiscal challenges facing the country.

Just about every politician wants New Zealand to grow its way out of its fiscal difficulties, but no-one wants to embark on the sorts of supply-side reforms that might actually boost productivity and spur significant growth. Although there is a recognition (from everyone except the Greens and Te Pāti Māori) that jacking up taxes too much would hinder said growth.

And at the same time, the levels of growth that New Zealand has actually had over the past 20 years have not been sufficient to pay for the loose fiscal management of successive governments — including the current one — which reduced the rate of spending increases and tried to let growth do the rest.

Treasury was also at pains to point out that for most shocks monetary policy is a better tool to use than fiscal policy ie it is better and more effective for the Reserve Bank to cut interest rates than for the government to increase spending.

But this now leaves New Zealand in something of a quandary. Labour’s incredible political achievement of gaining majority government allowed the spending tap to be opened — including all manner of non-Covid spending under the cover of the pandemic response. But the politics of the coalition do not allow that tap to be turned off any time soon. Even without the coalition, the pre-election spending promises made by the National Party — to spend more on health, education and law and order — severely limit where savings can be made.

Those priorities will have to be reconsidered at the next election and as the economy improves, which it will at some point.

All the while, the fiscal cost of NZ Superannuation will continue to rise with the ageing population and need to be fitted into each new Budget.

But this is not where National and Labour are at. Consider the following: National took a tax plan into the last election that was a series of bracket changes and handouts branded up as tax relief, but it was actually designed in such a way as to not make it look like well-off people were getting too much of a tax cut. Luxon had promised tax relief, but its guiding principle by the end seemed to be to minimise political attacks. It was neither fish nor fowl.

Labour will likely be announcing a capital gains tax by the end of the year, with the proceeds hypothecated to be spent on something concrete that voters understand. In common with the National policy from two years ago, it seems almost certain to be designed to minimise criticism — this time from Labour’s left flank — while not terrifying middle New Zealand.

Neither have had anything like the big-picture fiscal picture in mind.

In the meantime, central government — and not just the current one — is behaving just like the councils it likes to denigrate on a regular basis. Future spending liabilities are not really seen by voters today, so are ignored as much as possible — but the costs will be worn by their children.

New Zealand will be poorer, its citizens will have fewer opportunities, and unless governments begin to start making some harder decisions, global bond markets and those who hold New Zealand’s debt will make them for us.