The first nine-month financial report under the Coalition Government shows higher operating costs, reduced infrastructure investment, and growing debt as it prepares for Budget 2025

The Treasury has released financial statements showing the first nine-month snapshot of Crown finances fully under the Coalition Government’s control.

Christopher Luxon and his coalition partners took office in November 2023 but did not deliver a full Budget until May 2024, taking effect a couple of months later in July.

New Zealand has yet to experience a full year of the new Government’s fiscal management. The first six months ran under a slightly modified Labour Budget, and only 10 months have passed since Budget 2024 began.

But Treasury’s financial statements for the nine months to March offer a snapshot of the fiscal situation facing Finance Minister Nicola Willis as she prepares to deliver her second Budget in two weeks.

They show higher operating costs, slightly lower tax revenue, reduced capital investment, and worse debt and deficits than in the same period last year.

This is not necessarily the Government’s fault. Much of it stems from earlier policy decisions and a weak economy. However, some Coalition policies have contributed as well.

Waiting to build 

First, infrastructure investment. The Coalition has big plans and has laid groundwork to improve future development. But it has also sharply reduced actual spending and commitments during its first nine months in full control of the accounts.

The Coalition has committed to just $16.1 billion in future projects this fiscal year, down from $18.9 billion last year. It is also significantly underspending on those commitments.

Only $10.2 billion has been spent on physical assets such as roads, hospitals and schools in the past nine months — $2.8 billion, or 21%, less than forecast. That amounts to 2.4% of full-year GDP, down from about 3.1% in the same period last year.

Weak government spending has frustrated the construction sector, which is also dealing with a private sector slowdown driven by high interest rates and uncertainty.

Mark Malpass, chief executive of NZX-listed Steel & Tube, told The Post he was frustrated by the number of cancelled infrastructure projects.

“We were hoping, with the National Coalition coming in, that 18 months ago, we would have started seeing some investment,” he said. 

“Typically governments, when you're in a recessionary environment, invest in infrastructure and social housing. And we've just seen the opposite, really”. 

While the Fast-Track Approvals Act should unleash a wave of major projects at some point, the construction sector has been left waiting, and shedding thousands of jobs.

Spending hangover 

Capital spending may have slowed sharply over the past nine months, but operating costs have continued to rise. Core Crown expenses reached $104.1 billion in the nine months to March — $3.2 billion more than in the same period last year.

The rise is due to inflation-linked increases in superannuation, benefits, and public sector wages, along with a higher unemployment rate and a growing share of retirees. Transfers and subsidies rose 7% on the previous year, as more people qualified for the higher benefit rates.

Personnel costs rose 3% despite public sector layoffs, likely due to wage growth and the recycling of savings into frontline roles.

Tax revenue didn’t keep up. It rose 1.1% to $89.5 billion in nominal terms but fell slightly as a share of GDP. The drop reflects tax cuts in Budget 2024, weak corporate profits, and fewer income earners.

Rising costs and lagging revenue are a recipe for debt and deficits — both grew over the nine-month period. The OBEGAL deficit was $8.4 billion, slightly below forecast but still on track to reach 4% of GDP by year-end.

Net core Crown debt rose to $182 billion, or 42.6% of GDP, while the Crown’s total net worth fell $9.9 billion to about $184 billion. Net worth is the most complete measure of the Government’s finances, rather than core debt or the annual deficit alone.

Balancing act 

The numbers support two common criticisms of the Government: it has pulled back on capital investment during a downturn, and it hasn’t been able to cut taxes without increasing borrowing.

However, the data also shows how much cost cutting is needed to balance the budget and stem ongoing losses to net worth. In economic terms, the Government is converting public net assets into day-to-day spending — though it hasn’t actually sold any assets.

It’s acceptable to do this for a short time, for example to manage a downturn, but it’s not sustainable. Further fiscal pressure from an ageing population is looming, and New Zealand is not well placed to confront it.

Budget 2025 will need to reinvigorate capital investment and rein in day-to-day spending while avoiding serious social harm.