When Treasury provides its pre-election economic and fiscal update on September 12, it is expected to show the Crown accounts dive an extra $14 billion deeper into deficit over the next four years.
It’s important to note this isn’t because the Government has gone on a surprise spending spree, it has actually spent less than planned over the past few months.
The deeper deficits are due to much lower than forecast tax revenue coming in, as higher interest rates eat into corporate profits.
Economists at Westpac NZ expect this trend will continue and roughly double the $14.4 billion in operating deficits, over five years, that Treasury had forecast in Budget 2023.
Treasury said in May that net debt would peak, as a percentage of gross domestic product, at 22% in 2024. In nominal terms, the debt would be about $91 billion that year.
But Westpac expects the economy will be smaller and the debt higher, which could mean net debt peaks closer to 25% of GDP and nears the self-imposed 30% ceiling.
Robertson said on Wednesday that the Government did have to adapt to economic conditions, but only enough to stay within the guardrails it has set itself.
“We set those rules—surplus across the period and keeping debt under 30% of GDP—and those are my guiding stars,” he told reporters.
Written in the stars
In 2022, Treasury and Labour came up with a new set of fiscal rules that aimed to stop governments from running regular deficits and racking up debt.
The United States government has not had a budget surplus since 2001, whereas New Zealand ran surpluses for five years prior to the pandemic and for over a decade prior to 2009.
This means that NZ entered the Covid-crisis with a low debt to GDP ratio, which allowed for an abnormally large increase in net debt while still retaining a relatively low ratio.
New Zealand had the third largest increase in net debt, between 2019 and 2023, in the OECD and had the third largest deficit in 2023 — both as a percentage of GDP.
Eric Crampton, an economist at the New Zealand Initiative, said debt and spending had to be part of the Covid response but the Labour government went overboard.
“Deficits that large might make sense in a recession, when tax revenues are down and spending on benefits is high. But doing this while the Reserve Bank is meant to be trying to get inflation back down is simply irresponsible,” he said.
Treasury believes Government spending should be equal to a roughly 0.5% annual surplus over a business cycle, or roughly 10 years.
But it doesn’t suggest that number as a target. The Government should save—run surpluses—during the upswing of an economic cycle and run a deficit in the downswing.
The actual rule it settled on in 2022 was to maintain an average operating surplus between 0% to 2% over a 10 year period.
Labour would have achieved this goal based on Treasury's May forecasts. The surpluses and deficits between 2017 and 2027 would have averaged out to about +0.8%.
The short-fall in tax revenue will likely turn this into a narrow miss, although the fiscal rules are designed to give governments some flexibility on the exact timing.
National standards
In the absence of a fiscal plan from the National Party, it is impossible to guess how they would handle the deficits or even what fiscal rules they would use as a guide.
Interest.co.nz asked whether finance spokesperson Nicola Willis could commit to using the same or tighter rules as Labour, but she declined to comment either way.
Speaking on Tuesday, Willis said the New Zealand economy was very fragile with persistently high inflation, interest rates that have risen very quickly, and a significant current account deficit.
“All of that means that this is a time for very careful economic management, and that’s what we intend to show with our plan”.
The National Party has previously said it would release its tax policy prior to the PREFU, which means it will arrive in the next two weeks, and its full fiscal platform shortly after.
Writing in the NZ Herald on Friday, Matthew Hooton, a public relations consultant who has worked for the National Party, said even National’s minimum tax cut promise had become fiscally dubious.
Willis should follow the lead of conservative women, Margaret Thatcher and Ruth Richardson, and cut spending while holding tax rates steady in her first budgets, he said.
Any tax cut would have to be balanced out with proportional spending cuts, or else National’s plan would result in deeper deficits than Labour.
In the past, some people have argued tax cuts pay for themselves by spurring faster economic growth. But this does not work when the Reserve Bank is intentionally suppressing growth.
An unfunded tax cut would have a similar effect to an increase in spending and would not be welcomed while inflation was still above its target.
85 Comments
Does provisional tax get included run the current tax receipts or held in a separate account
Based on my situation, both my business and my personal income paid roughly 100k in provisional tax, most of which I will get back next year, based on how my business is tracking this year. Unless business picks up, and soon. next years total tax bill will be less than 20k,
Yvil is in the tourism and hospitality business, so his post of a couple of days ago should carry some weight:
by Yvil | 24th Aug 23, 4:50pm
"We would have been better to let it crash in 2008"
Absolutely, but unfortunately we want to "save everyone". It would have been far better to weed out the weak, learn a lesson and feel the power of consequences rather than having the good and diligent bailing out and supporting the bad and careless."
In the strictest Darwinian view, this is sound reasoning. The bigger issue in this instance is the contagion effect to the wider economy of suddenly killing off a decent percentage of your jobs and businesses. Rather than them ebbing and flowing in a regular business environment.
Thanks for quoting me Beanie, I did indeed write this, but you have taken it out of context. What I said was not in relation to a one off shock, like Covid, but in respect of what I feel is a general change in attitude towards not letting anyone fail, in normal circumstances.
tourism is back , i took the opportunity to travel a lot of NZ during the covid years so saw and talked to a lot of business owners that would have been gone by now if the government had not stepped up , many were hanging on by any means possible to get through so now i am happy that a lot are still around to enjoy the bounce back.
in saying that i am also a little annoyed of all those that are trying to rewrite history apart from auckland those everywhere else had a pretty normal summer of 2020/21 compared to the rest of the world .
do we need an enquiry into the covid response YES but only to make sure we learn from it, did we waste money YES my biggest gripe is the money we spent on the isolation hotels and some of that could have been spent upgrading , expanding and building new hospitals instead
My biggest gripe is how much money we could've saved if the country had historically spent a much smaller amount of money building a pandemic quarantine facility somewhere remote, instead of relying on the hotel network of the countries largest city.
But many people would still pooh-pooh such an idea now, and even more would have prior to 2019.
How many businesses needed the support to survive because of the government shut down their revenue stream? Ours didn't survive - second lockdown spooked all our clients into delaying their contracts indefinitely - and had a $600k project outright cancelled. It ended for the best - managed to offload our clients to other providers, and finish the smaller contracts myself ~8 months later - but I don't overlook the government's role in our business' closure.
Easy to say too much was doled out during COVID, but how many businesses would have survived if it wasn't?. Mine wouldn't have, and it would have been a bloodbath in the tourism and hospitality sectors.
Yes. But when the monetary system is set up so that credit and capital is largely derived from pvte banks, this was inevitable. Banking has not been primed to support productive enterprises over non-productive lending such as the bubble. Audaxes has simply illustrated why on many occasions on this site.
The irony here is that bank privilege is established by the ruling elite through law and throw central bank policy and regns (enabled by the law and govt appointments).
Government did only what everyone expected of it. Their response targeted workers and their families first, and businesses second. It was 100% necessary and worked exceptionally well - and was underspent.
The nigger in the woodpile was/is the RBNZ !!!
They ignored Economics 100 and threw huge sums of cheap money into the economy with NO REGARD for who got it, nor what it would be used for. When supply chains are broken and supply is scant or nonexistent and money is cheap and plentiful - what did the RBNZ expect would happen? (begin sarc) Inflation? Surely not! ( end sarc)
Economic textbooks will not remember the RBNZ's MPC and Governor kindly. In fact, textbooks may even conclude theirs was a classic example of what-not-to-do!
At this point it should be becoming obvious there's little distinction between NZs governance and economy, and most of everywhere else.
Within that fairly uniform world, sadly we managed the early 2020s better than most.
But you guys keep thinking it'd be some other, radically different way, if we just had different department heads. With superhuman hindsight powers.
Just...no
Covid was always going to wreck supply and demand equilibrium. No economist could accurately model the width and breadth of the effects of a pandemic on such a complex manufacturing and supply chain, and pandemic era social behaviour. And even if they did, there isn't the tools to mitigate it to any decent degree.
Spot on. My only gripe was that the lack of coordination between RBNZ and Treasury. The fiscal interventions of Treasury negated the need for any super loose monetary policy / QE etc so the housing market boom was completely unnecessary. But, as you say, hindsight etc.
Where to start!!!
Firstly, deficits are by definition the amount of new money that Govt has spent into the economy minus the total amount of tax they have collected (spending creates new $, taxation destroys $). So the Govt deficit is the net amount of money that Govt has created and given to households and businesses. When the Govt deficit goes up, we get richer, when Govt runs a surplus, we get poorer.
Our economy relies on an inflow of new money, which comes from net Govt spending plus net bank lending (bank loans made minus loans repaid). When the net inflow of money slows down, our economy slows down unless people (including overseas people) start spending their savings.
We have now had over 12 months of basically zero inflow of new money. Net bank lending + net govt spending has been static in real terms. On top of this, higher interest rates have added $10bn of annual cost to businesses and mortgagors have seen huge reductions in disposable income. It is therefore no surprise at all that we are in recession and the tax take is falling quickly. Whilst Govt remains committed to fiscal austerity and RBNZ stay macho on monetary policy, this doom loop will continue until Govt spending picks back up because so many people qualify for financial support (benefits etc).
As Crampton notes, in a recession Govt would usually proactively counter the drop in net bank lending by increasing Govt net spending (aka 'deficit spending') - thus maintaining the net inflow of money needed to keep things moving. But, the reckonomics ghouls have managed to convince us all that any increase in net Govt spending will make inflation worse - despite there being countless examples across the world of Govt spending alleviating inflationary pressures. So, recession it is then! There is no alternative. The beatings must continue until morale improves etc.
Unfortunately our population have been conditioned to believe that deficits are a sign of mismanagement and failure while surpluses are a magnificent economic success story. The majority of governments around the world run consistent budget deficits and have done so for centuries in some cases while surpluses are the abnormal outcome and will often lead to a recession. Deficits allow economies to grow and they provide the savings for households to accumulate, all positive things.
We have low levels of unemployment and that should be a major measure of whether the government is doing a good job or not
Again, a nice sounding golden rule.
If the created jobs can't sustain someone though, are you enriching people, or just keeping them occupied....
It doesn't have to be just public service jobs as government spending supports the entire economy and it creates a spending chain. http://www.matchesinthedark.uk/spending-chains-sankey-diagrams/
It doesn't have to be just public service jobs
I wasn't referring to public sector jobs. We have a whole lot of jobs that aren't of significant enough value to pay for the sorts of lifestyle the public expects. I.e., they're just enough to keep people out of soup kitchens, but not a lot more.
The 'Govt needs to be small for the economy to be successful' line has zero credibility tbh.
While I understand what you're saying Jfoe, isn't the prevailing dogma based around that the pvte sector should be doing the donkey work in terms of innovation and growth, therefore high pvte debt is the consequence and 'fuel' for that growth.
What's more, if the economy is based on the 'wealth effect', then arguably the idea of low govt debt / high pvte debt is consistent.
You are right. It is the prevailing dogma ... according to neoliberals and ultra-capitalists who have sold this nonsense to the masses and the masses have lapped it up ... and now can't understand why the gap between the top 5% and the rest is growing bigger by the second.
You are right. It is the prevailing dogma ... according to neoliberals and ultra-capitalists who have sold this nonsense to the masses and the masses have lapped it up
It is the prevailing dogma of neoliberals but also the "anti-neoliberals." That's why the latter never talks about it. And when you decode their policies and actions, you can see it is the basis for how they operate.
The ideal scenario imho is one where the economy is running in balance with no increase in Govt or private debt over the medium-term. In this scenario, money simply changes hands and everyone can afford to live well because technology and skills are making us all marvelously productive (we would also need to be in balance ecologically of course). Credit in this scenario is used to finance further enhancements to productivity so that we can all live even better lives without needing to work harder.
How big Govt needs to be in a scenario close to ideal depends on lots of factors... Do Govt arrange / provide free universal services like defence, parks, streets, schools, broadband, dentistry, A&E, walking trails, gyms, pools to those that need them? Or, do you go for a small Govt that pumps cash into households and trusts the market to stand up services that meet household needs? My view is that the former is more efficient and fairer. For example, if there are not enough dentists to meet demand, should access be based on who can pay the most or who is in the most pain?
As an aside, many significant innovations have come from publicly-funded research and development, and the private sector has done what it does best - take those innovations and scale production up to be market ready.
"What is the difference between poor and pauper?
Paupers then were defined by their being in receipt of relief while the wider poor lived in varying degrees of poverty. Thus, a poor person would be legally defined as a pauper only when they were in receipt of relief."
Socialists - always aiming to create a country of paupers who are then dependent to ensure their vote.
Doesn't sound like September 12th will do Labour any favours. Not sure how the tax take is down, isn't everyone getting huge pay rises and the tax brackets still have not changed ? Low unemployment still as well, tax should be up not down. Labour are gone in October anyway, cannot come fast enough. National should stay quiet until the 12th and then put the boot in.
So where is the money going to? Households are spending less and repaying debt instead or increasing their savings and a lot of money heads offshore because of our current account deficits and this is all described by sectoral balances. https://en.wikipedia.org/wiki/Sectoral_balances
Similar story here (not exact $ wise but in terms of % - roughly 50% down in terms of what my business will be paying in tax).
Basically had the BUMPER 2021/22 year with a big profit so my prov tax for the last financial year was based off that, but actual tax bill came in at ~50% of the prov tax so had that refunded - and this FY it's looking like I'll be making a smaller profit again (partly due to starting to lose some work, partly due to higher costs, and also I'm deliberately trying to make some lifestyle changes to have more family time ... funny how I never believed having kids would do that, and now I'm always looking for an excuse to work less)
My personal income has remained the same as the business is in a position to allow me to do so, but less corporate/biz tax to the tune of almost $100k.
My accountant said he's seeing the same thing play out over and over and over again, with the majority of businesses his firm works with simply not being able to recreate those bumper post-lockdown profits.
So we have a budget deficit and inflation.
And who gets to comment on solutions?
Westpac - a profit driven retail bank
New Zealand Initiative - a mouthpiece for profit driven businesses
National Party - the political party of profit driven businesses
Matthew Hooton - a public relations consultant profit profit driven businesses & their political party
Hmmm ... Anyone else see a lack of balance?
So lets get back to the problem: a budget deficit and inflation
An obvious solution is to increase taxation. That would address the deficit and remove money from the system to reduce inflation. Is that mentioned anywhere? No. Quelle surprise!
So what sort of taxation could / should be temporarily increased?
1. Business profits - payback time for their contribution to inflation (greedflation)? We have bands of different taxations rates for PAYE - about time we did this for businesses!
2. The public who are contributing to inflation?
3. Higher Kiwisaver contributions, and compulsory (like Aussie), & reduced government contribution for higher income earners
4. Higher GST rates for expensive (luxury) imports
No doubt this approach would go down like a cup of cold sick with the people who were quoted in this article.
But the rest of us are sick of privatising the profits while socialising the losses (or budget deficits in this instance).
A common misconception is that taxation finances the governments spending but in reality the government actually has to spend its currency first before it can tax it back and cancel it. We spend the governments money and it never spends ours as taxpayers are not the currency issuer.
https://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-…
https://www.levyinstitute.org/pubs/Wray_Understanding_Modern.pdf
I also questioned that. It looks increasingly likely that Robertson will do a Cullen & go out in typically Socialist fashion announcing that he's spent (= wasted) all the money so there's nothing left for National to do except austerity to recover the country's finances for a term or 2 (in preparation for the next round of incompetent Labour largesse).
Cullen should have been more worried about the household debt that his budget surpluses created. The government can repay its own debt at any time that is chooses to just as it did with the use of QE and it does not need to borrow in the first place, its just something to frighten finance ministers and dampen public expectations.
Define private sector. If that money is extracted from the country and sent offshore then that sectorial surplus effectively ceases to exist as working capital for the country. Relevant to banks extracting huge interest payments for such basic items such as housing. The divvying up of the economy into private vs. public only works in a closed economy, where simply getting by doesn't result in huge outflows.
Both parties need to answer simple question: given the investment needed in NZ, how ru going to pay for it without allowing more borrowing? Plus: ru afraid of crash in NZD if you raise borrowing when CHina not buying enough of our stuff to pay for imports?
Of course none of that will appear in "debate" on election.
Infantile
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.