By Michael Ryan*
New Finance M inister Nicola Willis has claimed she was blindsided by the state of the government’s books. Days after stepping into the role, she said:
The outgoing government has left us with some nasty surprises. There are some fiscal risks that are pretty significant that we’re going to have to work hard to manage.
Willis has promised to deliver a mini-budget before Christmas to show the “true state of the New Zealand economy and the government’s finances”.
But is it possible for an outgoing government to leave what Willis has called “snakes and snails” for the incoming government to deal with? Or is this just the normal politicking of any new administration wanting to look good by comparison?
New Zealand has long had legislation designed to prevent fiscal surprises from happening – the Public Finance Act 1989 and the Fiscal Responsibility Act 1994 (which was incorporated into the Public Finance Act in 2004).
The Fiscal Responsibility Act, in particular, was meant to prevent the problems faced by Jim Bolger’s incoming National government in 1990 from happening again. Technically, at least, there should be far fewer snakes or snails for a new government to slip on.
The opening of the books
Bolger said he pushed for greater fiscal transparency. The surplus forecast by the previous Labour government had been produced, in part, by some creative accounting.
He also had to deal with the near collapse of the Bank of New Zealand due to major losses caused by deregulation and some bad loans. The government held a majority share in the bank, which eventually received a bailout before being sold in 1992.
According to Bolger, the outgoing prime minister Mike Moore claimed
on many, many, many occasions the budget was balanced, it was in surplus, which was totally false. There was no surplus. There was a huge deficit.
Reducing fiscal uncertainty
The Public Finance Act requires regular fiscal reporting, including fiscal strategy reports, budget policy statements and economic and fiscal updates.
The reporting is intended to promote the full disclosure of all relevant fiscal information in a timely and systematic manner.
One of the required reporting documents is the Pre-election Economic and Fiscal Update (PREFU) – Treasury’s economic forecast for the country and the government’s fiscal outlook.
As well as giving a broad overview of the goverment’s finances, the PREFU helps prevent major policy reversals by an incoming government, by ensuring the economic and fiscal information available to them is as complete as possible.
It’s harder for a party to claim it can no longer afford a policy if it was well informed. By promoting transparency and policy predictability, the provisions of the Public Finance Act can be seen to be reducing uncertainty from fiscal policy.
While uncertainty is a difficult concept to measure in economics, my own soon-to-be-released research suggests the Act has been successful in achieving this goal. I found net tax and government spending uncertainty were approximately a third lower between 1994 and 2017 than they were between 1972 and 1989.
The result is perhaps more surprising considering the arrival of coalition politics in 1996. Fiscal policy is subject to more uncertainty (or is less predictable) when made by a group of parties with different ideologies.
Could the 2023 PREFU have been wrong?
The 2023 PREFU was 164 pages long. About a quarter of the document is dedicated to “Risks to the Fiscal Forecasts”. With such an extensive examination ahead of the 2023 election, you would expect the risk of a shock to be low.
There are four possible explanations for Nicola Willis’ apparent surprise:
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The Treasury may have missed some fiscal risks. This seems unlikely given the comprehensive statement of fiscal risks in the PREFU.
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New significant risks may have developed since the PREFU was published in September.
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The risks Willis referred to may have been mentioned in PREFU, but it was the magnitude of certain risks that surprised the incoming government. If this is the case, could more be done to communicate the magnitude in future?
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Finally, this is all smoke and mirrors from the incoming government to walk back on election promises. Concessions in the coalition agreements with ACT and New Zealand First may have constrained National’s ability to complete its agenda.
Which is the more plausible explanation? Willis has promised more detail in the coming days. But irrespective of the explanation, we need to keep in mind the broader context.
Yes, the odd surprise may happen. But New Zealand’s fiscal policy legislation is pretty good at promoting transparency. If there is a surprise, it is unlikely to be of the magnitude Bolger experienced in 1990. We should be grateful for this.
*Michael Ryan, Teaching Fellow in Economics, University of Waikato. This article is republished from The Conversation under a Creative Commons license. Read the original article.
50 Comments
My guess is that the 'shocks' are a mix of:
- Price rises (cost pressures), which have the same impact as reductions in budgets - i.e. they require activity to be cut (or more money being allocated to sustain current outputs)
- The new Govt failing to spot that some activities were only funded for a year or two (this is pretty typical, but I bet the new Govt didn't do their prep on these despite the info being publicly available)
- Financial impacts that are coming into the planning horizong quickly but haven't been added to forecasts yet - most obviously the billions of dollars of international carbon credits that we will have to buy from the non-existent market for said credits!
- Huge deferred maintenance backlogs (from COVID and general poor planning / neglect)
I mean Grant Robertson had no formal finance qualifications, but National are supposed to be the competent party. You would think they'd allocate portfolios to people based on their experience.
Simeon Brown for example was a Commercial Banker, why was he not given finance? Sounds like people are using politics to "cut their teeth" into areas they have no formal qualifications, potentially for future career aspirations.
Yes, I ranted at the time about how austere Labour's May 23 budget was. The media were so desperate to write 'Labour blowout' articles that they completely ignored the (real term) cuts that were a feature across the budget. Even the increase in early years funding was more than offset by reductions in wider school / tertiary budgets, and the operating allowances were tight as - especially once Labour dropped their 2% efficiency savings target in before the election. I suspect that we will see Nicola paint a doomsday picture. However, the big question is whether she then
(a) pushes out the date for budget 'surplus' to give herself some more headroom
(b) cuts budgets and services even harder, or
(c) suspends some of those tax cuts.
I fear she will go for (b), which will pour petrol on the recession fire.
Much better quality control required in an article! 4 points and they are numbered 1,2,1,2
There’s at least one further explanation that isn’t mentioned, with only partial overlap with the first explanation:
Treasury’s assumptions behind their forecasts were flawed
I called out some at the time PREFU was released
The next big question, then, is: were those flawed assumptions the result of poor analysis, or were they at least partly the result of ministerial influence?
Given that Treasury (and RBNZ) are predicting a host of recession-looking shifts in key predictive indicators (e.g. unemployment going up by more than it has ever done without an accompanying recession), I think it is pretty safe to say that Treasury made some highly optimistic forecasts. When Grant said after PREFU that Treasury were forecasting that we would narrowly avoid recession, I spat out my lunch. How on earth did they convince themselves to give him that advice?
4.
They should have known what they were getting into- they've been in Parliament forever. You ask question as an Opposition, until you know.
But this lot are not honest; they've come in promising to all, but with the intention of delivering to a select cohort.
Tangled webs...
But irrespective of who is in power, they're ALL falsely accounting. And, irrespective of who is in power, those pigeons are coming home to bite whoever are the incumbent lie-peddlers (peddling the laudability/possibility of endless economic growth, is simply a falsehood) will be the ones looking silly; the ones booed out of office.
The correct answer is:
5. The Minister of Finance does not know what they are doing.
This was clearly signposted pre-election foreign buyer tax revenue calculations using faulty assumptions, and the subsequent doubling down on that position when actual, much smaller, figures were presented.
Watch this minister carefully for more dishonest accounting.
Its definitely politics. GR said much the same thing when they came to power:
https://www.rnz.co.nz/news/political/345027/govt-accuses-national-of-le…
English accused Cullen/Clarke of economic mismanagement as well:
https://www.rnz.co.nz/news/national/15897/labour-to-blame-for-financial…
Unless you don't have a memory, its nothing new.
The writer gives us 4 options. "It always happens every time governments change" isn't one of them, but its closest to option 4. Yes, should be called out no matter who is in power, but taken with a massive grain of salt, cos the other team says the same thing about the other team every time. And it gives them license to walk back policy, as National will do, or introduce new policy like the last National caretakers did (GST rate rise). Labour just seems to forget that they ever mentioned billion dollar holes.
Thank you Michael.
Hopefully Willis has taken notice.
My guess of the four possible explanations, is the fourth is the most likely.
But I'd add a 5th ... Willis was so out of her depth with understanding PREFU that she didn't bother studying it in any detail until after the election. Now that she understands it, probably because someone sat her down and explained it to her, she's freaking out.
I may be being a tad unfair. We'll see.
Hardly surprising given her education...
She graduated with a first-class honours degree in English literature from Victoria University of Wellington in 2003,[7] and earned a post-graduate diploma in journalism from the University of Canterbury in 2017.[8] She was a member of the Victoria University Debating Society, and competed in international tournaments.
And was elected in 2018.
And at just 42 she's not really even cut her baby teeth yet when it comes to economics.
Which begs the question ... Who is really feeding her the economic insights she parrots?
"After graduation [2003?], she took up a position as a research and policy advisor for Bill English and went on to serve as a senior advisor to John Key in 2008."
Experienced in debate. So a debater, with lots of experience in rhetoric, and public relations spin with the background in journalism. So we can expect more rhetoric and political spin.
https://en.wikipedia.org/wiki/Nicola_Willis#:~:text=Nicola%20Valentine%…(born%207,ACT%20and%20New%20Zealand%20First.
Is she suitably qualified for the role? Does she have any large scale operational business experience, finance or money management experience to make wise and informed decisions based on their past working experience?
In most jobs in the commercial sector, people are required to have appropriate and adequate experience for the role before they are employed. It doesn't seem to work that way in government where government decisions impact all the residents of the entire nation.
Employing a person without any suitable and appropriate experience for the role of a chief financial officer is increasing the risk of outcomes that are undesirable. Seen that done in the corporate world many times and that has led to financial bankruptcies.
We should all expect her to be as bad as GR. Likely she will strike up an early relationship with Orr, who will show her the way things actually work (or the view of it that suits him the most). She will then be indoctrinated and kept under the thumb of the Western central banking cartel.
FYI, the background of the previous Minister of Finance.
https://en.wikipedia.org/wiki/Grant_Robertson
All New Governments come across surprises. And start out to blow them out of proportion and blame the previous Governments. There is an element of hyporcrysy in these positions when taken in Opposition and while in Power. That is what Politics is. Budgets hide more than they reveal, fact of life.
Having said that, it is a good thing to consider the Public Finance Act to minimise such fooling around.
Will National have a deadline on passing the Amendments ?
The ETS was an intergenerational rort as soon as it was mooted.
Make every future generation operate WITHOUT acreage because WE decided to use it ahead of time.
Called fraud.
Rather than Lawyers for Climate Change, we need lawyers pro bono defending the rights of future generations. In a massive oxymoron, success would put them out of a 'now' income....
It was known the ETs money was not going to be before the election .
At a stretch maybe she is hoping she can pass the final auction off as a surprise , if it fails to met reserve. But it has been well signaled, that there is a good chance it wont meet reserve as well.
Holding a right wing Government to account does not automatically make one a left leaning socialist. Infact, if you're actually a National supporter then you should be expecting better of them on the basis they were elected to represent you.
Pointing the finger at Labour only serves to give National a free pass with a lower bar. It says a lot about any political party or supporter if they'd stoop to that level, regardless if the other side does it.
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