Chris Hipkins says Labour has become the party of fiscal responsibility and its increased spending has reduced poverty, cut emissions, and boosted pay for critical workers.
The party leader was forced to defend his Government’s fiscal record at the annual Bloomberg Address on Wednesday, when challenged over steady rise in spending.
In nominal terms, core crown expenses have increased by $41 billion—or about 47%—during the pandemic years. However, this number is boosted by inflation and a bigger economy.
Core expenses as a percentage of gross domestic product were forecast to be 32.5% this year, which would be a 16% increase from 28% in 2019.
“If you look at what is driving that increase in expenditure, I’m not going to make any apologies,” Hipkins told Bloomberg.
He said the extra spending had lifted 77,000 children out of poverty, lowered climate emissions, and provided pay rises for nurses, teachers and other public workers.
This extra spending has been spread broadly across different policy areas, according to Budget 2023 data.
Social development, which includes superannuation and a range of benefits, has increased to 10.4% of gross domestic product from 8.3% in 2019.
Health spending has increased to 6.4% of GDP, up from 5.7% three years ago. Treasury & finance costs, which includes debt servicing, has risen to 4.2% from 3.9%.
Transport was up to 2.4% from 1.5%, environment spending rose to 0.8% from 0.2%, and foreign affairs jumped to 0.5% from less than 0.2%.
A Fiscal Freaky Friday
Hipkins said Labour would focus on getting the Crown accounts back into surplus now that the Covid emergency has passed. Then, he took a jab at National’s foggy fiscal plan.
“In a somewhat unusual reversal of positions, it’s actually the Labour Party promising to be the more fiscally prudent this election,” he said.
He said balancing the budget and paying down debt was a smarter investment than “big and unaffordable tax cuts, which will add to inflation”.
In a press release, National’s deputy leader Nicola Willis said the claim lacked credibility.
“As the economy recovered after the pandemic, the Government’s tax take soared. Instead of banking the gains and saving them for a rainy day, Labour layered on more and more spending – breaking all of the spending promises they made at the last election,” she said.
She said National was the only party with a plan to manage the economy, but didn’t mention any of its own spending plans.
When asked, Willis wouldn’t comment on whether the party would return to surplus sooner than Labour, nor give any details about spending targets and fiscal rules.
“National is the party of responsible economic management and fiscal prudence, and that will be reflected in our fiscal plan which we will release after the PREFU,” she said in a statement.
The Treasury's pre-election economic and fiscal update (PREFU) will be released on September 12, next week.
Chippy’s chipper economy
Hipkins has been seeking to differentiate himself from his political rivals by taking a much more optimistic view of New Zealand’s economic state and prospects.
National’s Christopher Luxon has suggested the economy is in dire straits and needs urgent intervention, but Hipkins has a view that it's a pandemic hangover that will soon pass.
“New Zealand is bursting with opportunity and talent. And while the current period is a tough one for many businesses, I’m confident there are better days ahead,” he said on Wednesday.
Both are politically convenient perspectives. An opposition leader will almost always say urgent change is necessary and an incumbent will say things are under control.
This makes it hard to know what each leader truly believes behind the narrative they present to the public. It's not helped by the fact that governments do not control the economy.
Earlier this week, Luxon told an audience of business leaders they shouldn’t waste their time wondering what the Government would do, and focus on building businesses themselves.
Business had developed a “parent-to-child” relationship with the Government, he said, echoing the semi-infamous comments he made in the United Kingdom last year.
Soft & dependent
In a keynote speech to a British think-tank in 2022, Luxon said Kiwi businesses were “getting soft and looking to the Government for all their answers”.
He said a National government would unleash businesses and wouldn’t stack on additional costs and regulations like Labour had done.
More sick leave, a higher minimum wage, and more public holidays were offered up as examples of this in his speech.
Notably, National now supports all of these things — or at least wouldn’t unwind them.
Luxon wants the government to boost education, commercialise more research and development, attract more foreign investment, and open more export markets.
Some of these goals are shared with the Labour party, as Hipkins outlined in a policy document and subsequent speech on Wednesday.
It had focused on a similar set of priorities: more exports, agriculture technology research, infrastructure, and education/skills. Both parties plan to launch a charm offensive in India.
But is this what the economy actually needs? What policy levers can the Government pull?
Inflation remains the biggest economic challenge by far — the economy cannot grow until the Reserve Bank brings back price stability.
National has promised to remove RBNZ’s dual-mandate but this is unlikely to have any short term impact on monetary policy with employment way above sustainable levels, right now.
The government can play a role in the war on inflation, but mostly as a supporting actor. It could choose to rein in spending or impose higher taxes to pull demand out of the economy.
However, the best opportunities to do that have passed. Economists called for Labour to fund the cyclone recovery with a temporary levy, others called for spending cuts way back in 2021.
Has the worst passed?
Chipper Chippy said it seems like the economy was turning a corner and was well positioned to bounce back from the aftermath of the pandemic.
“Our job as a Government is to keep the economy as buoyant as possible, and that’s absolutely what we will be focused on”.
On Thursday, Kiwibank economists published a regional economic report which was consistent with an extension of RBNZ’s engineered recession.
“Ultimately, it’s all about inflation … the sooner we see inflation fall back towards 2%, the sooner we will see the RBNZ shift into reverse,” they wrote.
Next year, the central bank could cut interest rates which would bolster investment intentions and bring back business confidence.
“And if realised, we would expect to see the economic scores across all regions improve next year”.
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