Brian Easton notes that the government is still borrowing for consumption and suspects neither Nicola Willis nor Ruth Richardson actually understand what is behind their recent public spat

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

I do not think anyone understands the politics of the spat between Ruth Richardson, who chairs the Taxpayers Union, and Nicola Willis – including those two. The underlying economic issue is analytically clearer.

The technical term for it is ‘fiscal consolidation’. It is easiest to understand it by focusing on the government’s net worth the value of its assets less its debt. No measure is without its problems, but net worth is a better measure than net debt as I explain here and here.

In a typical year you would expect the government to increase its net worth, accumulating more assets than debt. A government needs to allow for a growing population and for a growing economy. It would be saving and investing some of its income just like the prosperous household of a working family. If it is not saving, it is borrowing for consumption, which is likely to be imprudent (except in an emergency) and unfair to future generations when the cost of the borrowing comes to charge. We expect the government to save except in emergency years. In practice it usually does.

The government savings series goes back to March year 1948. (Dennis Rose has done the sterling work but nowadays both Treasury and Statistics New Zealand provide updates.) In 2010-2013, there was a three-year ‘emergency’ period of slight dissaving, because of the shocks of the Global Financial Crisis and the Canterbury earthquakes.

However, there was a seventeen-year period from 1978 to 1995 in which the government dissaved every year – spending more on consumption than its revenue. This was the Muldoon era followed by Rogernomics. There were no shocks so severe that could justify the period as an emergency. Rather, Robert Muldoon was asking future generations (you and me) to fund some of the consumption of his times, increasing debts and running down assets. The Rogernomes reduced the level of dissaving but did not get back into the black. It was Ruth Richardson who did, by savagely cutting real levels (which doubled child poverty) and other spending. Getting back to a government surplus (which increases Net Worth) is called ‘fiscal consolidation’.

We can trace the recent path of Net Worth in Treasury’s Half Year Economic and Fiscal Update 2025 (HYEFU). The Treasury’s independent forecasts  have the economy running flat following a biggish fall in early 2024; per capita GDP is not expected to return to the September quarter 2023 peak until December 2026 which means three years of stagnation.** The orthodox explanation for this stagnation is that the Reserve Bank had to squeeze out with high interest rates the inflation which was a consequence of responding to the Covid pandemic.

Stagnation was the cost of the squeeze. HYEFU thinks that by end 2026 the economy will be growing at a rate similar to the pre-Covid growth rate. But the GDP track will be about 7 percent lower.

Last week, I described the difficulties of fiscal management in Britain as a consequence of the Brexit shock. Our Covid shock was of a similar magnitude; it faces Willis (and Grant Robertson before her) with severe fiscal management challenges.

In particular, she has been borrowing for consumption (as did Bill English facing the GFC and Canterbury earthquake shocks fifteen years ago). HYEFU expects Net Worth to fall every year from $182b in June 2024 (the last year fiscally determined by the Ardern-Robertson Labour Government) to $169b in June 2029.* That is five years of dissaving; five years when we have been borrowing to consume, rather to invest.

In her recent Budget Policy Statement Willis defended her fiscal consolidation strategy as a squeeze. Even so, there has been substantial cuts to some government spending.*** Because of the international situation New Zealand is to spend more on the military. The rise is from $3.2b in Labour’s last year to $3.7b in 2030. Even so, as a proportion of GDP, defence spending is falling from 0.75 percent of GDP to 0.66 percent in 2030. Yet Willis highlighted this as an achievement. (Don’t tell Donald Trump.)

Richardson is advocating more cuts (including measures which would put a lot more children into poverty), in effect repeating her 1990-1 one-off slash. While she is proud of her courage, her National colleagues were probably a bit more rueful because her measures were major contributors to National losing a quarter of its voter share in the following (1993) election. (It sneaked back into government because it was the pre-MMP era with the Left vote deeply divided.)

We are much closer to the next election; the 2026 budget will be just six months before it. Willis probably judges that the sort of cuts the Taxpayer Union wants would be electoral suicide, even more damaging politically than Richardson’s.

In fact, HYEFU does not bode well for the Luxon Coalition Government’s prospects. Yes, it expects some economic growth towards the end of 2026 but unemployment will remain around 5 percent of the labour force. The government is already committed to cutting back public spending, and Willis is promising further cuts. There appears to be no room for sweeteners such as tax cuts, just unimplemented promises.

While HYEFU considers some risks in its forecasts, it does not consider the possibility an international financial crash. Treasury’s grim response is likely to be that if the crash is as big as some fear, then all bets are off. And yet the possibility of a major crash hangs over us. An economy which is already borrowing for consumption will have reduced room for responding to international chaos. That is one reason for the fiscal consolidation; the other major one is long-term sustainability.

There is an irony in the dispute between Richardson and Willis. Had there not been the threat of a major credit downgrade, Richardson would not have needed to slash. We now know there was no major shock for more than a decade, so a Willis squeeze would have worked with much less political damage. On the other hand, we will be astonished if the next significant shock is over a decade away, so Willis pursuing a Richardson slash makes more sense from this perspective than it turned out in 1990-1. (The ‘slash’ need not be cutting further government spending as the Taxpayers Union has advocated; it could be increased taxation.)

While HYEFU is a sober presentation, does one detect in other Treasury-sourced statements an increasing concern about a nearing great international financial crash? It is certainly anxious about the need for faster fiscal consolidation.

*The Net Worth to annual GDP ratios are 43.9% in 2018 when Labour took over, 43.3% in 2024, and 32.2% in 2029 and in 2030. The ratios may not be inflation-adjusted.

** The HYEFU forecasts were prepared in October. I doubt that Treasury would dramatically change them in the light of the recent September 2026 GDP release which suggests the mild recovery which it is forecasting.

*** Between the 2024 and 2030 fiscal years the following areas are projected to fall (in nominal terms – further in real terms):

• Core government services (down 24%
• Transport and communications (down 11%
• Economic and industrial services (down 26%
• Heritage, culture and recreation (down 11%)
• Primary services (down 3.5%)
• Housing and community development (down 37%)

PS. I shall take next week off; returning to columning in the new year.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.