Brian Fallow explains why the Budget reminds him of a famous line from an old black and white movie

By Brian Fallow*

Budgets are of interest not just for what they commit to for the fiscal year about to begin, but for what they signal for the years following.

Especially in an election year.

Budget 2026 you might call Ninotchka’s budget.

Watching Nicola Willis deliver her budget I was reminded of the 1939 movie "Ninotchka" in which Greta Garbo plays the title character, a rather stern and austere Soviet official who has been dispatched to Paris to try to recover some Romanov jewels which have turned up there.

In an early scene she is discussing with some Russian comrades the brutal purges and mass trials going on back home. Picture Garbo at her most impassive as she delivers the memorable line: “There are going to be fewer, but better, Russians.”

Fewer but better civil servants, or at least better equipped ones, is a notable objective of this budget. The Government portrays the plan to cut the public sector payroll by nearly 9000 people as merely reducing bloated back-office bureaucracy. It is a facile view and probably unfair to many of those affected.

And it is a vain hope that it will free up money for the front-line public servants we all admire.

Prime Minister Christopher Luxon had already effectively spent the expected payroll savings by announcing National will cut the operating allowances from $2.4 billion to $2.1 billion. That means that over three successive budgets there would be a cumulative $1.8 billion less for the Government to spend, neatly offset by the average $600 million a year expected reduction in the public sector payroll.

Operating allowances, usually described as the pots of “new money” available in each annual budget, are a crucial metric, especially for the fiscal years beyond the one that is about to begin. It sounds like money for new initiatives but it is mainly to cover inflation.

The only part of the Government’s operating spending that gets automatically adjusted for inflation is the transfer payments, that is, New Zealand Superannuation and social welfare payments, which comprise about a third of it.

Forecasts for the rest of it, for the “out” years essentially just roll forward what has been agreed for the fiscal year about to begin.

For example this budget allocates $34 billion for health for the coming year, and forecasts $34 billion the following year and then $34 billion the year after.

So in a year’s time, if the coalition is still in power, when the Health Minister has to cover inflation and other new costs, their options will be to fight the rest of the cabinet for a share of the shrunken operating allowance or make cuts to existing spending, and hope the cuts don't become infected.

Altogether when the transfer payments are taken out the remaining operating spend is in round numbers a bit over $100 billion. The newly reduced operating allowances of $2.1 billion a year is just not going to cover inflation, a growing population and new initiatives, not to mention a mounting interest bill.

It is a recipe for cuts to public services. In a word, austerity.

And in a year’s time the macro-economic environment is expected to be one where the oil shock has put downward pressure on both private consumption and business investment.

It is an environment where it might be thought timely to offset those contractionary and disinflationary effects by some loosening of the fiscal belt – targeted and temporary, of course. Instead the Treasury forecasts public consumption to fall by 1.3 per cent over the year to June 2027.

So too bad. Getting the books back in order is the dominant objective.

Finance Minister Nicola Willis emphasises the need for resilience to potential shocks and for the Government not to contribute to inflation and higher interest rates.

But there is an irony here.

We have just had the OECD turn up to shake its head and roll its eyes at us, pointing to the link between our eccentric tax treatment of savings and how underdeveloped our share market is.

We remain heavily reliant on importing the savings of foreigners. The Reserve Bank tells us that one dollar in every six the banks lend us has to be raised on offshore financial markets. Some 60 per cent of Government bond issuance goes offshore. New Zealand’s net external debt at the end of last year was $234 billion, equivalent to 53 per cent of GDP.

So if the US bond market finally loses patience with fiscal fecklessness in Washington, the interest rate impact will be felt here, no matter how good the New Zealand Government’s books look.

*Brian Fallow is a former long serving economics editor at The NZ Herald.