Treasury’s pre-election update shows little room for new spending, as National finalises its fiscal plan

National Party leader Christopher Luxon has promised to deliver an alternative fiscal plan before advance voting starts in two weeks time, with all its policies funded.

It comes after the Treasury's pre-election update showed future governments would have very limited scope for new spending, if they wants to return to surplus in the foreseeable future. 

Forecasts show the Crown accounts returning to surplus in 2027, after seven consecutive deficits, but only if the next government limits its annual operating allowance to $3 billion.

By comparison, Labour included $4.8 billion of new spending in Budget 2023. The forecasts released Tuesday suggested that could be the biggest budget NZ sees for years to come. 

When Finance Minister Grant Robertson searched for savings to bake into the pre-election forecasts, he reduced the size of allowances set for new spending in future budgets. 

This helped the forecasts return to surplus, but also set a very difficult mission for future Finance Ministers who would have to deliver these tight budgets.

Stephen Toplis, head of research at BNZ, said the election put “serious doubt” on the surplus forecast, as it didn’t factor in any campaign promises from either party.

“You’d have to say that, whatever the election outcome, policy settings will probably end up more relaxed than is currently the case, whether that be higher levels of spending or tax cuts that are not fully offset,” he wrote in a note. 

Michael Reddell, an economic commentator, said the surplus was only forecast based on the numbers the Government told the Treasury to use.

“Anyone can plonk down a number. Delivering it is a different thing,” he wrote in a blog. 

Financial headache

Current polling suggests that these ultra-tight budgets will likely be a problem for a future National government and its coalition partner, the Act Party. 

On Tuesday, Act said it would have to revise its tax proposal after seeing the forecasts, while National recommitted to its plan — despite growing doubts over whether it was funded. 

Finance spokesperson, Nicola Willis said the tax cuts were designed to be deliverable without cutting frontline public services and were funded by reallocated spending and new taxes. 

Party leader Christopher Luxon said National would take a few days, or weeks, to digest the new forecasts and formulate a fiscal plan that allowed it to deliver on its campaign promises. 

However, both declined to comment on specifics, such as whether the party would favour borrowing more, cutting public spending further, or dropping policies.

Treasury wrote in its report that the allowance for future spending was sufficient to meet cost pressures but not much more. Population growth and other unforeseen factors could also add to cost pressures and test the limits of these allowances. 

Reddell suggested this was Treasury’s coded way of saying it was unlikely that future governments would be able, or willing, to keep to these tight limits. 

Treasury went on to say that governments in “recent times” had regularly added new spending over and above the allowances they had signalled previously.

“If this trend was to continue and there was no corresponding offset from either an increase in revenue or a reduction in expenses, there would be an adverse impact on the fiscal outlook”. 

‘The cupboards are bare’ 

Treasury said the forecasts were for “flat-to-falling” government consumption, with real spending ending the four year period slightly lower than it was in 2023.

“This represents a significant departure from the recent upwards trends,” Treasury said. Real spending had increased about 4% per year over the past decade. 

Willis, said Robertson wouldn’t actually follow through on his forecast to clamp down on spending. 

“It's important to remember today that this update is Grant Robertson's best case scenario. It assumes that, after years of spraying the money hose around, suddenly he's going to show some restraint,” she told reporters. 

Labour had exceeded its operating allowance in the past three budgets and Treasury had consequently included a higher spending forecast as a risk scenario, she claimed.  

However, Willis batted away questions about how she would cope with cost pressures as a future finance minister.

Independent economist Cameron Bagrie said the parties weren’t able to form full fiscal plans without the pre-election document to benchmark against. 

“Both [National and Labour] have done about as much of that as they could possibly do without it,” he said. 

But now it was time to add up all their promises and plug them into the fiscal forecasts. 

It would be “immensely difficult” for any finance minister to make their party’s election promises stack up with those operating allowances, Bagrie said. 

Too much of the election campaign had been driven by “populist policy” without enough attention being paid to the fact that roughly $2.8 billion would be needed “just to keep the lights on”.

Labour looked likely to have more challenges than National, but both would struggle to stay within the limited allowances, he said. 

Debt offers flexibility  

BNZ’s Stephen Toplis said this set of accounts could impose a major constraint on policy promises going into the election — at least in theory. 

On the other hand, net debt was well below the self-imposed cap and the fiscal outlook wasn’t bad in global terms. 

“While the deterioration is bothersome, it should not be overlooked that the fiscal balances (especially the net debt position) look fairly good by international comparison.” 

“On this basis parties may yet adopt greater flexibility than some might expect,” he said. 

Treasury forecast net debt would peak at 22.8% in June 2025 and fall to 21% two years later. Even under a higher spending scenario, debt would only reach 25% in the medium-term. 

Toplis said fiscal targeting was “just one leg of the stool”, ensuring that spending doesn’t drive up inflation was just as important as balancing the budget. 

Prior to the pre-election update, S&P Global Ratings confirmed NZ's AAA local-currency sovereign credit rating, most relevant to government borrowing given almost all is in the NZ dollar, and its AA+ foreign currency sovereign credit rating. The outlook on both is stable.

"We expect New Zealand's fiscal deficit to narrow over the next three years as Covid-19-related temporary spending measures come to an end. Net general government debt will stabilize at a level that is modest compared with that of most highly rated sovereign peers," S&P said.

“New Zealand's economy has entered a technical recession on the back of aggressive monetary tightening. New spending by the government and a slowdown in tax collections will delay, but not derail, the path of gradual fiscal deficit reduction”.