Restraint gets harder
After facing a chorus of doubt about whether he could reach his targets, Finance Minister Grant Robertson has a new kind of problem, not seen for at least a decade. The Crown accounts – the financial statements of the Government – appear to be in such good shape that selling the message of restraint is difficult.
In some ways, the accounts are too good to be true. A surplus of $5.5 billion is the biggest in a decade. While the figure is somewhat deceptive (more than $1b was money the Government wanted to spend but for a variety of reasons did not), the booming tax take was not only stronger than expected, but the source of the money was surprisingly broad. Companies are earning more (and paying more corporate tax), more people are employed and those people are earning more (meaning more income tax) and consumers are spending more (boosting GST payments).
Robertson is now in a place even he probably thought was unlikely until a few months ago. In Opposition he, along with the Greens, set what seemed an ambitious target: to cut debt to 20 per cent of the size of the economy, by 2022. On the eve of the election this target, and the Budget Labour proposed to get there, was looking so ambitious that it threatened to be the party’s undoing.
National’s Steven Joyce claimed the plans contained a massive hole, and since the election many commentators have warned that Robertson was unlikely to reach the target and would borrow billions more than he was admitting.
Incredibly, the Government has already cut debt to below 20 per cent of gross domestic product.
As he presented the figures, rather than crow about meeting the goal, Robertson said that this may not last, as the Government has major future spending plans. The real goal is still to have debt at this level in four years’ time.
The finance minister has very good reason to try to get on the front foot and manage expectations, as he talks up the need to prepare for a rainy day. Questions have already begun about whether, given the state of the books, Robertson would consider tax cuts or offer relief to motorists paying record prices for petrol. Harder questions will come.
The Government is negotiating with unions representing teachers – broadly speaking, loyal Labour voters – on a pay settlement. After nine years in Opposition telling teachers, and other public sector workers, that they deserved bigger pay increases, how will Education Minister Chris Hipkins convince the unions that the current $500 million offer is the best he can do?
Even the National Party has begun suggesting the Government has the option to spend more in areas such as teachers’ pay.
Robertson and others have insisted they cannot fix what they see is a major deficit in a single pay round. But compared to the size of the surplus, an improved offer for teachers would feel like it could be lost in the margin of error, from a Government collecting more than $1.5b a week in revenue.
Make no mistake, New Zealand’s books are healthy, but the accounts could be something of a high-water mark, in the medium term at least.
In terms of reaching his debt target, Robertson should consider himself slightly ahead of schedule, but with a long and uncertain journey to come.
The problem with the Government’s plans is that they are based on what could prove to be overly optimistic Treasury forecasts. Effectively, the Government’s bean counters are betting that the recent good times will keep on rolling.
The Government has been taking more in tax than it expected, up until the end of June. But in the months since, business confidence has plunged. How much of that falls at the feet of the Government and how much should be blamed on international factors is, in this context, irrelevant.
The fact remains that there are signs the economy is slowing and although we do not appear to be facing a recession, it is unlikely the accounts will be surprisingly strong in the future. Robertson himself admitted yesterday that if anything, the risks are that the economy will not turn out to be as strong as Treasury has predicted.
If that slowdown comes, tax revenue will grow slowly, but the pressure to spend will continue. This is arguably a better problem to have than when his spending plan was being mocked leading up to the election. But the weight of expectation after nine years out of government is an ongoing problem for the coalition, and that pressure only increases after the huge surplus of 2018.