New world bubbling through the Govt’s books and into politics

ON Tuesday morning, Grant Robertson opened the Government’s books to unveil a fiscal fairy tale.

The Government’s accounts for the year showed a measly $4.6 billion deficit, with Government debt just over 30% of the economy, equating to

$102.1 billion.

Flash back to Budget 2020, when Treasury forecasts feared the deficit would be $29.6 billion, and the Government’s net debt would sit at 44% of GDP — or $129.5 billion.

Robertson leaned into the fairy tale analogy as he announced the results on Tuesday, joking he was tempted to say they came from ‘‘once upon a time, in a land far, far away’’.

He’s right about the ‘‘once upon a time’’. The numbers only took in the year from July 1, 2020 to June 30, 2021 — missing the devastating Delta outbreak. In that fiscal fairy tale, Robertson Rumpelstiltskin turned deficit straw into economic gold.

But these things never last forever. Noone really knows what the books will look like in a year’s time, let alone at the next election. Robertson himself hinted at work going on behind the scenes, suggesting that in future the books could be very different indeed.

Ministers are submitting Budget bids at present and Budget 2022 is very advanced. Robertson used Tuesday to set the date for the beginning of the 2022 Budget process — December 15, when the Government will release the Budget policy statement outlining the priorities for Budget 2022.

Robertson has gazumped the usual process this year, taking the unusual step of signalling well in advance what the main priority of the Budget will be: climate change.

He’s also publicly huffed and puffed that the way he puts the Budget together has made it difficult to properly fund that particular priority. The villain is the 30yearold Public Finance Act, which incentivises governments to keep a lid on spending by forcing them to trade off current spending against future debt. It does not contemplate the cost of inaction.

Robertson knows this. He’s still feeling around for his place in the Oedipal psychodrama that is the Labour Party’s relationship to the LangeDouglas years. Torching the Tory public finance system to fund the green transition would be a leap away from the history of the Fourth Labour

Government, but it’s not clear how big a step Robertson wants to take.

He’s been working on the budget changes with Climate Change Minister James Shaw — something of a win for the Greens, as following the 2020 election, Shaw no longer has the associate finance portfolio, where such work would normally sit.

Robertson said there would be ‘‘more to say’’ about that work by December, although just two months out, the Government hasn’t made a final decision about it. The work has been going on for the better part of a year.

In February, Robertson vented some frustration in a closed speech to upandcoming public servants, saying that instead of mitigating against the shorttermism of New Zealand’s relatively brief electoral terms, the Budget system exacerbated shortterm thinking.

The change will likely relate to a decision from the last Budget to funnel all money made from the Emissions Trading Scheme into emissions reduction beginning next year. The Government expects this to hit around $1.4 billion a year by 2025 — about a third of what we now spend on defence.

One idea the Government is mulling skirts the rigours of the public finance system by booking climate change as ‘‘below the line’’ spending.

When a minister wants to fund something like, for example, buying every Aucklander a wellearned coffee, costing $6.5 million, say, that minister has to argue for that Budget bid against every other minister for the right to spend that $6.5 million.

However, a handful of the biggest Budget lines go through ‘‘below the line’’ — completely bypassing the Budget process. Ministers don’t need to argue to spend an extra $1 billion on superannuation to fund the cost of more people hitting the age of eligibility because that extra spending goes through automatically.

The Government is looking at a way of doing this for climate change: ringfencing a part of the Budget each year to pay for greening initiatives without having other ministers scrap for it.

The money would likely come from the ETS, but possibly other sources too. Treasury already models ETS revenue, and ETS prices. This could force it to do some more detailed thinking about the cost of climate change, like it does with the cost of superannuation.

But climate isn’t the only spooky cost looming over the Government’s books. The Government is being dragged away from its innate fiscal conservatism. It’s borrowing a lot (in relative terms) — and plans to borrow a lot in future. It’s already pivoting Government finances in this direction.

Its Three Waters group estimates as much $185 billion in water spending over the next three decades, much of which will be debt funded (the rest from water revenues). The NZ Transport Agency has been allowed to borrow substantial sums of money this year (a first) and will likely be able to borrow more when a review of its funding finishes next year.

Kainga Ora has borrowed $5.6 billion for new housing, and plans to borrow more. The Infrastructure Commission this week announced we have an infrastructure deficit of $75 billion and recommended doubling public infrastructure spending from 5.5% of GDP a year, equating to roughly

$30 billion a year, money that will probably need to be borrowed.

These costs are barrelling towards the Government; and it’s not clear how or even if it wants to fund them.

Meanwhile politics is starting to move on.

Members of National’s base are pondering whether the party’s position as debt hawks is electorally viable.

The Greens are moving the other way. Shaw recently recorded a podcast with Modern Monetary Theory evangelist Stephanie Kelton, who is essentially in favour of just printing money to fund whatever the government wants to do.

Covid, though important, is something of a financial distraction. The new world, with its attendant challenges, is already here. It’s bubbling through the Government’s books and into our politics.

reporter.