Belt-tightening, yes, but certainly no austerity on the way
If there was any doubt that Nicola Willis’ first Budget would not be an austerity Budget, there it was: the Government will save $1.5 billion per year for the next few years. That’s about 1% of the Budget.
That isn’t a $1.5b reduction in actual nominal spending each year, but a saving from the forecast increase in spending. It’s a saving against what Labour budgeted, and it is modest.
Willis shared the news when she delivered her first big Budget scene-setter in the Hutt Valley on Thursday.
While Labour and the Greens will try to frame it as such – and good luck to them, this is politics – it simply is not going to be accurate. The level of service that New Zealanders expect from their Government is highly unlikely to be affected for most people at this point in time.
Willis used the speech to reiterate the Government’s main talking points, and her own developing economic narrative within that. But on Thursday, in addition to the cuts and the need for fiscal restraint and for new spending to actually only be at the level each Budget says it will be, she announced the return of “social investment”.
This was an approach championed by former finance minister Bill English. The idea is basically that with all the data we now have access to, it should be possible to identify people and families who struggle with poverty and dysfunction. That creates an opportunity to pump a lot of money into helping the children and getting those people onto a lifelong path of work and contribution, rather than welfare dependency, dysfunction and crime.
Quite aside from the moral dimension of the plan – the idea is that over time much more money will be spent much earlier in people’s lives to avoid the longrunning costs to the state of prison and so forth. The interventions would be labourheavy, tailored and intensive.
That’s the idea. In reality, Jacinda Ardern became prime minister in late 2017 and the concept never became a living policy programme.
Willis is now changing that, setting up a Social Investment Agency to help run the whole thing. Although this certainly grates against the Government’s general tenor of new bureaucracies not being needed, it is still part of the same general thrust of this coalition Government, that money has been put in the wrong places.
It is also notable that a bit of money found in the Budget will go towards social policy, not just finding room for whatever tax package is announced on May 30.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) released its 2024 economic survey into New Zealand on Monday.
This is a big survey, done every two years, in which the OECD does a deep dive into a member country’s affairs, flies over one of their economists and gives its view on what’s going on.
The OECD – a club of developed economies that is based in Paris and has existed since 1961 – does this for all its member countries.
The report noted that the New Zealand economy grew more than other countries during Covid-19, but in the 12 months to December, growth per person declined by 3.1% over the year.
That is the key challenge facing the Government and continues to be the challenge facing New Zealand. It is the thing that Willis says is one of the key indicators she watches and wants to see improve under the current Government
New Zealand is a frontier economy that relies on importing goods, services and labour. As a nation New Zealand has not got the balance right between immigration levels on the one hand and provisioning for future growth for a long period.
The big splurge of migration over the past 18 months helped meet labour shortages, easing wage inflation, but on the other hand it also highlighted New Zealand’s infrastructure deficit and put more pressure on housing.
The report featured special chapters on competition regulation, education and climate change.
Being based in Paris and European in patrimony, the OECD tends to be comfortable with higher taxes and technocratic government intervention. OECD chief economist Clare Lombardelli talked about “structural interventions” in markets with low numbers of players and said that while New Zealand’s businessfriendly environment is good, it is not sufficient to drive the outcomes the country needs.
Lombardelli listed off all of the usual sectors for the lack of competition: supermarkets, banking, telcos, dairy and others.
The OECD’s answer to much of this is to give the Commerce Commission more powers, something the new Government will be sceptical about, given the quality of some of the work it produces.
A press release last week from the Commerce Commission, telling Kiwis that petrol was cheaper at non-staffed petrol stations, seemed a pretty odd use of its time.
It also is currently charged with doing a lot, but with not much resource.
It was also typical of OECD advice in the sense that its answers often seem to be that if regulation isn’t working out well, the solution is just to make the interventions better. If only it were so easy. And nothing it really outlined was new information.
In education, the OECD basically found what the new Government has been arguing since the election campaign: that educational achievement has declined and needs to be sorted.
The organisation also sounded an ominous warning that the Government might have to intervene in the house insurance market, which has been moving towards much more bespoke risk-based pricing. It commented too on the high concentrations of power in the various sectors and talked a lot about climate change risk for New Zealand.
Willis, who was at the presentation at Treasury, said that the Government and the OECD disagreed on some things, but that’s kind of the point.
Willis said she welcomed the Government’s plans and assumptions being challenged.
Over the new few weeks, however, the plans and assumptions will be challenged by the opposition parties and in some cases tby he public. The big thing this Government now needs to weather is the tidal wave of grumpiness that seems to be washing over New Zealand.
Prices are high, the economy is languid, winter is setting in and the still newish Government can’t fix any of these thing in short order.
Luke Malpass is politics, business and economics editor