Willis walking Budget tightrope
In a month and one week Nicola Willis will hand down her first Budget as minister of finance. And against the backdrop of a Government taking the country in a different direction.
The Post has been dutifully reporting the rolling job cuts across the public service. The size of the cuts is not particularly large compared to the growth in headcount in the public service. But the size and speed of the changes have been notable and broad – even if a lot of the numbers were job vacancies that haven’t been filled.
In addition, it has certainly sent a shiver up collective spines across the service – if this is what the down payment on cuts looks like, what might the real thing in May be?
After the initial set of cuts, the most likely ongoing budgetary restraint will see the service settling into a more docile rhythm of a sinking lid on staff.
And the restraint is now starting to be felt elsewhere across the economy. With corporate profits being challenged, Air New Zealand’s profit guidance downgrade on Monday gave as two of its reasons, “ongoing weakness in domestic corporate and government demand”.
Squeezing household and business discretionary spending is exactly what the Reserve Bank Governor Adrian Orr has been trying to engineer for the past two years or so.
And despite Christopher Luxon being professionally optimistic (over and above the usual requirement for prime ministers), including about inflation coming down to 4%, this is going to be a very difficult year.
The International Monetary Fund has warned that driving the last bit of inflation out of the system (and getting New Zealand into the 1% to 3% range) could prove a sticky undertaking. That in turn could push any interest rate cuts further away – bad news for borrowers, good for those on fixed incomes.
The Willis Budget has to grapple with a few key fiscal and economic realities. The first is that New Zealand’s productivity performance has been poor since the early 2000s. The Budget is not the primary vehicle to deal with that, sustained microeconomic reform is, but Budgets usually contain at least some of that.
The Budget will also have to put the finances back on to something like a sustainable track. In the past two decades, successive governments have only delivered a handful of Budget surpluses, leaving the country in a state of perma-deficit.
Then the Government will have to deliver its tax package – something similar to what was promised pre-election.
Both the smaller coalition partners understand the political economy of this for the National Party. If the “tax relief” is to be delivered while also not increasing debt (a pre-election promise), room in the Budget needs to be found, hence the cuts to date. But not delivering what will amount to a tax cut to lower middle income earners would be hung around National’s neck for the next three years.
The term “tax relief” is clearly deliberately used. It is actually – based on pre-election promises – a mixture of bracket changes and handouts in the context of increased Government spending. It won’t really just be a tax cut.
It also won’t be because the only real tax cut is a spending cut, anything else is just rearranging who pays what and in which generation. All this needs to be done in a non-inflationary way, that doesn’t meaningfully increase debt.
And while it is understood that Budget negotiations have been mostly professional, they have started to scratch at some itchy differences which have mostly been successfully balmed since the start of the Government.
While the National leadership is pretty aligned with ACT on the broader things the coalition needs to do for the country, NZ First is far more transactional. It is aligned with the parties on many matters, but is always keen to remind National that everything outside the coalition deal has to be negotiated. And Winston Peters is determined that NZ First will be re-elected to Government in three years.
Also, during the coalition negotiations, both smaller parties privately complained that Christopher Luxon could at times be a high-handed poor listener who tended to lecture others without being over the detail of policies or issues himself. That was fine once negotiations had concluded and the stress was over but at the time, it did cause both NZ First and ACT to talk and get to know each other more.
That is once again occurring as ACT and NZ First both privately chafe at being publicly rebuked by the prime minister for criticising the Waitangi Tribunal.
It’s a bump and should iron out, but time is the single most precious commodity in ministerial politics. And time spent managing the coalition is time and energy not spent hitting quarterly targets.
When I interviewed her ahead of the mini-Budget in December Nicola Willis said, “we’re going to start a new chapter”. But she said that the May Budget was where it would all happen. That will be tough. There’s a fearsome number of things to balance in this Budget.