Yip, the current government should just keep borrowing all the time.... because that worked so well under GrantR
ANZ economist criticises Labour’s ‘debt-funded spending spree’ in previous Budgets
An economist from New Zealand’s largest bank said the Labour Government went on a “debt-funded spending spree”, leaving a fiscal mess for the current Government to clean up.
ANZ economist Miles Workman, in a research note previewing next week’s Government Budget, said the large growth in spending that occurred in Labour’s second term was an “inflation-fuelling fiscal expansion” that was yet to be fully unwound by the coalition.
He said that while a “significant portion” of the Budget was likely to be paid for by repurposing existing spending, there was still a long way to go before Labour’s additional spending was unwound.
Workman said this would likely be the strategy for future Budgets, citing the fact that “unsustainable” amounts of additional spending had been baked-in to departmental baselines.
“[G]iven how much of the last Government’s unsustainable expansion is still locked into baselines, there will probably be plenty of room for
more of the same in future Budgets,” he said.
He said the impact of reducing the level of new spending in the Budget would reduce pressure on the Reserve Bank’s Official Cash Rate (OCR) by 5-10 basis points (bps), which could mean lower interest rates for borrowers, particularly those on short terms.
The overall level of Government spending will increase in the Budget.
Both discretionary spending, such as on health and education, and non-discretionary spending will increase. However, cuts to the operating allowance – the amount of new money to increase discretionary spending – mean spending will increase by less than previously expected.
Workman described this as a “relatively gradual approach” to unwinding the “
last Government‘s unsustainable expansion” of spending.
He warned that because of the Government’s decision to take a gradual approach to reducing debt levels, there were “flip-a-coin” odds that the “debt to GDP ratio will be a decent clip above its pre-pandemic level when the next big global crisis or natural disaster comes along”.
“Structural deficits are likely to be forecast for years to come,” he said.
$15 billion problem
To illustrate the challenge, Workman cost-adjusted pre-pandemic government expenses and compared them to what the Government was actually forecast to spend.
This shows that “cost-adjusted government expenses were forecast to run around $15 billion higher per year compared to just before the pandemic” and suggests that it is not just the state of the economy or rising costs that is driving the Government’s massive deficits.
“The point this [calculation] makes is once you strip out the increased cost of delivering public services, the Government is still spending about $15b a year more per year than just before the pandemic,” Workman told the
Herald.
“The pandemic came along. The last Government provided support, but it kept spending. Around Budget 2022, inflation was starting to pick up. The output gap was showing there wasn’t any resource available in the economy to accommodate future fiscal expansion, but the Government delivered another stimulatory Budget,” he said.
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In the note, Workman said these figures showed there was “room for the Government to continue reprioritising less-effective spending from within existing baselines to meet new demands and priorities”.
“Savings initiatives funded $3.8b of Budget 2024’s operating package (around $15b over the four-year forecast horizon), and we could easily see a similar magnitude to that this year.”
It was not right to “pin persistent fiscal deficits on the state of the economy. Rather, these reflect a fundamental shortfall between government revenues and expenses left by the previous Government – a shortfall the current Government is addressing only gradually (by containing growth in new spending and allowing growth in the nominal economy to outpace that of the public sector),” the note said.
“According to December’s HYEFU [Half-year Economic and Fiscal Update] forecasts, the Government was set to run 10 years of consecutive OBEGAL [Operating Balance Before Gains And Losses] deficits since the onset of the pandemic. That compares to six consecutive deficits following the Global Financial Crisis and Canterbury earthquakes.
“At this pace there’s certainly no guarantee the books will be back in the black before the next inevitable crisis/shock comes along,” it said.
Workman said there were ongoing pressures waiting for the Government in the future, “challenges that will be difficult to overcome in an equitable way without broadening the tax base”.
‘Voices of reason’ or ‘shallow analysis’
Finance Minister Nicola Willis said she was “pleased to read” the commentary, describing it as an “injection of reality to a debate”.
She said it was incorrect of critics to claim the Government should be “spending even more”.
“In fact, we went on such a big spending party under Labour that New Zealand is weighed down by a structural deficit, massive levels of debt, having to haul effort to get that back under control,” Willis said.
She said the Government had chosen a “gradual” course to fiscal consolidation, and was not drastically cutting spending.
Hipkins criticised what he called a “shallow analysis” of the Government’s finances.
“You’ve got to look at what some of the big drivers of increasing government spending over the last decade have been, and they’ve been things like an ageing population, increased costs for healthcare, and so on,” he said.
An ANZ economist has said Labour's Budgets were unsustainable and fuelled inflation.
www.nzherald.co.nz
