The Kākā by Bernard Hickey
The Kākā by Bernard Hickey
A smoking gun without smoke or a barrel

A smoking gun without smoke or a barrel

Budget hyped as proof of 'fiscal vandalism' has no real surprises, no blowout of deficits or debt & few tax cut details; Govt's plan is 'fiscally neutral', but not distributionally neutral

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Willis has been confidently speaking of Labour’s ‘fiscal vandalism’, but in the end unveiled a set of books without any real surprises, budget blowouts, or even many details of her own Government’s fiscal plans. Photo: Lynn Grieveson / The Kākā

TL;DR: Weeks ago, Nicola Willis accused Grant Robertson of ‘fiscal vandalism” in handing over a set of books she said were littered with ‘snakes, snails and fiscal cliffs.’

Yesterday, she repeated the accusation and unveiled a set of books without any real surprises, budget blowouts, or even many details of her own Government’s plans for income tax cuts funded by new taxes elsewhere, benefit cuts and spending cuts.

It was supposed to be a smoking gun. Instead, all we saw was the barest wisps of smoke without a barrel of budgetary detail about the new Government’s own plans.

The bottom line - The experts tasked with judging the riskiness of Government debt viewed the books yesterday as showing a better economic and budgetary outlook, not a worse one. The 10-year Government bond yield actually fell two basis points to 4.58% after the release of the mini-Budget and it has fallen 42 basis points from 5.0% since Willis warned on December 4 the mini-Budget would prove an act of fiscal vandalism. That move would have been the other way around if there had actually been fiscal vandalism.

Elsewhere in the news today:

  • The collapse of labour hire firm ELE Group into receivership has dumped 1,000 workers into joblessness a week before Christmas, including over 500 migrants now stranded here with temporary visas unable to be transferred to new employers and no access to welfare; RNZ, FIRST Union

  • Consumer NZ again accused New Zealand’s banks of making only “glacial progress” in updating their IT systems to allow “confirmation of payee” for account name checking and removing hyperlinks from bank texts to prevent hundreds of millions of dollars in scams. NZ Herald Lane Nichols. The criticism came after the New Zealand Bankers Association said yesterday it would not have more detail on the systems changes until the end of April; and,

  • More shipping companies re-routed vessels overnight from the Suez Canel and all the way around the bottom of Africa, fearing attacks from Iranian-armed Houthi rebels in the Red Sea and unclear on how a US-led coalition of naval forces would respond. Reuters

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A smoking gun without smoke or a barrel

Finance Minister Nicola Willis and Treasury yesterday released a very minimal mini-Budget and Half Yearly Fiscal and Economic Update (HYEFU), which failed in my view to show evidence of “fiscal vandalism” by the previous Labour Government, much less the “fiscal cliffs, snakes and snails” that Willis warned about in the new Government’s first post-Cabinet news conference on December 4.

The mini-Budget and HYEFU instead showed that since the PREFU in September:

  • the Budget Deficit forecast for the current 2023/24 fiscal year fell by $2.1 billion to $9.3 billion;

  • the return to surplus was still forecast to be in the 2026/27 year, albeit down to $0.1 billion from $2.1 billion in the PREFU;

  • the surplus was then forecast to rise to $3.4 billion in 2027/28, which is not the ‘deficits as far as the eye can see’ that was seen in both 1990 and 2008 when National last took over from Labour in Government; and,

  • the Government’s borrowing requirement rose $7 billion over the forecast period, which was a bit more than market expectations for $5 billion, but the new year’s forecast for the borrowing requirement in 2027/28 was $16 billion, which was less than the $20 billion some in the market had expected.

This is hardly the picture of budget blowouts and ‘fiscal snakes’ promoted on December 4.

Here are the key charts showing what was different between the PREFU and HYEFU:

Barely any change in cumulative deficits by 2027/28

A $7b increase in new borrowing, but less than expected by 2028

Barely any difference in cumulative fiscal stimulus by 2027/28

But there was an increase in Treasury’s house price forecast

So what was actually announced in the mini-Budget?

There was smoke missing from the previous Government’s actions, but there was also missing smoke from the new Government’s actions. Many expected detail on the new Government’s plans for tax cuts from next year and how it would be paid for, but that was mostly missing.

Here’s what was confirmed:

  • $7.5 billion in new tax increases, benefit spending cuts and public service spending cuts, which represents just half of the nearly $15 billion cost of tax cuts outlined by National before the election;

  • the indexation of main benefits (but not superannuation) to the cheaper inflation indexation from wage indexation, which means beneficiary families will be paid $676 million less from April next year;

  • the full accelerated restoration of interest deductibility for landlords, albeit with detail due early next year;

  • the removal of Labour’s Budget 2023 extension of free early childhood education to two-year-olds from three-year-olds to save $1.2 billion; and,

  • confirmation of the early return to a two-year brightline test from Labour’s 10-year brightline test for capital gains on sales of rental properties from July next year.

Here’s what was missing:

There was no detail about the income tax threshold changes or in-work-tax-credit changes promised by National before the election; and,

There was no detail on which Government departments would be slashing spending and jobs before Christmas, other than that Labour’s $0.5 billion ‘baseline reduction’ programme had been increased to $1.5 billion.

Here’s what Willis said in three statements titled ‘Fiscal repair job underway’, ‘First steps for tax and income relief announced’ and ‘Economic repair job begins’, including this on the tax cuts detail to come in next year’s Budget:

“The Government is progressing work to deliver meaningful income tax reduction in next year’s Budget.  This includes considering design and implementation advice for the delivery of our proposed Family Boost childcare tax rebate, and for delivering income relief to workers and their families.

“Work is continuing to uphold the commitment in the ACT-National Coalition Agreement to consider the concepts of ACT’s income tax policy as a pathway to delivering National’s promised tax relief, subject to no earner being worse off than they would have been under National’s plan.” Willis

That indicates no decisions on the balance of the tax cuts between threshold changes and Working For Families changes. Being no worse off sounds a lot less reassuring than actual promises of tax cuts with threshold and tax credit details.

Treasury said it expected the Government’s plans to be broadly fiscally neutral, but made no comment on whether it would be distributionally neutral. That was the test for tax changes set by the previous National government, but which has been conspicuously absent with the current one.

Ka kite ano


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The Kākā by Bernard Hickey
The Kākā by Bernard Hickey
Bernard Hickey and friends explore the political economy together.