INDEPENDENT NEWS

On Nicola Willis And Her Surplus Fetish

Published: Fri 31 May 2024 10:12 AM
So.... according to the Treasury, we’ll have to borrow $17.1 billion by June 2028, to help fund ( among other things) a nearly $10 billion tax cut programme, also paid for by slashing billions – and 240 line items – from our public services. Conventional political wisdom to the contrary, there is little public support for this slash-burn-and-borrow approach to economic management. In fact, some recent academic research has found a surprising lack of enthusiasm for it – among supporters of all political parties:
There was very little support for tax cuts coupled with cuts to spending on core public services. Over 60 per cent of those surveyed stated they wanted a more progressive tax system. Nearly 80 per cent of respondents favoured an excess profits tax. More than half of those surveyed were open to some form of wealth tax. Over 60 per cent of respondents stated they were in favour of all sources of income being taxed equally. Nearly 90 per cent of respondents wanted the wealthiest New Zealanders to pay at least as much tax as typical New Zealanders do (something that is not the case at present).
Unfortunately, while such views are front and centre of many voters’ minds, they barely figure in the 24/7 news cycle of political discourse. The timing of the tax cuts announced yesterday was also open to question. Company tax revenues are already falling as the economy continues to slow down under – among other things - the cumulative weight of the Reserve Bank interest rate hikes. Yet somehow, the government feels this is a good time to cut into income tax revenues as well, while boosting consumer spending and thereby throwing more fuel back onto the inflationary fires that the Reserve Bank has been trying so hard (and painfully) to dampen.
That head-on policy collision aside, it may also seem strange on principle that government revenues should be deliberately reduced. We live in a country where the population is increasing (especially so among Māori) and is getting older, and while much of the nation’s infrastructure is falling into serious decay. (The Budget’s main answer to the infrastructure crisis: build more roads!)
Regardless, the coalition government is perversely on track to reduce the state’s ability (a) to respond to emergency events and (b) to address the current levels of unmet social need. Oh, and the outlook is for weak economic growth at best, over the forecast period. For the young, Budget 2024 must be looking like a one-way ticket to Australia.
You’d think climate change alone would be a cause for caution. More extreme weather events, occurring more often, seem likely in future. Yet Budget 2024 has not only cut back funding for initiatives by the Climate Change Commission but as Greenpeace has pointed out, funding cuts are also being made to the Department of Conservation, to the Ministry for the Environment and to Environmental Legal Aid as well. In a more general sense, the Budget is also reducing the ability of government agencies to plan and to respond to any kind of future emergencies.
It is doing so by reducing the funds available for new operational spending to a miserly $3.2 billion this year, and then to an absolutely skeletal $2.4 billion over each of the next three years. By doing so, Finance Minister Nicola Willis hopes to deliver the centre-right’s favourite fetish object - a small surplus (!) in 2027/28.
For that to happen, the Treasury forecasts will have to be dead accurate. Habitually, they are not. Over the next four years, some unexpected challenge is bound to arise, yet by handing out tax cuts we are reducing our ability to cope with them. Ultimately, a surplus is not an end in itself, and shouldn’t be treated as such. Can you remember where you were, and what you were doing, on the last occasion the glad news spread from village to village that the government books were back in surplus? Me neither, but it was in 2019/2020.
Will this joyous event happen again, as predicted, in the 2027/2028 year? Not even Treasury thinks this is likely:
Treasury warned that her [Willis] future allowances of just $2.4 billion would likely fall short of the cost pressures required to maintain the current level of services.“The high-level analysis indicates that the future budget allowances are unlikely to be sufficient to cover future cost pressures on existing services,” it said. This means the cost-saving exercises and public sector cuts that occurred this year will have to be repeated in each budget to fund new initiatives.
Great. An endless war in Gaza. Endless, unnecessary years of austerity and attrition here at home. Willis is promising us years of blood, sweat, and further tax cuts thrown in the general direction of the peasantry in order to keep us from storming the castle gates. This depressing scenario is being presented as grim but necessary: the hard decisions that needed to be made.
No actually, they didn’t have to be made. The Budget’s “hard decisions” were ideological preferences dressed up as necessity. Cancel the tax cuts and you could (a) fund reductions in child poverty, address social inequality, create jobs, treat mental health adequately and provide free dental care to far more people (b) get inflation finally under control faster, and thereby (c) provide relief to the hallowed middle-income Kiwis struggling to meet their mortgage payments, which the tax cuts will now keep high, for longer. The tax cuts cannot (as promised) be “fiscally neutral” - if only because most of the cutbacks to services and related job losses will arrive after the tax cut-fuelled spending spree by the middle/upper classes has begun.
The circa $3 billion tax handout to landlords is another extravagance that the Puritans in the coalition government cannot bring themselves to forego. They know they shouldn’t, but they have also given David Seymour $153 million (and counting) for his campaign to use charter schools as a battering ram to smash the teacher unions, and (eventually) privatise the education system.
In sum, Budget 2024 is not a creature of necessity. It is an ideologically driven pattern of deliberate choices made, opportunity costs incurred, and alternatives foregone. Shane Jones for instance will get a new $1.2 billion regional development fund to administer largely as he sees fit – and ironically, the immediate purpose of this fund will be to improve flood resilience to lessen the impact of the climate change that Jones routinely mocks and minimises. He’s a flexible fellow.
As for that charter schools handout :
$153 million in new funding will be provided over four years to establish and operate up to 15 new charter schools and convert 35 state schools to charter schools in 2025 and 2026 depending on demand and suitability.
The punitive prison state will get a big boost, too. As public servants are being laid off in droves, the government is funding the hire of 685 new Corrections staff, along with a pay rise for those to be employed at the expanded “super prison” at Waikeria. More hundreds of millions are to be poured into Defence as well, and that’s even before the big ticket items related to the second pillar of AUKUS get put on the table.Lockups and Lock Outs
In bygone days, Budget Day used to be an occasion for re-affirming the social contract. We paid our fair share of tax, and on Budget Day we got to learn what benefits (these goods, those services) we would be getting back in return. Basically, Budget Dayt was a show and tell about the useful public goods that only governments can provide efficiently, effectively and affordably.
Not any more. That’s not how Budget Day is now being framed in most OECD countries:
[The]emphasis has ‘been] shifted from explaining “what is the government doing with our taxes?” to “what is the government doing to manage its finances?”. It’s as if we are no longer citizens who trust government to attend to our collective needs. Instead we have become mere shareholders in a financial institution, indifferent to how that institution invests, so long as it covers its risks and does not accumulate too much debt.
Like all shareholders, we’re not supposed to overly concern ourselves if management, in its wisdom, decides to cut costs and lay off staff in “unproductive” areas, if such actions enhance the bottom line, and deliver a short-term annual dividend. As a result, it's hardly surprising that if you don’t have a job, you got nothing from yesterday’s annual general meeting of NZ Inc. You don’t even merit a seat at the table.Surplus to requirements
In line with the emphasis on fiscal managerialism, much of the Budget Day narrative yesterday was about when the surplus will arrive, and how big it might be. The narrative focus is definitely not on who stands to benefit the most from these arrangements- is middle-income New Zealand really where the social need is greatest?- and/or what will happen to the unfortunate families who have been banished to the social sidelines. Somehow, government spending has come to be viewed as being (inherently) a bad thing, and likely to displace private enterprise from the greater good of being able to make a buck from the provision of social services.
Even on those corporatist terms, some of the brazen short-sightedness on display by Willis and Co. yesterday was jaw-dropping:
Investment to support business, science, and innovation is cut by $1.4bn – and only $700m is returned. This includes cutting large elements of the Warmer Kiwi Homes programme, which improves the energy efficiency and health of New Zealand’s ageing housing stock. Tackling climate change is no longer a concern, with $180 million cut from the Energy Efficiency and Conservation Authority. The National Resilience Plan, established to help with future natural disasters, is to end.
None of these cuts – and relatively few of the cuts carried out elsewhere – were essential. Even at the current high of circa 43% of GDP, our government debt is still just modestly mid-range when compared to other developed countries, and headed downwards. On that score, Willis has admitted – when pressed – that New Zealand’s current level of public debt is “prudent.”
For a well-publicised sign of why the long-term austerity measures being proposed are a political option, and not a necessity...$24 million of extra money for mental health is being spent on the I am Hope/Gumboot Friday organisation, which has strong links to some of the governments’s donors, to some of its former caucus colleagues, and to at least one former National party electorate candidate.
This particular counselling service is being lavishly funded even though (a) there has been little or no independent evidence of the efficacy of its work, and while (b) funding for those people with more serious mental health and addiction problems has been all but ignored.
In fact, the sum total of funding for new mental health initiatives in Budget 2024 appears to be less than the amount gifted to I Am Hope/Gumboot Friday alone. This is despite research by the Association of Salaried Medical Specialists (ASMS) showing that in 2022/2023, an estimated 329,000 adults and 55,000 children had an unmet need for Mental Health and Addiction Services: an increase of 73 per cent and 45 per cent respectively since 2016-17.
Overall, the extra funding allocated for public health, says ASMS Executive Director Sarah Dalton, does not address the levels of (increasing) unmet need in public health, the longer waiting lists and the problems of over-stretched medical staff:
While $1.43 billion has been allocated for health sector cost pressures in 2024/2025, Te Whatu Ora officials indicated at annual review hearings in March that $1.43 billion is no longer enough to meet cost pressures.
"This will be barely enough to keep the lights on," ASMS Executive Director Sarah Dalton says. Adding to further disappointment are the reductions to promised additional medical student numbers to increase the stretched health workforce.
"National campaigned on increasing medical student numbers by another 50 places in 2025 however only 25 places are indicated in this budget," Dalton says. "With 22 per cent vacancy rates amongst senior medical officers in the public health system, we need a greater commitment to train and retain our current workforce. Any reduction from the promise of 50 is a big problem. This budget leaves our health system treading water, our workforce over-stretched, and patients left waiting longer and longer."
Oh, and those 13 expensive new cancer drugs that National solemnly promised to fund? That commitment has been junked. Good to know though, that the health and wellbeing of the nation’s landlords is being well looked after.Rules of Expedience
Budget 2024 contained evidence of political expedience in other, less dramatic ways as well. Thousands of jobs and public services have been lost as departments and state agencies have scrambled to comply with the government’s recklessly arbitrary demand for 7.5 % in savings. Yet Winston Peters and his MFAT realm have been mysteriously spared. Less than 1% savings have been made at MFAT, no further questions asked. Winston Peters, man of the people, but not subject to the same rules.
Finally....government rhetoric to the contrary, frontline services have not been spared the knife. As the CTU has pointed out:
Real terms cuts are made to operating grants to Education. Vote Customs sees only cuts, no investment at all. The same is true for Agriculture, Biosecurity, Fisheries, and Food Safety, as it is for Māori Development and Pacific Peoples.Living with“public choice” theory
How did we become so hostile to the common sense reality that the state is the only reliable funder of essential social services? How did “public choice’ theory come to be taken as the only political narrative on the economy deemed to be credible? As outlined in the link above:
Public choice theory sees government spending as a necessary evil. It accepts that there are certain things only government can do (such as Defence), but, in line with neo-liberal economic ideology, it rejects the idea that there are other things governments can do better than the private sector.
To maintain that blinkered belief, New Zealand’s litany of private sector failures in the delivery of essential services has to be treated as inconvenient truths, best forgotten. Health, education, infrastructure, transport etc can all provide telling examples of private sector failures that surely, no one would want to repeat. The same goes for the scale of predatory pricing (supermarkets, banks, power companies etc) that New Zealand has virtually invited, thanks to its lack of adequate government regulation.
Budget Day shuts out all such troubling realities. It is the big annual occasion when Finance Ministers get to be seen in their best ideological finery :
Rather than an economic statement about how the government provides useful public goods, where the market cannot provide or cannot do so efficiently, the Budget has become a political statement, about providing public funding for a population’s unreasonable demands for spending on health, education and other wasteful services. The ideal is to spend just enough on these services to keep at least 51% of voters on side.
So...in line with public choice theory, we are expected to ignore the fact that this Budget tax cuts package will increase social inequality and related social problems. Those on the minimum age stand to receive at best, about $12 extra a week from a government that ensured its grudging increase to the minimum wage earlier this year did not keep pace with the cost of living.
At the same time, couples with jobs where each is on income in the $65,00 to $75,000 income range (such that they can afford childcare services) will receive the maximum amount of assistance. Willis has conceded that only 3,000 households will qualify for the $250 a week largesse that National intimated to voters last year would be made available to almost everyone.
As mentioned, the unemployed, and single-parent beneficiary households received nothing from Budget 2024, while their landlords received a $2.9 billion package of relief. The more houses they own, the bigger that relief is likely to be. Is this New Zealand the way we want it? In line with their punitive “social investment” approach to welfare, the coalition government is willing to blame the poor for being poor. As in: “A key driver of child poverty is living in a benefit-dependent household”. There was no mercy shown for them, or their children, in yesterday’s Budget.
Instead, they will be expected to find jobs in a jobs market that the government is making more crowded by the day. This competition for an insufficient number of job vacancies is bound to put “downward pressure” on the wages required to pay the country’s rising levels of rent. In the nation’s boardrooms, that’s New Zealand the way they like it.Inflation, a song sung blue
I’ll try to be brief on this. For almost two years, the Reserve Bank has been blaming inflation (aka the cost of living crisis) on excessive household spending. More aggressively than in most other OECD countries, the RB has used interest rates as its blunt instrument to impoverish households and force them to reduce their spending - even though a raft of external factors (oil prices, Ukraine War grain prices, blocked supply chains and yes, predatory pricing by supermarkets) were the far more important drivers of rising prices in the domestic economy.
Regardless, the cost of borrowing rose for everyone – including for the capital investment in the technology required to increase productivity. So, no surprise that the economy slowed. That’s exactly what the RB was trying to engineer. Jobs were lost, people with mortgages got clobbered etc. That same process also explains why the business tax take has gone down.
So… come Budget Day, and just as the harsh medicine seems to be working and – both here and offshore - inflation is being tipped to fall back into the target ranges of the central banks... along comes Nicola Willis and her election bribe that will deliver to wealthier households (who have more disposable income to spend) a round of tax cuts that will almost certainly re-kindle inflation once again.
The tax cuts will give the economy a sugar hit of spending power that will no doubt delight retailers, hike up prices, and cause the Reserve Bank to postpone the lowering of interest rates until well into 2025. At the very least, the RB will want to wait and see what the inflationary impact will be.
That being the case, anyone in the Auckland mortgage belt who is using the tax calculator to count their blessings from the tax cuts might also like to calculate how much the net gain will be after the needless prolonging of high interest rates. As mentioned, the tax cuts will not be fiscally neutral because much of the “balancing” spending cuts will not arrive until after the tax cuts have taken effect. Timing matters, when you’re relying on offsets. The inflation bump from the tax cuts might be only temporary. Let's hope so. But (a) the RB has been acting on short-term trends and (b) in the light of this government’s actions since taking office, hope is a debased currency.
As mentioned, the real purpose of the Budget Day circus is to show the world what a sound fiscal manager Nicola Willis is and parade the centre-right’s claim to be superior managers of the economy. There’s no evidence to back up that claim, and never has been. Besides, most economists would not think that it's a great idea for the government’s fiscal policy to be contradicting the entire thrust of the central bank’s monetary policy. Just saying.
Here, from Makoto Shinkai, is a welcome change of tone:Makoto Shinkai Time
The Japanese film-maker Makoto Shinkai is best known for his 2016 world-wide anime hit Your Name. This lovely, home-made, five minute film called She and Her Cat is what first put Shinkai on the map, back in 1999. That’s one more reason to regard 1999 as being one of the great years in motion picture history.

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