Budget 2024 shows NZ has some tough choices to make: Scandinavia or Singapore

To truly understand yesterday’s Budget, it’s worth returning to a statement made in 2020 by the then British High Commissioner Laura Clark that New Zealand has “Scandinavian ambitions in terms of quality of life and public services, but a US attitude to tax”. Her point is that New Zealand politicians want an economic setting that doesn’t work – low taxes mismatched with high spending.

Eventually, the country must choose to either follow Scandinavian high taxes and high spending or US low taxes and low spending—or, indeed, something in the middle. But what is not a serious option is what Labour and National governments continue to promise: relatively low taxes and relatively high government spending.

Yesterday’s Budget continued with that Frankenstein mix, which has produced a relatively incoherent and messy Budget. The centrepiece is an array of complicated tax credits, boosts to Working for Families and tinkering with tax thresholds. Although the result is that the Budget delivers “tax relief” and “fiscal responsibility,” which will have some immediate voter appeal, there will be doubts about whether both of those are illusionary.

Hence, no serious economist or political analyst could endorse Budget 2024 (nor the last Labour Government’s budgets) as a credible blueprint for creating a good society. This Budget, like previous ones, just hasn’t represented the Scandinavian or US path; instead, it is continuing to try and force the best of both models to fit together.

The 2024 Budget embeds the high-spending, low-tax settings

The best big-picture analysis of this year’s Budget comes from Danyl McLauchlan, who was awarded the Voyager Media Award for “Best Columnist in New Zealand” last week. His online Listener column yesterday was short and to the point, arguing that Finance Minister Nicola Willis has attempted to spend more on the welfare state while giving tax cuts and promising an eventual return to surplus. He says that once you ignore the accounting tricks, the Budget fails to deliver any of those things – see: In praise of deft accounting tricks (paywalled)

The critical point of McLauchlan’s analysis is his explanation that New Zealand’s economy has been hampered by severe structural weaknesses for decades—especially in terms of low growth, low tax, and high expenditure—but then Covid pushed Labour to supercharge the settings in 2020.

Much like how Naomi Klein’s book “Shock Doctrine” warned that rightwing governments would opportunistically use natural disasters and emergencies to push through ideological agendas, under Jacinda Ardern and Grant Robertson, Labour suddenly ramped up spending, producing a much bigger state without any real commitment to returning to pre-Covid levels. And now, Willis and her Government have embedded the Covid settings with their first Budget (despite some promises to downsize in the future).

McLauchlan explains: “When Covid hit, the government responded to the crisis with a huge one-off emergency spend: vaccines, the wage subsidy, the stimulus funds. But there was also an additional increase in the overall size of the state. This was locked in during Labour’s post-Covid budgets, but the additional spending wasn’t matched by an increase in taxes. This created the structural deficit Treasury has been warning about with increasing urgency. It’s the macroeconomic equivalent of buying the groceries with your credit card.”

After factoring in the Government’s numerous accounting tricks and the political realities, National’s tax cuts won’t be meaningful, government departments will struggle, and future budgets will get bigger. McLauchlan concludes: “it’s hard to see any serious change in direction from the course set by Labour. If we were speeding towards a cliff before, we’ve merely adjusted in a slightly different direction, optimistic that a bridge will suddenly appear before we launch into the air.”

Gloomy Readings of the Budget

If McLauchlan’s analysis of the Budget seems extremely gloomy, rightwing political commentator Matthew Hooton manages to be even more shocked by the National Government’s Budget, saying, “The Coalition has shown itself unwilling to divert from the disastrous fiscal track we’ve been on since 2008. They have proven themselves not to be serious people” – see: Debt set to explode under Nicola Willis (paywalled)

Here’s some of Hooton’s interpretation of the Budget’s fiscal details:

• Willis is borrowing for tax cuts – “$28.7 billion cash over her first four full financial years”

• Willis’ spending “is $16.3b more than the Government spent in Robertson’s last full financial year”

• Willis “plans to spend $2.6b more in 2024/25 than Grant Robertson admitted to in his last Budget”

• “Core government spending will be $5.6b more in 2024/25 under the National-led Coalition” than under Labour’s last year

• Core government spending as a proportion of GDP will be 33.5 per cent, compared to Robertson’s last full year, of 32.3 per cent

• “Willis is now forecast to spend $40.5b on debt servicing over the next four financial years

Hooton concludes, therefore, that the new National-led Government is even worse than the last Labour Government.

Leftwing journalist Max Rashbrooke makes some similar points about National’s spending, saying that the Government’s approach cannot be described as “austerity” because “public spending is projected to rise from $138.3bn this year to $156.4bn in 2028” – see: Budget 2024: starving the future’s needs to pay for today’s politics

Rashbrooke paints a picture of a highly pragmatic Budget focused on electoral concerns instead of long-term stewardship: “What Willis did, in fact, was to craft a short-term hand-out to key political constituencies – while averting her gaze from the increasingly unmanageable long-term pressures building up in the public finances and, by extension, the social fabric.”

He argues that the country's long-term interests have, therefore, been neglected. For example, infrastructure commitments are particularly inadequate: “Infrastructure spending rises sharply this year, to around $18bn, but falls to under $10bn in 2028, even though the population will grow significantly in that time, and we already have massive under-investment to make up.”

He might also have mentioned housing – nothing in the Budget indicates that the Government has any significant plans to deal with the affordability crisis. As commentator Sam Stubbs said yesterday, “the sword of Damocles hangs over Kāinga Ora, with no clear path yet to increased housing supply in New Zealand.”

The Chief Economist with the New Zealand Initiative, Eric Crampton, also thinks Willis’ Budget isn’t all that different from what Grant Robertson delivered in previous budgets. He says that although it “would be unfair to describe Budget 2024 as a Grant Robertson budget”, it would be “fair to describe it as permanently entrenching a much larger state than even Robertson had promised in 2019” – see: Entrenching Labour’s big-spending approach to government (paywalled)

Crampton notes that Willis promises to cut the size of the state back eventually but doesn’t trust that this will happen: “Finance Minister Willis promises a larger government sector effectively forever. A return to pre-Covid core government spending, as a proportion of GDP, might happen 18 years after the borders closed.”

As an example of how the Government has been willing to continue funding unnecessary expenditure – or “corporate welfare” – Crampton draws attention to the subsidies that lobbyists convinced Robertson to hand out to videogame makers in last year’s Budget: “Given the need to find savings, it was surprising that Budget 2023’s $40 million per year in videogame subsidies will continue. It isn’t much in the grand scheme of things, but did the government just overlook this one, or does it think that subsidising the videogame industry when trying to get the books back in line is a good idea?”

Not everyone distrusts National’s stated intention to reduce spending eventually. Tim Watkin’s RNZ analysis emphasises that the new Government is indeed determined to shrink the size of the state, and although the axe wasn’t swung in yesterday’s “status quo” Budget, the “pendulum has swung” and the next two budgets of 2025 and 2026 will shrink the state down to the “barest of bare bones” – see: No surprises but little excitement for voters in National's tax cuts

Much of this will depend on how much extra spending occurs in future budgets. The budget's forecast “spending allowance” is currently set at only $2.4bn for the next three years. Willis has promised that she intends to keep to that limit, but not all are convinced. Treasury says that the stated future spending allowances, once adjusted for inflation, will be about $100m short of that needed just to “maintain the existing level of services” – see Thomas Coughlan’s Nicola Willis keeps tax cuts promise, but financial pain lies ahead

Without adhering to these spending allowances, no surplus can be delivered. On this, Crampton says that if you believe that National will deliver its forecast surplus by 2028, this “requires believing that police budgets will shrink from $2.7 billion in 2024 to $2.4 billion in 2028, that school lunch funding will end after 2027.”

The Grim state of the economy

Another big problem is that yesterday’s Budget showed that the tax take is well down and will likely remain so. Economist Brad Olsen told Newsroom that the state of the economy can be summed up in one word: “grim”. He elaborated: “The fact that the economic track is so much worse over the next couple of years, I think we expected that downgrade, but seeing the numbers is still pretty stark”.

The poor structural state of the economy is pointed to by leftwing political commentator Josie Pagani, who says that eventually, a government is also going to have to deal with raising productivity, and there was nothing in Willis’ Budget to suggest this is a focus for the current administration: “Here’s our basic problem: Big ticket costs in health, superannuation, crime and infrastructure go up by more every year than the economy grows. That’s been happening for decades. The population is ageing, equipment costs are rising, and we need to pay cops, nurses and engineers more to keep them here. As expensive things keep getting pricier, more taxes or ever deeper cuts in other areas are needed to pay for them. We are in a doom loop from which the only way out is an economy that undergoes a step change in productivity supported by a state sector that can deliver more and better” – see: A weak Budget for a weak economy (paywalled)

Pagani also points out that “Government debt is forecast to total 43.5% of everything the economy produces next year,” so the country needs to produce more. We can’t just smooth over these economic cracks by turning the immigration tap on: “It has been 50 years since we earned more overseas than we spent. Our productivity is dismal, so we work longer hours for less than nearly any developed country. We grow by adding people instead of by innovating.”

New Zealand must choose between the economic models of Scandinavia or Singapore

This year’s Budget clearly continues the status quo in which politicians want to believe they can keep their relatively high spending alongside relatively low taxation. To keep this fudge going requires lots of borrowing, debt, and accounting tricks.

Eventually, a choice will need to be made between new taxation—especially on the wealthy, involving taxes on things like land, capital, and wealth—or a significant reduction in spending and state delivery.

Matthew Hooton has advocated this choice in the past, suggesting that the models to choose from are either Scandinavian or Singaporean. As I reported in December, Hooton says he would prefer the Singapore model for New Zealand, but advocates that even the Scandinavian model would be better than the status quo. On his Patreon blog, he explained that he’s OK with New Zealand trying to implement a Scandinavian model, including much higher taxes, as long as it’s done competently: “I prefer ‘Singapore’ but would be quite happy with ‘Scandinavia’ if that were the consensus. The main thing is to choose one and get on with it rather than remain stuck in the middle as we have been since 1999”. For more on this, see my December Political Roundup column, The Influencers and ideas getting New Zealand politics “back on track”

Rashbrooke takes up a similar argument today, saying New Zealand governments “have champagne tastes on a beer budget”. And looking at various examples of the difference between expectations and reality, he says, “Something, surely, will have to give.”

His analysis builds around the working assumption that politicians across the political spectrum use that government spending should be around or below 30 per cent of GDP. He suggests that this arbitrary figure needs re-thinking and that New Zealand could instead emulate European countries: “German governments typically spend around 38%, Dutch ones 40%, and Austrian ones 42%. (And that’s not even counting the tax-loving Scandinavians.) If we taxed at those overall rates, our government would have around $20-30bn extra to spend each year.”

Regardless of whether New Zealand went with the European or Scandinavian model preferred by Rashbrooke or the Singapore or US model preferred by Hooton, it’s clear that one of these directions must be chosen. Unfortunately, neither the National nor Labour parties will take the country down either route.

Surprisingly, even the minor parties in Parliament are happy to follow high spending and low taxation status quo. As Hooton says today, “It is astonishing that even Act plans to line up and vote for the fiscal profligacy its supporters thought they were voting against when getting rid of Robertson.” But similarly, the Greens were very willing to do the same with Labour’s budgets.

With all the political parties failing to provide any serious political direction, let alone “transformation,” perhaps it’s time to put more faith in other agents of change. Notably, two think tanks were announced this week—more on this in future columns. It seems like New Zealand desperately needs the help of such institutions in making some difficult decisions about the future.

Dr Bryce Edwards

Political Analyst in Residence, Director of the Democracy Project, School of Government, Victoria University of Wellington

This article can be republished for free under a Creative Commons copyright-free license. Attributions should include a link to the Democracy Project (https://democracyproject.nz)