Olivia O’Malley is a former press secretary to New Zealand’s Leader of the Opposition and long-time Conservative staffer. She currently works in public affairs.
It’s been a little over three weeks since New Zealand’s new government took office, with a coalition of the centre-right National Party, headed by new Christopher Luxon, ACT (slightly further to the right), and the populist New Zealand First, led by Winston Peters.
It has been busy. The first 100 days is an oft-used measure of a new government’s impact in New Zealand, and usually consists of a laundry list of the previous government’s initiatives which will be repealed, alongside new initiatives pledged during the election campaign.
Today Nicola Willis, newly minted Minister of Finance, presented her first “mini budget”, setting out what the government plans to do now it has seen the real state of the economy. Somewhat to its good fortune, the books have been in a markedly worse state than the economic forecasts had predicted.
This, of course, has advantages and disadvantages. There is much to criticise from the previous government’s legacy: high inflation, instability within the housing market following historic increases and then huge falls, and $7.2 billion in fiscal cliffs’ that the previous government has left behind.
All this means is that the new government will have plenty of slack and goodwill from a public that is suffering economically. On the other hand, there is limited resource to do what the government actually wants to do.
Tax cuts are high on the public’s agenda. A staple in the centre-right playbook, both National and ACT pledged tax cuts on the eve of the election.
However, those have yet to materialise. Willis has promised cuts to income tax beginning in July 2024, though it remains to be seen whether National will scrap the top tax rate of 39 per cent for income over $180,000.
More could also be done to combat fiscal drag, with the parameters of the tax brackets not having changed in years despite high inflation. The average full-time worker on minimum wage almost earns enough to be in the third of five tax brackets.
In any case, the government knows it has made this commitment a central plank of its offer to the public, and it will have to be true to its word if it is to maintain the economic credibility for which it wants to be known.
When Labour came into power in 2017, National had generally managed the economy well and so had plenty of scope to invest in projects such as light rail (still yet to materialise) or increase payments to welfare recipients.
This time, there is little slack in the budget to allow for luxuries; the government books have been found to be far worse than expected, meaning there is even less fiscal headroom than initially accounted for during the election campaign.
Another pressing issue contributing heavily to government spending is mission creep. Much was made of the expensive use of external consultants in the run up to the election. But Labour has also grown the public sector headcount by around 34 per cent since 2017, equivalent to around 47,000 full time workers.
Putting this into perspective, the Institute for Government estimates the Civil Service here in the UK has grown by 24 per cent since 2016, against a backdrop of Brexit and Covid-19. Of course, New Zealand also experienced Covid-19, but it has had nothing equivalent to Brexit which might have required the creation of entire new departments.
One key difference is that much of Wellington’s economy is focused on the public sector. A city of less than 300,000 people – many of whom are civil servants – it is easy not to notice on the ground when there is a huge increase in the size of government departments, because it feels like everyone already works in one.
But the conclusion here is pretty clear. If National are to comprehensively balance the books and leave room for the investments in infrastructure and public services that need to be made, nothing less than swingeing cuts will be required.
As of today’s mini budget, Willis has asked most departments to find savings of 6.5 per cent, with some of the especially enlarged asked to reduce expenditure by 7.5 per cent. Multiple Labour-era policies, including Let’s Get Wellington Moving and Fair Pay Agreements, have also been thrown on the bonfire to help the government make savings.
In that respect, the government faces a similar situation to the incoming National government of 2008, which took office in dire economic straits off the back of a global financial crisis and with spending needing to be drastically pared back.
Yet the Key government still managed to deliver tax cuts to the majority of New Zealand workers from April 2009 – after just five months in power – and voters will be expecting National to announce the same in the next budget.
The government knows this, and today said it was “progressing work to deliver meaningful income tax reduction in next year’s Budget”. But it is notable, and to a slightly lesser extent disappointing, that a way of funding tax cuts has not been found already.
It also increases the challenge next year: voters will be expecting a much larger cut than something smaller and swifter, which may have passed muster if it were announced today. And politically, what could have been more festive than announcing a tax cut just before Christmas?