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Dr Bryce Wilkinson

The Prefu forecasts are not realistic

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Tuesday’s Treasury’s pre-election forecasts confirmed that Government spending exceeds revenue by more than what was forecast in the May 2023 Budget.

Far too many commentators are concluding the increase is not too bad.

Do not be fooled. The forecasts are not realistic. They are too optimistic.

They have an Alice in Wonderland feel: “When I used to read fairy tales, I fancied that kind of thing never happened, and now here I am in the middle of one!”.

The forecasts accept, as Treasury must, the Minister of Finance’s advice that the Government is going to be very tight with new spending initiatives through to 2027. Allowances for extra spending have been cut by around 1 per cent of GDP.

Why does this advice feel unreal?

It feels unreal because Labour’s Fiscal Plan in 2017 proposed to increase core Crown operating spending by just $11.7 billion, spread over the five years to June 2022.

Two years later (pre-Covid-19), Treasury put the increase at $27.7b. That increase made a mockery of Labour’s fiscal plan.

The subsequent spending response to Covid-19 took the increase to $77.4b. That additional blow-out would have been understandable were it temporary.

It is neither temporary nor the full story. Treasury’s pre-election forecasts in 2020 were informed by Covid spending responses. Spending in the year ended June 2024 was forecast to be $116b. This week, the forecast spending is $139b.

Even on the latest optimistic forecasts, core Crown operating spending will average 32.5 per cent of GDP during the four years to 2026-27. That compares with a pre-Covid ratio of 28.0 per cent in 2018-19.

Some commentators argue that the forecasts mean tax cuts are off the table. That assumes all existing spending is sacrosanct.

That assumption is absurd.

Many spending programmes have unclear objectives. Lack of accountability follows. Poor accountability guarantees waste.

The Auditor-General, for one, has published grave concerns about inadequate accountability in specific cases.

A great deal is at stake. This year, core Crown spending is averaging $1b every three days.

Each billion represents $500 per household. Most households could meet more pressing needs with some of that money.

The proportion of current spending that directly benefits the public overall is very small. Categories include spending on defence, the police force, courts, prisons, immigration services, inland revenue, communicable diseases and public administration more generally.

Statistics New Zealand estimates that such spending by the central government has been around 6.3 per cent of GDP since 1993. In contrast, annual taxation has not fallen below 27.2 per cent of GDP since 1993.

Certainly, some of the extra taxation is needed to cover the interest cost of public debt, and a well-designed welfare state that does more good than harm.

Disturbingly, however, most current Government spending benefits the individual recipient, rather than the public at large.

For example, around 12 per cent of GDP is spent on what Statistics New Zealand classifies as social assistance in kind – health and education. Outcomes are troubling in both cases.

The deep problem with much Government spending for a private benefit is the lack of clarity about why it is needed. Most people know their needs better than Government does.

This lack of clarity guarantees poor accountability. Poor accountability guarantees waste.

What is needed is a government with a Minister of Finance that makes accountability for government spending a major focus.

Pruning government programmes that have unclear objectives and poor accountability would help reduce pressure on households, public debt and future tax rates.

The need for a focus on ill-justified spending is all the greater because many voters are clamouring for the Government to ease the cost of living.

Two things that could help are likely not in their minds.

Instead, public debate is likely to focus on Government action to reduce the cost of living by borrowing, hand-outs or tax cuts.

Such things do not reduce the cost of living. That remains what it is. Sooner or later, people just pay that cost in less transparent ways.

Events since 2017 illustrate one aspect of this. Treasury projected in December 2017 that the net public debt would be $64b in June 2023. The actual outcome was $155b.

That increase of $91 billion, justifiable or not, represents some combination of deferred taxation and reduced future spending. It is a serious amount. It represents 81 per cent of current annual tax revenue.

People have yet to experience the reality of this deferred taxation. The ongoing deficits to fund heightened spending exacerbate this problem.

Calls for more borrowing to fund more ‘relief’ are palliatives.

In contrast, greater value for money from Government spending would help make things more affordable.

A fiscal council that directly alerted Parliament to low-quality spending would help inform the public too.

Higher national income from unchanged inputs would also help. That means productivity growth. Act has this focus.

The alternative to a much greater focus on lifting productivity and pruning ill-justified spending is unseemly ‘what’s in it for me at someone else’s expense’ voter strife.

When the Government is spending so much of national income, debate about the quality of that spending should be taken much more seriously.

Complacency and fatalism about ‘marginally worse’ forecasts fail to hold governments to account for rosy scenarios and ill-justified spending.

This article was first published by the Herald HERE – and is available on the NZ Initiative website HERE.