A scrappy state of affairs

One of the great fiscal institutions in New Zealand is the Pre-election fiscal update (PREFU). It compels governments to throw open the books before the general election so voters know the state of the nation’s accounts.

The PREFU preceding the 26 November general election has just been released, and it doesn’t make pretty reading.

The government is facing an $18.4 billion deficit, which is 9.2% of GDP on the OBEGAL (Operating Balance before Gains and Losses). The size of this deficit is largely the result of the Christchurch earthquake, which has cost about $9 billion so far. However, the other $9 billion, up from a forecasted $5.5 billion earlier in the year, is the result of permanent spending increases in unaffordable government programs. The Key government has refused to consider scrapping or seriously changing these programs fearing electoral backlash.

About $1 billion of the deficit is the cost of last year’s tax cuts. This figure is the net effect of the changes: GST increase minus income tax cuts. The three big items introduced since the mid-2000s make up most of the deficit: interest-free student loans, working for families’ welfare payments, and Kiwisaver (a personal retirement savings scheme that supposedly boosts ‘national’ savings where the government borrows to give members a 50% return on their investment through a subsidy). Without these three newish big-spending initiatives, the deficit would have been more manageable.

The good news is that the projections are relatively rosy and predict higher levels of growth in the next three years, aided in no small part by the earthquake rebuild and expected export demand from China and Southeast Asia. It is worrying though that Treasury has revised the earthquake repair bill from $15 billion to $20 billion and assumed that Europe will sort its debt crisis.

The government has quietly let the state of the books deteriorate. Blaming fiscal deficits on exogenous crises may be easy but does not fully explain the woefully unbalanced budget. Fortunately, with the World Cup over and an election in the offing, it is time for some serious scrutiny of the government.

Luke Malpass is a Policy Analyst with the New Zealand Policy Unit of The Centre for Independent Studies.