Eric Crampton: NZ Initiative economist on Nicola Willis' plan to rein in Government spending in the Budget

Nicola Willis is looking to further rein in Government spending in next month's Budget - but one expert has warned it won't go far enough.

The Finance Minister is slashing the operating allowance from $2.4 billion to $1.3 billion.

She's targeting a return to surplus in 2029.

NZ Initiative economist Eric Crampton says Government spending has been running too high for years - and cuts need to be made to save the situation.

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Episode Transcript

Speaker 1 (00:00):
Now, after the initial shock about Finance Minister Nikola Willis's
almost zero budget, there are now calls for her to
go even further now. She announced yesterday that she's given
herself an operating allowance of one point three billion dollars
for next month's budget, but most of that, in fact,
all of that has already been allocated. Plus. Eric Crampton
is the New Zealand Initiatives economist.

Speaker 2 (00:19):
Hey, Eric, good afternoon.

Speaker 1 (00:21):
How much harder would you like her to go?

Speaker 2 (00:24):
We have a massive structural deficit. On the numbers that
Mike Ridell reported recently from the IMF, it's about the
worst in the OECD if you compare it to overall GDP.
That's not good. The Public Finance Act says we are
really not supposed to do this, So cutting until we
no longer have a structural deficit would be a very

(00:44):
good idea. That doesn't mean that we can't have a deficit.
If we're having a downturn, it's normal to have a deficit,
but a structural deficit is one where even if the
economy we're firing on all cylinders, we would still have
a deficit. That's a problem. We've had one since about
twenty twenty, it was justifiable in COVID. It is no
longer justifiable now.

Speaker 1 (01:02):
How big is it?

Speaker 2 (01:05):
Well, in the figures that Microdell had put up, it
was substantial percents of GDP. I would have to double
check the exact number, but it was worse even than
the United States, which is having awful budget blowouts. The
problem is less on the tax side and more on
the spending side. So if you remember back to budget
twenty nineteen, the great well being budget that was going

(01:26):
to solve every problem that the country had and keep
government spending blow twenty nine percent of GDP. Well, our
tax take or core cround tax take is above where
it was in twenty nineteen as a fraction of GDP.
The problem is that government spending outpaced it considerably. So
we're now looking at well north of thirty percent of GDP.

(01:50):
And some of that is financing costs. But financing cost
isn't the whole problem, but it is it is a
big part of the problem.

Speaker 1 (01:58):
How much like? Okay, So what are we looking at
in terms what do we need to cut in order
to save the situation? Would we get by with entire
government departments or are you going to come after the pension.

Speaker 2 (02:11):
Well, the big problems are in continued increases in transfers
to the elderly. Really that we've got these large transfer
programs that will get a lot more unaffordable in the
twenty thirties.

Speaker 1 (02:20):
You're talking about the Paintion run.

Speaker 2 (02:23):
Yeah, pension, but also combined with health spending, So those
together are going to be blowing out in the twenty thirties,
and having things set well ahead of that to avoid
well right now is kind of a good times, right
compared it to in the twenty thirties, when we will
have a much worse dependency ratio. So getting things in
line ahead of that would be a good idea. There's
been talk about means testing for a few programs, some

(02:45):
of which should have just been ended, like the winter
energy payments. At least means testing would make sense. About
a decade ago, I had put out a report looking
at reinstating interest on student loans. We're still providing those
on an interest freebase to all comers. I'm not sure
that that makes a lot of sense. Economist Studonovan had
put some rough numbers on it on Twitter today, figuring

(03:08):
that even just in charging for inflation on it would
save the government about two hundred million dollars a year,
which doesn't touch the sides of the deficit on its own,
but in combination with other things could help. So when
you're running high inflation and zero percent student loans, the
government is basically paying you to borrow. It's because the

(03:30):
real value that just erodes over time within with inflation.

Speaker 1 (03:34):
Have we ever had a situation we go back to
twenty eleven, we had a zero budget where we had
no increases. Right, it's become conventional to just increase the
budget every single year. Have we ever had a situation
where we have cut the amount of spending from one
year to the next?

Speaker 2 (03:48):
I having those numbers in front of me. There was
of course substantial fiscal consolidation in the nineteen ninety one
budget when they had a very large problem to deal with.
The approach in twenty from after coming out of the
GFC was more of this kind of fiscal restraint that
Minister Willis is trying to use, where you have tight
operating budgets and then count on economic growth to pull

(04:10):
you out of it. The problem that we've got with
that now is that the economic forecast globally is far
worse than it would have been even a year ago.
The tariff situation in the United States is depressing global
economic prospects that will hit New Zealand as well as
hitting all of our trading partners. That means it will
be harder to grow our way out of it, so
you need to rely more on actual spending restraint.

Speaker 1 (04:32):
Eric, it's good to talk to you. I really appreciate it.
Thanks for your tom. That's Eric Crampton, the economist at
the New Zealand Initiative. For more from Hither Duplessy Allen Drive,
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