The new Minister of Finance implied that Treasury’s ‘books’ were deceptive. Can’t see it myself.

I was disturbed by media reports that the new Minister of Finance, Nicola Willis, had criticised the previous Labour Government ‘for leaving the books with “nasty financial surprises” that National will have to clean up’ and that ‘after looking at the books Willis said the outgoing Labour Government had left some “nasty surprises”.’ She went on that ‘the Labour Party had left the “cupboard bare” and spent New Zealanders' money with “pretty wild abandon” ... What I've now learned is it's not just that the cupboard is bare, it's that there are snakes and snails and all sorts of things in there, nasty financial surprises that we as an incoming government are going to have to deal with.’

I do not have an exact transcript of what she said – hence the confusion of quotation marks – and it is not uncommon for an incoming minister to make extravagant claims about an outgoing government.

What disturbed me was that the new minister seemed to be saying that the Pre-election Economic and Fiscal Update (PREFU) was misleading, with the implication that the Treasury was incompetent or dishonest. She was not probably intending to do so, but ‘the books’ are the Treasury’s, not the Minister of Finance’s.

To give a context. In 1990 the incoming National Government was surprised by the fiscal situation it took over. To ensure this would not happen again, it passed the 1994 Fiscal Responsibility Act (now incorporated in the 1989 Public Finance Act), which required two reports a year on the state of the government’s finances, one at budget time (BEFU) and one half-a-year later. (The Half-Yearly Economic and Fiscal Update (HYEFU) has just been published.) Additionally, it required a PREFU to be published a few weeks before any election. (September 12 in the case of the 2023 election.)

Willis seemed to be challenging the integrity of the 2023 PREFU. Each EFU makes it very clear that it is a Treasury document. Here is what HYEFU 2023 says:

     “On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with, this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications of government decisions and other circumstances as at 23 November 2023 that were communicated to me by the Minister of Finance as required by the Public Finance Act 1989, and of other economic and fiscal information available to the Treasury as at 24 November 2023.”

Note that, as Treasury also states, HYEFU 2023 was ‘completed prior to the release of the Coalition agreements, the Government’s 100 Day Action Plan commitments and the decisions made on the Mini Budget.’ So it is really the Labour Government’s last EFU, rather than the National Coalition Government’s first EFU. (It is due in May 2024, just before the Budget.) The commentariat treated it as a dead duck, and focused on the Minister of Finance’s financial statement released at the same time.

I looked carefully at HYEFU 2023 to see whether it had changed much from PREFU 2023. Yes, there are differences but no more than normal. I am not surprised. Yes, there is a deterioration in the fiscal position between August and November 2023 but by far the most important reason is that the economy has deteriorated more than expected, which reduces government revenue. In my experience Treasury is scrupulous about following the law, although it readily acknowledges that it has to make its best judgements in applying it. Treasury macro-economists loathe getting their forecasts wrong; there would be no intention to mislead in PREFU 2023. The HYEFU economic forecasts were finalised on 6 November. Since then there has been more bad news. (I’ll review the state of the economy early next year, when I’ve had time to put in the grind.)

What then is Willis going on about? I put aside that she is trying to portray a crisis – the strategy of incoming governments in 1975, 1984, 1990 and 2008. Not all those portrayals were justified but some gave the new government the excuse to make radical changes including reneging on election promises. Undoubtedly though, Willis wants to portray the previous government as a fiscal disaster – that’s politics.

One problem she faces is that she may not have a good grasp of the ministerial challenges she faces. No matter how hard Treasury tries, there is always a bit of a fiscal shambles of things popping up unexpectedly. Cabinets never resolve all that they face each Monday morning. There were issues which the Labour Cabinet had not yet addressed when it closed down for the election campaign.

One such example may have been Kiwirail’s ambitions for the Cook Strait ferries. Willis has scotched them for being too expensive. The way she did so was unfortunate. Old Wellington hands – Willis is not among them – are too familiar with government agencies making ‘gold-plated’ claims for taxpayer funding in order to get a less ambitious project approved. The Treasury paper rejecting the proposal probably suggests alternatives.

There are also the ‘risks to the fiscal forecasts’, which take many pages in an EFU (48 pages in HYEFU 2023 compared with 19 pages of fiscal outlook). You have to be a bit of a geek to pay them much attention (I plead guilty). Many carry over from EFU to EFU, there are new ones and some have come to book in the period between. They might be deemed ‘snakes and snails’, but they can be identified if one puts in the effort.

One is left with the impression that the National Opposition did not. Willis complains that there were spending programs due to terminate which she did not know about. A bit of diligence in the Opposition Research Unit would have identified them – did they tell her? Or was the Opposition badly prepared?

I do not want to suggest that there are no fiscal problems facing the incoming government, even if it were not giving major income tax cuts. Days before the release of PREFU 2023 the then Minister of Finance, Grant Robertson, announced that most government departments were told to cut back their spending, alerting old hands to the challenges. (A few days before the election, a leaked paper reported that the Ministry of Business Innovation and Employment was reducing staffing and tightening up on expenses. Newbies reported this as though MBIE had assumed that a National-Act government would be elected and were anticipating the expenditure cuts it would impose. In retrospect, Robertson may want us to think that, but the reality is that MBIE was responding to his directions.)

As far back as I can remember, there has been Wellington-based gossip about Treasury losing its grip. There is no evidence of this in HYEFU 2023, despite what their new Minister said. In parallel, as far back as I can remember there has been a view that Oppositions are badly prepared for taking over the government.

PS. Some of the commentariat report that Willis had announced ‘expenditure cuts’ worth $7.5b up to June 2028. However, that total includes a tax hike of $2.3b from commercial depreciation becoming non-depreciable for tax purposes from 1 April 2024.  (The outgoing Labour Government went into the election with the same policy.) There are more expenditure cuts to be announced.