Published in The Australian (Sydney), 27 September 2023
We all know what ‘déjà vu’ is: that eerie sensation that we’ve been here before – that we are reliving a moment — often unpleasant — from the past.
Many New Zealanders experienced a sense of déjà vu listening to the government’s recent statements about the economy and fiscal forecasts. In the Pre-Election Economic and Fiscal Update (PREFU), the Labour Government promised to keep a tight grip on spending and prophesied a budget surplus by 2027.
The message was clear: everything will eventually be fine. Less clear was the basis for the implausibly optimistic assumptions underlying this conclusion.
For example, the government’s forecasts included a decrease in police funding amidst a rising crime wave sweeping the nation. Is that realistic? Hardly. But it was necessary to make the numbers add up.
This is not the first time Labour has indulged in such fiscal chicanery. Cast your mind back to 2017, just before the election that elevated Jacinda Ardern to power, courtesy of Winston Peters.
Labour, still in opposition, found itself embroiled in a controversy. Then-Finance Minister Steven Joyce claimed that there was a ‘fiscal hole’ in its plans.
The accusations were dismissed at the time. The sums did add up mathematically. But Joyce was not wrong. The projections relied on unrealistic assumptions.
Labour presented itself as the solution to New Zealand’s problems and as committed to tight, disciplined spending.
It was just a matter of time until something had to give: either Labour’s inclination to embark on new (and costly) programs or its self-proclaimed fiscal rectitude.
Spoiler alert: it was the latter.
Of course, Labour’s supporters would now say that none of this was the party’s fault. Had it not been for Covid, the Ukraine war and maybe some bad weather, everything would have been fine.
Such a view is, to put it tactfully, questionable. As New Zealanders would (sarcastically) put it: “Yeah, right.”
By the time any of these events happened, Labour had been in office for two years. And over that two-year period, public spending had already started shooting upwards. Even when the Covid crisis was over, Labour kept spending at the elevated level of the first Covid year, 2020.
Let’s look at some of the numbers to illustrate these developments.
Before Covid-19 shook the world, Labour had already embarked on a spending spree. By the end of 2019, New Zealand’s public spending had soared to $97 billion, up from $84 billion just two years earlier.
This surge occurred at a time of relative normality, long before the term “pandemic” entered our everyday vocabulary.
When the Covid crisis hit, it acted as a catalyst for even more government spending.
The increase was initially understandable. Governments worldwide were scrambling to support their economies, and New Zealand was no exception. Spending shot up to a staggering $128 billion in 2020.
But the real issue arose in the aftermath. After the initial crisis abated, one would have expected a return to some semblance of fiscal normality. However, Labour chose a different path: to maintain these elevated spending levels, seemingly adopting a ‘new normal’.
The latest PREFU suggests that spending will remain at 2020 levels for the coming years (even adjusted for inflation), with no significant downscaling in sight.
Labour’s fiscal story is mirrored in its approach to welfare.
Before Covid, 120,000 Kiwis received the Jobseeker Support benefit. In fact, that level had been remarkably stable for the previous three years.
But after only two years under Labour, the Jobseeker number had suddenly climbed by 24,000, even though the unemployment rate was actually trending downward. There was no reason to expect beneficiary numbers to increase – other than the government making benefits easier to get.
When Covid started, Jobseeker Support numbers soared to 212,000 at the peak of the crisis. But again, even after Covid and with the unemployment rate at a near-record low, the number of beneficiaries has remained uncomfortably high at around 180,000. More than that, the Government expects them to stay that high over the coming years.
Just like the growth in spending, this growth in welfare is not just a pandemic-related blip. It appears to be a more permanent shift, threatening to perpetuate a larger welfare state.
The welfare trend is not an isolated case; it is a microcosm of Labour’s broader financial strategy. Still, Labour would have us believe that these developments are manageable and that eventually, everything will fall back into place.
But let us be clear. Labour’s claim to be able to return to a budget surplus by 2027 rests on assumptions, some of which are utterly unrealistic.
That brings me back to déjà vu.
In 2017, New Zealanders were lured by Labour’s rosy assumptions and promises of fiscal discipline. The result? Six years of red ink, inflated public spending, and deteriorating public services.
In 2023, Labour wants to pull off that trick once again, but this time the public does not buy it. In recent opinion polls, Labour’s projected share of the vote has dropped to the mid-20s.
The problem, however, for whoever forms the government after 14 October, will be inheriting a fiscal mess. Labour has achieved what should be impossible: to preside over a deterioration of public services while vastly increasing public spending.
So, a priority for the next government must be to achieve much better value for money in its spending. It will need simultaneously to restore the quality of public services like health and education and to try to return the budget to surplus. It will be a clean-up job on a massive scale, requiring tight budget discipline.
That will be yet another déjà vu – harking back to before the current government, to its predecessor.
The government of John Key and Bill English faced a similar task in dealing with the implications of both the Global Financial Crisis and the Canterbury earthquakes.
The next Government’s task will be just as daunting.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative (www.nzinitiative.org.nz). He is the co-author, with Dr Bryce Wilkinson, of The Deficit Diaries: Six years of red, available on the Initiative’s website.
