PREFU26 enables us to compare the economic management of the 2023 Labour Government with the 2026 Coalition Government.
Some argue that the forecasts in the Treasury Economic and Fiscal Updates are biased in favour of the government of the day. That cannot be right. The forecasts underpin the Crown’s borrowing program, and the forecasters would get a right bollocking from the Treasury Debt Management Office if they were biased.
The lack of bias is especially critical when Treasury prepares PREFU, the pre-election forecasts. It does not know who will be in government after the election. It would certainly not want to have to say to a new government ‘cough, cough; we biased our forecasts to get your opponents elected; what we really thought was ...’
The consequence is we can, with cautions below, use the 2023 and 2026 PREFUs to compare the economic and fiscal management of the 2023 Hipkins-Robertson Government with the 2026 Luxon-Willis Government.
Here is the contrast of the PREFU23 forecasts for the June ending 2026 year with the actual outcomes. (I’ve focussed on fiscal indicators because that is what a government has most control over.) They are shown as proportions of annual GDP.
2026 Fiscal Measures
PREFU23 PREFU26
Forecast Actual
Core Crown Tax Revenue 30.1% 27.6%
Total Crown Revenue 40.2% 38.7%
Core Crown Expenses 32.2% 32.1%
Total Crown Expenses 40.5% 40.1%
OBEGAL (explained below) (0.3%)* (0.6%)*
Net Core Crown Debt 40.4% 41.0%
Net Crown Worth 39.1% 38.9%
*Negative means a deficit; that the government is borrowing for consumption.
No surprises that the tabulation shows that the Coalition has cut the tax take (by a goodly 2.5 percentage points of GDP from 30.1% to 27.6%), partly by income tax cuts but also by not going ahead with some of Labour’s planned taxes. However, the Coalition’s other revenue, mainly from levies, was higher, so the total revenue was only 1.5 percentage points lower.
But – despite the Coalition’s reputation – its expenses were only fractionally down. I assume that the funds from many of the cuts it imposed were reallocated to other spending activities. (The 2026 budget promised further cuts which have only just started.)
The net result is that the government’s fiscal deficit, measured by OBEGAL – operating balance before gains and losses – actually increased from the projected 0.3% of GDP to 0.6%. That is not a big increase, but it is not the impression the government has been trying to convey.
The overall consequence is that the public debt is higher than PREFU23 projected and Crown Net Worth is lower. OBEGAL does not translate exactly into changes in these aggregates, because the government has been borrowing for investment while gains and losses are now included. (OBEGAL only covers current spending and revenue. When it is negative, as it has been for a number of years, the government has been borrowing for consumption.)
Overall then, the Crown accounts look to be in a slightly worse situation in June 2026 than had been expected in PREFU23.
Before making judgements about fiscal competence, we must recognise that the PREFU23 forecasts were based on assumptions of no unexpected shocks in the world economy; its text is quite explicit about this and the PREFU26 text says much the same thing.
In fact, there were some exceptional shocks. On the downside there have been Donald Trump’s trade wars and his actions in the Middle East. On the upside has been the injection into world demand and liquidity from the huge deficit resulting from his Big Beautiful Bill – BBB – but it is also pushing up short-term interest rates. It would be quite unreasonable to expect economists to predict such political shocks; their cousins in political studies did not either. (The same applies for PREFU26. Although obscured in the economic forecasts are possible economic shocks such as a financial crash, hinted by the uncertainty warnings in the forecasts.)
The PREFU23 forecasts did not pick the substantial thrust to the US economy which the development of the Artificial Intelligence Industry has generated – the world has benefited too. (Neither did I.)
It is easy to argue that the net effects of these shocks have made economic management more difficult in the 2023 to 2026 period (but the COVID shock was quite a challenge to the previous Labour Government). If you want to use these effects as a justification for a less than impressive fiscal management of the Nicola Willis stewardship, then you have to abandon the claim that the Grant Robertson stewardship was the problem. PREFU23 shows he left the economy in no worse a position than it is today.
If you are that way politically inclined, you will commend Willis for cutting taxes but if you are honest with yourself, you also have to grumble that public sector spending was hardly reduced to pay for the tax cuts.
The other get-out-of-jail card is PREFU26's promise of a better outlook. Forgive my scepticism. I recall PREFU23 also promised free beer tomorrow.
My guess is that economic historians, ideological differences aside, will not look upon the Coalition Government’s economic and fiscal stewardship as outstanding. The Ardern-Hipkins Labour is contested, but there may be a consensus that its main problem was the tardiness of the Reserve Bank in unwinding the monetary stimulus it gave to the economy to deal with the COVID shock quickly enough. (In principle, RBNZ decisions are independent of the government.) One complication the Coalition had was that, whatever National’s instincts, its NZF partner objected to its taking a more fiscally austere position and its ACT partner objected to it taking the opposite approach.
This assessment of Willis and the Coalition’s stewardship tells us nothing about the likely performance of Barbara Edmonds and a Labour Government if they get elected in November. This year Edmonds is the sort of unknown quality that Willis was in 2023, while Labour has lost a lot of competence with the retirement of Robertson and David Parker. (Craig Renney, who spent 2017-2020 advising the Minister of Finance would in part offset their loss, if he gets elected in Wellington South.)
One turns to thinking about HYEFU26, the statutorily required half-year report to be published in December with three months’ more data (including from overseas), and facing the tax and spending promises from the new government’s election campaign. They all promise to balance the budget, but they overlook that their spending promises can be implemented a lot more quickly than their tax proposals (assuming they can be implemented at all). I should also not be surprised if new cabinet ministers judge their agencies are already being cut too savagely.
My guess is that after the election the Treasury will be advocating more fiscal restraint in the immediate future, just as it has been repeatedly warning us that there is a severe fiscal problem further out, well beyond the PREFU forecast.
Note that the graph which accompanies this column shows the economy has been preforming much less well than PREFU23 expected, That does not excuse the differences in fiscal management.