If there is a major shock, New Zealand has not got a lot of fiscal room to move.
In late 2008, there was the Global Financial Crisis. New Zealand’s orthodox response was a fiscal expansion with a deficit (OBEGAL) of $3.9b in the June 2009 year compared to a fiscal surplus of $5.6b in June 2008. The deficit for the 2010 year (for a full year, rather than a half one) was $6.3b.
The Key-English Government could do this because the previous Minister of Finance, Michael Cullen, had built up net worth (to 56% of annual GDP) and reduced Net Core Debt to a low level (5% of annual GDP). That is quite a cushion to deal with a shock.
His successor, Bill English, used this cushion to protect New Zealanders with the intention of getting the fiscal position back into surplus. However, in late 2010 and early 2011, the Canterbury earthquakes generated a fiscal as well as a physical shock. The fiscal deficit for June 2011 was $18.4b (9% of annual GDP). It took until 2015 to get back into a small surplus; the government had run fiscal deficits for six successive years. By that time, net core Crown debt had sextupled and was now 25% of annual GDP, while Crown Net Worth was 36% of annual GDP. In effect the GFC and earthquakes reduced the government’s net worth by about $40b.
English, Stephen Joyce and Grant Robertson began rebuilding the government’s fiscal position. Net worth was slowly rising, Crown debt falling. But neither was back to anywhere near the Cullen level.
In early 2020 New Zealand was hit by the Covid crisis. Once again, the government opened up the deficit to cushion New Zealanders. By June 2024 the debt was 42% of annual GDP; net worth was 43%.
No doubt Cullen and English would have counselled eliminating the fiscal deficit. Arguably Robertson was a bit slow, but his successor, Nicola Willis, was even slower. Indeed, debt is expected to climb to 46% of annual GDP by 2028 and net worth to fall to 36%. It is expected there will be nine years of fiscal deficits, longer than that under English. The Cullen-English stewardship has been abandoned.
It is hard to argue that the Covid economic shock was a bigger than the Global Financial Crisis, and even if it were, it is certainly smaller than the GFC and Canterbury earthquakes combined. (The closure of the Strait of Hormuz is assumed to be temporary under the current projections.)
Unlike it had been in 2008, the Crown balance sheet is no longer well placed to withstand a further major shock. Pick your nightmare: another international financial crisis as the current Minsky boom crashes, a major natural hazard, foot and mouth disease ... It will not creep up on us, like global warming. One morning you will turn on your radio, or whatever, and the world will have changed overnight.
Can we cope? We have limited fiscal room. That is the nightmare secret in the budget; that is why the government is practising a kind of austerity in election year.
To add to the cheerlessness, Patrick Smellie reported on Willis’ experience on her recent trip to Washington (paywalled):
‘From a senior career public servant at the US Treasury, she received acknowledgment of the harm [by the Iran war] being done to economies everywhere. They asked “What can we do?” ... Her second briefing, with an unnamed Trump appointee, was quite different and involved a “difficult message for me [Willis] to hear”. The message was that the US “would be largely resilient to the economic effects of this conflict”, even though “other countries won’t be that lucky”.’
It’s a message which in the defence policy area the US is also promoting. In summary; you are on your own. (Can you imagine New Zealand saying that to Samoa?)
It may not necessarily be quite as bad as that during an international financial crash. As in 2008, the US is likely to lead an international cooperative effort; New Zealand will pack in behind. But if it is a local crisis (such as Taupo exploding), we may not get as much international support as we might hope. (That was a factor which made the 1984 exchange crisis so difficult.)
You need not panic, not yet anyway – no need to store an extra three cans of baked beans – just be cautious. The point is that fiscal management has not been prudent. Public consumption has expanded in recent years and there have been tax concessions. (Choose the balance according to your political preferences.) Because the Luxon-Willis Government was not prudent enough in its first two years, it has to be more austere than it would prefer in its election year.
Of course, within the overall austerity, it has had to choose which households are to suffer the ‘cost of living’ pressures. Cullen or Robertson would have chosen differently, but they would still have had that some households would be worse off, especially as the limitations on borrowing meant that we cannot charge cushioning current generations to future ones. We have already had five years of such charging and are already expecting another four.
That is the budget secret we would prefer not to know.