Prefu may not have delivered any short-term shocks, but it’s a reminder that Labour has not solved the long-term problems that bedevil the economy – such as a tax system that doesn’t raise enough revenue, writes Max Rashbrooke. 

No need to panic. That was the main message from yesterday’s opening of the government’s books – as we are compelled to call them, despite ledger books having gone the way of the dodo – in an event known as the Prefu, or pre-election fiscal update.

Notwithstanding talk of a “bloodbath” in the public accounts, the predictions were much the same as in May’s budget. No recession is expected. The economy will continue to grow at 2.6%, on average, over the next four years. Inflation will be back under 3% some time next year, and wages will easily outpace it. Unemployment will rise, but only to 5.4%, a below-average amount.

Government debt remains low by global and historical standards: it is expected to be just 21% of GDP by mid-2027, compared to 36% in Australia and 95% in Britain and the US. And while the cost of paying back that debt is rising, it is still very low – currently less than 1% of GDP, lower than it was at any point under the last National government (or indeed the two governments before that).

It’s true that the government’s deficit this year will be larger than forecast, and it won’t be back into surplus – earning more in tax and other revenue than it spends – until 2026-27, a year later than expected. (And even that assumes future administrations stick to projected spending, which they are typically not very good at doing.) But a government running deficits during tough times is hardly abnormal.

Under Bill English, the last National government ran deficits – keeping up spending, in other words, in order to support the economy – during and after the global financial crisis (GFC). Labour has dealt with not just a GFC-style event in Covid but also a second economic hit in the form of the global post-pandemic cost-of-living crisis. As governments everywhere raise interest rates to combat inflation caused by supply-chain issues, oil price hikes, the war in Ukraine and the wash-up of Covid spending, most economies are subdued, depressing demand for New Zealand’s goods.

National and Act will attempt to stoke economic fears by reciting dollar figures: this many billions of dollars in debt, this much in deficits. But such figures are meaningful only as a proportion of a country’s income, the true measure of its ability to pay. A $1,000 debt may spell disaster for someone on $10,000 but not for someone earning 10 times that. The projected annual deficits for coming years are very small as a proportion of New Zealand’s national income, and total debt is – as above – just one-fifth of GDP.

There is, in short, no need for anyone to go on a slash-and-burn mission through the government accounts, if the above numbers are accurate. Treasury does not, admittedly, have a great record as a forecaster; but given that neither does anyone else, these remain the generally agreed-upon figures. 

Protecting the most vulnerable through this economically sticky patch must be priority number one for whoever wins next month’s election. The need to ensure value for money in public spending is, admittedly, greater than ever, and Labour cannot escape scrutiny on that score. (It also faces a large long-term challenge; more on that below.) If anything, though, the books pose a greater short-term dilemma for National. 

Tax revenue is forecast to be $3 billion lower than expected this year, thanks mostly to falling corporate profits and tax payments, and $6.4 billion lower across the next four years. National’s tax plans were already under pressure regarding both their viability – few people believe they will really generate nearly $3 billion over four years from taxing foreign buyers of very expensive homes – and their desirability, given the questionable wisdom of delivering large tax cuts to predominantly wealthy landlords. Since tax revenue is already down, is cutting it still further really sensible?

But if the Prefu delivered no short-term shocks, it was still a reminder that Labour has not solved the long-term problems that bedevil the economy. Four shortcomings stand out.

First, although the economy will perform adequately in coming years, its current softness results from the Reserve Bank deliberately weakening it in order to slow inflation. This is a reminder that the bank’s only real tool for combating inflation – raising the amount that it costs individuals and businesses to borrow money – is a blunt one, to put it mildly. New Zealand needs other ways to keep prices under control, including a much tougher approach to uncompetitive sectors – supermarkets, building supplies and banks all spring to mind – where raising prices is all too easy in the absence of serious competitors.

Second, the country’s economic prospects are being borne up by immigration: arrivals are at record levels, and a net 100,000 or so people arrived this year. Per-person economic growth and productivity will remain as bad as they have been for a long time. The Treasury notes, meanwhile, that immigrants will “help ease acute labour shortages”. Even people basically well-disposed to immigration may question the wisdom of bringing in people to fill labour shortages when so little is done to help the tens of thousands of already-resident New Zealanders who are work-ready but remain on the unemployment benefit. Other countries spend billions of dollars a year on high-quality skills and retraining programmes; apart from initiatives like Mana in Mahi, New Zealand does very little.

Third, the country continues to run current account deficits – importing more goods and services than it exports, often loosely described as “living beyond our means”. The deficit will be a large 8.1% of GDP this year, falling to 4.3% in 2027. The latter may be fairly standard for New Zealand, but it remains a worrying reminder that our economy does too little to earn our way in the world: too focused on exporting raw logs and milk powder, it still struggles to build innovative, sustainable companies.

Fourth, New Zealand has a long-term revenue problem. Although this government has not spent every dollar wisely, its expenses – set to be around 32% of GDP in coming years – are low compared to the European countries whose public services we often admire. The Germans spend more like 36% of GDP, the Dutch 38%, the Austrians 40%. And they get world-class services as a result. Our spending is not really the problem: our failure to raise enough tax revenue is. The projections of a surplus by 2027 rely on the annual allowance for new spending shrinking from the current $3.5 billion to just $1.6 billion in 2026 (once existing commitments are factored in). 

As the Herald’s Thomas Coughlan has observed, new spending would – on these projections – not get back to this year’s level until 2037. There would be virtually no money for new initiatives, only – to use what seems to be the new term – enough “to keep the lights on”, in other words to compensate for inflation. That is obviously untenable, especially for Labour governments that tend to like new spending. And it is once again a reminder that, unless New Zealand starts to close the current loopholes in its tax system – the absence, for instance, of comprehensive taxes on capital gains, inheritances or wealth – it will struggle to afford the services that citizens in comparable countries enjoy.