Government debt: Election promises ignore the cost

Then there is the lolly scramble. Free this. Government-funded that.

Free doctors’ visits and dental care. Baby boosts and increased paid parental leave. More trains. Take all the public transport you can get for a minimum price, or maybe it will be free. School lunches (again). They’ll write off some of your student loan and even help you get your car fixed.

Then there are the claims and counter-claims about who has their numbers right and who doesn’t. Suggestions that taxes on capital gains will pay for the next phase of political largesse, in a market where little capital growth has occurred in the past five years, are laughable.

And besides, it’s MMP. Most of it won’t happen.

Unfortunately, most of the policy, and the majority of the accompanying commentary, is ignoring one of the biggest single issues we face. We can’t afford any of this stuff. Basil Fawlty would be proud. “Don’t mention the debt!”

Over the past few years, we have piled on a mountain of debt. And despite the occasional promise of a far-off future return to surplus, no one is talking about paying it back any time soon.

When former Finance Minister and Prime Minister Sir Bill English left the corridors of power in 2017 – just nine years ago – our net core Crown debt was a shade under $60 billion. That represented 22% of our GDP at the time. We had an operating surplus of $4.1b, and inflation was running at 1.9%. Our dollar was buying US72 cents and 95 cents against the Aussie. The position he engineered meant that we were able to run our daily affairs and repay our debt down as required. We were living within our means.

Six years later, the Labour-led Government vacated the Beehive. Our net core Crown debt was $155b or 39% of GDP. Our surplus had turned into a deficit of $9.4b and inflation was running at 4.7%.

Today, some of those numbers are little changed. The deficit is $10.8b and the annual inflation rate was 4.1% in June. But the debt is now $187b or 41% of GDP and current forecasts suggest it will be $230b by the time 2030 rolls around. Our dollar is buying US56 cents and just 80 cents Aussie. We are getting poorer.

But, I hear you say, we had Covid. Yes we did. And on English’s watch we had the GFC, and first the Christchurch then Kaikōura earthquakes. We could weather the storm because the books were in good shape.

The books aren’t in good shape anymore and we should doubt our ability to cope with such disasters again. We’re spending substantially more than we’re earning. Our interest bill alone is now $9b per year. That makes it our fifth-biggest cost behind health, welfare, NZ Super and education. It’s bigger than law and order. Think about that for a second.

Oh and don’t forget, global interest rates on government debt are going up. Tomorrow’s debt is more expensive than yesterday’s.

Sooner or later we have to stop borrowing money and start paying it back. Not to do so is mortgaging the future of our kids and our grandkids. English was the last Finance Minister to pay down debt. And we are not hearing anything on the election trail that suggests that our current political operatives are contemplating doing so any time soon.

The last Labour Government tore the English legacy to shreds and the current Government continues to borrow for the expenditure it inherited and the interest bill that came with it.

If New Zealand was a household, you’d hope that someone would be standing in the corner shouting “we need to stop spending”!

The current Government came to power three years ago with permission from the electorate to review and reduce the level of government spending. Most of us expected them to move quickly on the obvious stuff and progressively over three years on the not so obvious.

But it didn’t happen. Perhaps they were distracted by coalition negotiations. But they were slow to move, made a small number of Government redundancies and cancelled some consulting contracts. The figures tell us that the number of Government servants has grown during this parliamentary term.

But our elected leaders are quick to tell us how much money they’ve saved. People close to central and even local government love to discuss the savings they’ve made. And I’m sure savings have been made; I’m not doubting that. But if those savings are merely replaced by new spending elsewhere, the books are no better and we are no better off.

The spending might be better quality. Wastage might be replaced by funding for genuine need. But if the savings are swallowed up by new expenditure, and spending continues to outstrip revenue, then we are not improving our financial position. And right now we need to improve our financial position.

And so, as we face yet another critical election, we do so with more debt, more spending, more Government servants, and a higher interest bill than we’ve ever had before.

Meantime, we have the politicians pitching for our votes with promises to deliver things that they think we want. Those things all have a cost. What they’re really talking about is spending more money and borrowing more money to enable them to do so.

The promises tell us that we’ll give $1500 to start a KiwiSaver account for a new baby. That’s great, but where’s the money coming from? We’re borrowing it. That baby will grow up one day and face a debt mountain that our generation created. I suspect they’d rather not have the baby bonus at the start of their lives nor the debt at the end.

Our current interest bill is $9b per year. It will be over $13b by 2030. Politicians are fond of saying that’s the equivalent of four Dunedin hospitals every year.

If only they had built hospitals when the books were in shape our lives would be better. But in recent times, our politicians only talk about building hospitals when they are making comparisons or looking for excuses. If only they would talk about paying down debt so as we could afford to build some hospitals in the future.

In the current election campaign, the political left features a number of political parties advocating a wide range of new taxes. None of them have justified nor quantified the taxes to my satisfaction. And yet, these attacks on our personal property will apparently pay for the promises. This week’s analysis suggests that there’s a $10b shortfall in their numbers. Another one! Those analysts are also overstating the recovery of asset prices.

As an influential economist once said, “I’ve never seen a country tax it’s way to prosperity”. And let’s be honest. Most of the new taxes are designed to target the people who pay most of the tax now. As Britain and France have learned over the past 20 years, sooner or later those people get sick of it, and move away.

What none of our current political campaigners will tell you is that the quickest solution to our current economic malaise is to dramatically reduce the cost of running our government. And I don’t mean nickels and dimes, nor do I mean replacing one item of government expenditure with another.

What I do mean is a massive and sustained cost reduction effort at a macro and micro levels across everything in government.

You have to start with people numbers. At the end of 2017 we had 47,257 public service employees. At the end of 2023 there were 65,675. That’s a 39% increase. Today that number is slightly higher again. If we get back to 2017 numbers we save $2b. Every year.

It might sound cruel but cost reduction starts with personnel. People earn salaries and carry a wide range of costs with them. Office space, technology costs, taxi fares, phone bills, credit cards, Koru memberships and morning teas are all a function of people numbers.

This is tough stuff to do. It affects people’s lives and it’s emotionally difficult. But it’s also necessary and I for one don’t see any alternative choice. Singapore has 16 government ministries. We have 41 departments. That doesn’t count the 80 portfolios that sit within those departments.

We have massive costs. Our government debt is at an unsustainable level. Our economy is in the doldrums, and our currency is at rock bottom. High commodity prices and a weak dollar are helping our exports at an unprecedented level, and yet we still can’t pay our way.

We have to act now. If only we could forget the lolly scramble of political promises and fix what’s wrong. Sadly, I don’t think we’ll do that.

Instead, the promises will continue, our politicians will look weaker by the day, and we’ll continue to debate what a woman is and whether being a billionaire is ethical.

The way we’re going, we won’t have to worry about having too many of those!