This opinion piece was first published in The Post on 15 May 2023.

As a kid, I vaguely remember government Budget nights being a time to crowd around the radio to see how much more cigarettes or petrol were going to cost the next day. Budgets tend to be much less exciting events now, with the government drip-feeding the public with new spending initiatives over the preceding two weeks, trying to get maximum airtime for its largesse with our tax dollars.

This year’s Budget looks likely to be even less newsworthy than usual, given the fiscal and economic position the government finds itself in. On the fiscal side, the government’s net debt has already increased from 1.8% in 2019 (on the new debt measure the government uses) to an estimated 19.9% of GDP, surpassing the 11.6% recorded in 2013 following the Global Financial Crisis and Christchurch earthquake. Having supported the economy throughout the COVID-19 pandemic, and particularly during the lockdowns, the pressure is now on the government to return its accounts to surplus. The numbers are headed in the right direction: last December’s Half-Year Update showed that the government accounts could be on the cusp of a surplus in 2023/24, and definitely moving back into the black by 2024/25.

But the economic situation is arguably even more difficult for the government. Just five months out from an election, the New Zealand economy is flirting with recession, an outcome that never bodes well for the incumbent party. Ordinarily, more stimulatory fiscal policy could be an appropriate response, to both support the economy and improve the government’s chances at the polls. But the current highly stretched nature of the New Zealand economy is partly due to excessive government stimulus already.

To put the public sector’s growth over the last three years in perspective, government consumption spending during 2022 was 21% larger than in 2019, while government investment spending had increased 16%. Total GDP growth of 7% since 2019 means that the rest of the economy has expanded by only around 3% during the last three years. By mid-2022, total government consumption and investment spending made up its largest share of the economy since at least the 1980s.

Against that backdrop, adding even more government spending fuel to the economic fire now would be horribly inappropriate. In Finance Minister Grant Robertson’s pre-Budget speech last week, his focus on repurposing existing funding, rather than just increasing the government’s spending allowance, was an encouraging start.

The substantial growth in government debt throughout the pandemic has at times fuelled speculation about the need for increased or additional taxes in future to help balance the books. In recent weeks, the publication of IRD’s research into high-wealth individuals has seen discussion about a possible capital gains tax re-emerge – albeit not being introduced this side of the election. There were also suggestions of a levy, since rejected by the Prime Minister, to help pay for necessary repairs following the damage caused by Cyclone Gabrielle earlier this year.

Arguably one of the most instructive outcomes from the aftermath of the Global Financial Crisis (GFC) was the seeming lack of need for governments to actively reduce their debt when economic conditions improved, despite the debt blow-out that had occurred as they scrambled to bail out banks and support the economy during the downturn. Even among most of the worst performers – the so-called “PIIGS” (Portugal, Italy, Ireland, Greece, and Spain) – most showed no reduction in their debt levels between the end of the GFC and the end of the 2010s, despite major pressure to improve their fiscal outcomes. Fiscal settings throughout the 2010s generally seemed to be unaffected by the significant increase in debt levels compared with before the GFC.

Instead, the hope across many developed economies during the 2010s seemed to be that economic growth would gradually reduce the value of government debt relative to GDP so that, by the time the next crisis came along, the starting fiscal position would be similar to where it was leading into the GFC. As it transpired, eight years of “normal” economic growth between 2012 and 2020 was not enough to erode the debt, meaning many governments are now in an even more difficult position after supporting their economies during the pandemic.

Let’s be clear: the relatively small size of New Zealand’s economy means that we are always going to be held to higher standards than the likes of the US or France by international financial markets. But even with the increase in New Zealand’s government debt during the GFC and COVID-19 pandemic, we remain in a strong fiscal position relative to most other developed economies. It’s a position that we’ll want to maintain and strengthen further, before the next unexpected and critical challenge hits.

As a result, Thursday’s Budget must thread the eye of the needle. It needs to include enough spending to facilitate the cyclone recovery, improve housing outcomes for our most vulnerable, and support Kiwis struggling with the high cost of living. But at the same time, spending must be restrained to ensure that inflation is not stoked higher and to enable our fiscal buffers to be rebuilt, particularly given longer-term spending projections for healthcare and superannuation. There’s always a tension about the best use of government’s limited resources and what the right size of government is, and that question is even more striking in 2023.