Published in the Waikato Times and other Stuff titles, 25 March 2024

In a recent commentary under the headline “magical thinking about government needs a dose of reality”, the UK’s Institute for Government  argued that the country’s political parties were not being honest with the public about the state of the country (low growth, underinvestment in public services, high public debt). Among other things, the Institute has gone on to suggest the UK needs to pay closer attention to fiscal rules (with New Zealand being one country with fiscal rules of long standing).

Although the political and economic circumstances are different, are there lessons also to be drawn in New Zealand about “magical thinking” and fiscal rules? Do our rules also create magical thinking – or are they better than others?

The previous government had considered a public-private partnership (PPP) for a long overdue upgrade of accommodation at Linton military camp, and the incoming government is proposing to advance with this. It seems a tidy arrangement, but there must be questions as to whether the taxpayer ends up paying more for the arrangement through a 30-year contract than if the government had come up with the capital cost. Politically this would have been problematic because it would have added to the very visible public debt, and the PPP somewhat disguises that liability. Our rules don’t prevent that – nor do they prevent the government diminishing the tax base through tax cuts that may be needed to service such a PPP arrangement.

Another example of where we need to think very carefully about the distinction between capital investment and day-to-day operational expenditure is the Minister of Education’s recent announcement of a delay and reprioritisation of the current school maintenance and rebuilding programme. There may well be substance to such a review, but it again occurs in the context of a commitment to cut taxes. In the UK a wave of school closures have occurred because of crumbling buildings attributed to deep cuts in capital spending in the education sector since 2010. Our fiscal rules don’t prevent the capital allowance being cut and then used for other fiscal purposes, such as tax cuts.

Social housing is another area where the incoming government has declared a crisis and where the previous government had instigated a substantial and visible capital works programme. The international ratings agency Standard and Poors has not downrated the relevant agency – Kainga Ora – but the Minister has set up a review. The Minister also expects the private rental market to pick up the slack of homelessness currently being housed in the motel sector. This may well prove more costly, but our fiscal rules don’t prevent that from happening, nor make it clear.

There are other areas where “hard decisions” have been kicked down the road. It will now be optional for councils to implement medium-density requirements as they are urged to both build up and build out. In Auckland that almost certainly means extensive (and profitable) greenfields development. Water infrastructure is another area where local authorities have been encouraged to think there are options available that are less searing than those outlined by the previous government. These are cases where local politicians could be forgiven for thinking that they can have their cake and eat it too, but in the end there will be hard decisions to be made.

Finally, a “hard decision” that governments of all persuasions are finding difficult to deal with both in New Zealand and internationally, the existential threat of climate change. New Zealand has, in principle, relied on an Emissions Trading Scheme (ETS) and yet it is hard to point to any impact the ETS has had on reducing emissions. Instead, we have relied on offsets of doubtful quality and carbon farming to balance the books, with the Climate Change Commission questioning the current prices while Treasury has identified much higher prices for basic commodities if the ETS is used to reduce emissions. The use of these has very much been encouraged by our current fiscal rules.

Both Labour and National realise there is a substantial fiscal issue if New Zealand’s international climate change obligations were to be taken seriously. One issue identified by the recent head of Alliance, Murray Taggart, is the failure of urban populations to change their behaviour to curb emissions. And yet the incoming government is proposing to expand and improve our roading network, reduce a commitment to the alternatives to car dependency such as public transport, walking and cycling, and may hand back ETS funds to New Zealanders to fund its tax cuts rather than to subsidise the alternatives to emissions-producing behaviour (such as driving cars).

New Zealand has a proud bipartisan tradition of establishing fiscal rules to encourage greater honesty in economic decision-making, starting with the Public Finance Act in 1989 under the fourth Labour government and reinforced by the Fiscal Responsibility Act of 1994. However, we are in need of an update to ensure governments do not massage the requirements on debt and public capital investment, take into proper account the future liabilities for entitlements (such as superannuation and health care), and properly factor in the impacts of climate change mitigation and adaptation. Without this we could all be subject to more magical thinking. 

Peter Davis, Chair, The Helen Clark Foundation, an independent non-partisan public policy think tank

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