Labour’s legacy

The Herald reports:

An economist from New Zealand’s largest bank said the Labour Government went on a “debt-funded spending spree”, leaving a fiscal mess for the current Government to clean up.

ANZ economist Miles Workman, in a research note previewing next week’s Government Budget, said the large growth in spending that occurred in Labour’s second term was an “inflation-fuelling fiscal expansion” that was yet to be fully unwound by the coalition. …

To illustrate the challenge, Workman cost-adjusted pre-pandemic government expenses and compared them to what the Government was actually forecast to spend. 

This shows that “cost-adjusted government expenses were forecast to run around $15 billion higher per year compared to just before the pandemic” and suggests that it is not just the state of the economy or rising costs that is driving the Government’s massive deficits. 

“The point this [calculation] makes is once you strip out the increased cost of delivering public services, the Government is still spending about $15b a year more per year than just before the pandemic,” Workman told the Herald.

“The pandemic came along. The last Government provided support, but it kept spending. Around Budget 2022, inflation was starting to pick up. The output gap was showing there wasn’t any resource available in the economy to accommodate future fiscal expansion, but the Government delivered another stimulatory Budget,” he said. …

It was not right to “pin persistent fiscal deficits on the state of the economy. Rather, these reflect a fundamental shortfall between government revenues and expenses left by the previous Government – a shortfall the current Government is addressing only gradually (by containing growth in new spending and allowing growth in the nominal economy to outpace that of the public sector),” the note said.

Labour left the incoming Government a permanent structural deficit. We should never forget that.