When the facts change, Nicola Willis should change her mind

Comment: The Collins dictionary describes a pyrrhic victory as a situation where “although someone has won or gained something, they have also lost something which was worth even more”. The Government’s tax cuts package now risks being exactly that. Its costs are out of control. There is no compelling economic case. Cuts to fund them will harm many Kiwis. Yet onwards they plough.

Marc Daalder at Newsroom has costed the range of changes that have been made to the tax programme. $800m more for landlords. $500m less from casinos and gambling. $1.3bn less from welfare changes than expected.

Without changes to the package, only two routes are available to the Government. More borrowing, or deeper cuts to public spending.

The Minister of Finance has been clear that additional borrowing is not on the cards. That leaves only further cuts as a way of making the numbers add up.

This is tricky as most government expenditure is ‘non-discretionary’. These are areas like superannuation and benefits. The next largest areas are in health and education, and the government has promised not to cut these services. Overall, non-discretionary spending makes up 74.2 percent of all spending.

The Government has also made statements that are limiting its room for cuts. Finance Minister Nicola Willis tabled a note in the house in mid-February setting out the areas being explored for cuts. It specifically excludes all ‘non-departmental health and education’. It excludes all capital expenditures.

The areas left are output expenses. At Budget 23 there was a little under $40bn of these within the scope of cuts.

Cuts of 6.5% or 7.5% have been identified for each department. If we total up those changes, it creates a pool of up to $2.8bn per annum in potential cuts – or $11.2bn across the four-year forecast period.

That’s a huge amount. That’s more than we spend on police or disability services across the same timeframe.

A closer look at the areas involved shows that many of the areas that are at the risk of being cut most Kiwis would consider front line, the very thing Willis promised would be exempt from cuts.

These include areas such as public prosecution services ($79.5m), border control ($90.9m), cybersecurity ($14.5m), emergency management ($42.6m) and adoption services ($10.9m) These are areas where many would believe we should be investing more not less.

It also includes areas that could be described as essential to supporting community cohesion. Māori TV is there ($23.2m), as is processing veterans pensions.

Services that help grow the economy and protect consumers are there. There are many millions in research and development support. $20.8m for trading standards and consumer finance protection. Workplace health and safety ($132m).

The Government has made much of the need to cut ‘back-office’ services. But cuts of the size outlined are unlikely to be possible without affecting front-line services.

Cuts to the back office are likely to reduce the productivity of these services, as has been recently noted by the police. When doctors are filling out forms, they aren’t looking after their patients. When teachers are doing admin, they aren’t teaching.

The potential loss of so many valuable services should be a major cause of concern at any time. But the loss of these to pay for the tax package would represent an enormous pyrrhic victory for the Government.

This is made worse by the fact that the economic context is changing. Economic growth is forecast to be slow. Unemployment is forecast to increase. A growing population means additional demand for public services. And add in our climate change challenges as Cyclone Gabrielle reminded us a year ago. All of these factors speak of the need for more public investment not less.

But let’s ignore all that. The victory being gained from this package is simply the ability to say that you have delivered it. That would represent a victory of sorts.

But the cost of achieving that goal would be enormous. Already, disability services are under threat. Prescription fees will return. We will bring back nicotine products – at the cost of thousands of lives. And even free school lunches are under threat.

The value of the victory for the Government is not worth the price New Zealanders will pay. The size of the cuts is likely to be higher than the $4bn already indicated, as they want to recycle funding for new health and education services.

The fact that the real costs of the tax package have risen adds to that concern. They make no economic or productivity sense. It has made a choice to give landlords and others a tax break at a time when the need for investing in public services is ever growing.

It’s the wrong choice. The economist John Maynard Keynes was reported to have said, “When the facts change, I change my mind”. The Government should change its mind too.