Budget documents have revealed a nearly $8.5b hole in future funding.
Photo: RNZ
Budget documents have revealed a nearly $8.5 billion hole in future funding, and a warning that continued broad-scoped savings would have diminishing returns.
The Treasury has released a suite of Budget documents, showing how the Budget came together over the course of one year.
In 2024, Cabinet agreed to performance plans to give ministers assurance that departments were able to deliver within their baselines over the medium term.
The departments were asked to tally up their cost pressures (the costs of delivering their services) as well as reprioritisations (savings that could be made) over the forecast period.
While not a “silver bullet,” the plans were expected to drive a culture within departments to regularly look for opportunities and challenges.
A paper from the Office of the Finance Minister on 1 April showed the plans presented cost pressures totalling $27.9b over the forecast period, with $19.7b of reprioritisation options to offset the pressures.
This left the gap between the costs departments presented and what they said could be found through reprioritisations – what were called “unfunded pressures” – as $8.48b.
The majority of the cost pressures rested in Education, the Defence Force, Health, Disability Support Services, and Transport.
The unfunded pressures were mostly found in Health, Social Development, Transport, and MBIE.
The two intelligence departments (NZSIS and GCSB) were exempt from the exercise for security reasons, as were the Ministry for Regulation and Charter Schools Agency, because they were new.
The Treasury has released documents showing how Budget 2025 came together over the course of one year.
Photo: RNZ / Samuel Rillstone
The key drivers behind the cost pressures were identified as $8.6b in inflationary increases in goods, services, and operational expenses, and $5.6b of volume – the increase in service demands due to population and demographic changes. Wages were also identified as a driver, but the number was redacted.
“In all, the Plans flush out the scale of our fiscal challenge,” the paper said.
Across the 41 plans, 13 were rated ‘red’ because of insufficient reprioritisation options to cover their pressures, while 18 were ‘amber’ because their reprioritisations would require future Budget or Cabinet decisions.
“Treasury advises that we need a period of sustained operating surpluses over the medium term, whereas we are currently running a structural operating deficit of more than 2% of GDP. Bending the curve is essential to our fiscal strategy,” the paper said.
“This emphasises the importance of us seeking all opportunities for reprioritisation or savings to manage cost pressures, to ensure adequate space is left in Budget allowances to progress Government priorities.”
A separate document from August 2024 shows Treasury officials advising the finance minister ahead of a meeting on potential savings options and priorities for the Budget.
Treasury advised that $1.5b-4.5b per year in additional fiscal headroom would be needed to deliver the core cost pressures and new spending commitments.
It suggested the government keep its options open on tax and spending, in order to have flexibility to make trade-offs.
Treasury took a short and sharp look at potential savings options to create headroom, including revisiting things that were not progressed in the 2024 Budget.
“This initial review of potential further savings options suggests that there are likely to be diminishing returns to successive savings exercises of this broad nature (e.g., capturing all agencies and are not specific to functions or themes),” Treasury said.
“This is consistent with the experience of previous fiscal consolidations, as many of the obvious ‘low hanging fruit’ have already been exhausted.”
Changes to welfare, tax reliefs, and revenue were suggested as options.
At the Budget, Finance Minister Nicola Willis revealed an average of $5.3b of savings for each of the next four years, which came from changes to pay equity, a reduction in the government’s KiwiSaver contributions, tightening welfare for 18 and 19 year olds, and fully means-testing the Best Start child payment.
The Budget documents revealed a number of options were considered for the KiwiSaver changes, including completely removing the government contribution, or restricting it so only those aged between 18 to 25 could receive it.
Getting rid of Best Start entirely was also canvassed, but Treasury and Inland Revenue said it would reduce household incomes and increase child poverty.
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