Most of the promises Labour has announced are in the plan and, yes, they fit within Labour’s spending parameters, which are made up of four things: the party’s $2.8b capital gains tax, axing Investment Boost, axing the promise of an excise cut for heated tobacco, and matching National’s increases to discretionary spending of $2.4b for each of the next Parliament’s budgets.
Those commitments allow Labour to hug the coalition’s spending track, returning the books to surplus and bending the debt curve on a similar timeframe to the coalition, much to the pleasure of the ratings agencies which have been explicit that they want to see fiscal consolidation in the next term of parliament.
The problem is Labour’s most expensive promise, reinstating the old pay equity regime, has been left almost entirely uncosted and has not been explicitly included in the spending plans, with Labour saying that beyond an interim settlement for care and support workers, reinstating the regime will be funded within the existing spending envelope.
Other expensive promises, like the establishment of the Future Fund and freezing fuel excise and road user charges, have also not been explicitly included in the plan. The Future Fund seems to have been shrunk. It’s been given its $200m Crown grant, but there’s no money to allow the fund to receive the dividends from state-owned enterprises as originally promised.
An “interim” pay equity settlement of $2.5b for care and support workers has been included in the plan, but the full cost of reinstating the old regime has not been costed or booked against how much money is available. The most recent Treasury costing for the money saved by overhauling the old pay equity regime is $11b, meaning about $8.5b of Labour’s promise to reinstate it has not been specifically costed or accounted for.
Labour says it won’t put the full cost of reinstating the regime into its spending plan because each settlement is the result of negotiations. That is entirely reasonable and squares with longstanding practice for not including a specific budget line for bargaining. It would be foolish to let the other side see your cards.
But it also stretches fiscal credulity to believe that Labour can find about $8.5b from the money it has set aside for pay equity settlements, particularly given that money is also tagged for other things.
Labour’s headroom to pay for this mainly comes from accepting the coalition’s $2.4b “operating allowance”. This is the term given to the new money to pay for discretionary spending. The operating allowance is meant to pay for almost all the big cost pressures that arise across government: every time nurses’, doctors’ and teachers’ wages go up, they’re paid for by increases from this pot of money. Likewise, increases in the rent and power bills government departments pay, and the increased costs of the computer programs they use and pencils and pens they buy: everything apart from statutory increases to things like benefits and stuff like debt servicing.
Treasury’s most recent figure, from 2024, is that the Government needs to top these allowances up by $2.5b each year to maintain public services at existing levels. With Labour deciding to match the coalition’s $2.4b allowance increase, both Labour and the coalition are wedded to spending increases that are already slightly lower than what is needed to keep the proverbial lights on.
Labour has now also said it would fund the majority of the estimated $8.5b needed for pay equity from this money.
Its plan shows it has about $10.5b worth of headroom, which suggests that instead of funding public services, about 80% of this money will head towards pay equity settlements, leaving about $2b for cost pressures across the entire public service (excluding health) over the next four years.
The main losers will be outside the health sector, particularly in education, police, corrections, defence, and other parts of the core public service, but stretching all the way to the likes of RNZ, arts and sport funding.
Cost-pressure increases for health amounting to $1.4b to $1.55b per budget were set out by the coalition in the Pre-election Economic and Fiscal Update. These have been matched by Labour in this plan, although with a twist. Prefu did not include a fourth year of funding so Labour has stopped its funding increases in the third year, implying a freeze in health spending in the fourth year. Inevitably, health spending will need to increase in that fourth year with the $1.55b cost of that commitment needing to come from the $10.5b set aside for cost pressures and pay equity. National seems to be suggesting it will up this commitment, implying a higher health cost pressure spending track than Labour
The other problem here is that Labour has spent a significant portion of the cost pressures on its jobs guarantee for graduate nurses.
This will mean better nurse staffing levels, but will come at the cost of hiring specialists and dealing to other health cost pressures. And, as National’s finance minister Nicola Willis pointed out, it is a little ironic that Labour has spent most of the term attacking the dire condition of New Zealand’s hospitals and tertiary-level care, only for the party not to promise any increase in funding beyond its GP visits promise, prescription charge reversal, and increases to free screening programmes.
Read literally, Labour’s pay equity funding suggests a near funding freeze in almost every sector beyond health to fund settlements.
This seems unlikely and politically untenable. The union movement backing Labour is unlikely to stand for it. Labour, which faced criticism for underfunding cost pressures in its 2017 fiscal plan, turned around and funded these by simply increasing its allowances in government beyond what it signalled in its pre-election fiscal plan.
It seems reasonable to assume that’s what Labour would do here, but given the state of the books, this would require breaking its promise not to hike taxes beyond the capital gains tax and axing Investment Boost, or increasing borrowing.
The problem is that, given how massive the pay equity promise is and how small the allowances are, breaking either of these promises implies a very large increase to taxation or borrowing.
This is arguably the biggest unanswered question of this plan. National has spent the past year alleging Labour cannot fund pay equity along with everyone else. By funding pay almost all of the future pay equity settlements from the pool of money intended to pay for cost pressure adjustments in the rest of the public service, Labour gets very close to confirming that allegation.
The other questionable part of the plan is Labour’s decision not to set out how it would pay for its plan to freeze fuel tax. There’s a dispute about how much this would cost. National says it would cost over $3b. Labour has told the Herald it has costed it at $1.8b.
Labour plans to fund this by rejigging the National Land Transport Fund, the fuel tax-funded pot of money that is used to fund building new roads and maintaining old ones, as well as subsidising public transport.
The decision to force the fund to cut such a large amount of spending is significant. National promised a fuel tax freeze last election but funded it by topping up the fund with borrowing.
A $1.8b cut suggests quite large cuts to building new roads. The 2024 plan is worth about $21b once one-off Crown grants are excluded, so this is about a 9% spending cut to the fund, and more as the fund had anticipated higher taxes in the next few years. That’ll probably mean a bit of deferred maintenance, a few cancelled projects, both roads and public transport, and very grumpy councils who will get less money for road maintenance and public transport.
Collectively, the $8.5b in pay equity cost, $1.8b in transport cuts, and unknown Future Fund dividends lost amount to more than $10b in money unaccounted for in this plan – quite a bit compared to past plans.
The great irony of this fiscal plan is that so much of it is funded the same way the coalition has funded its past three budgets: by forcing the public service to cut money from somewhere and spend it on the government’s priorities.
Labour has criticised this for allegedly being “austere”. It’s worth noting that, on these numbers, both the coalition and Labour will be reducing public spending below the levels it has been at this Parliament.
Ultimately, Labour’s plan only adds up if you believe the party in government can implement a near freeze on all spending growth outside of health and pay equity settlements.
In parts of the public sector, the plan implies Labour would hew a more austere path than what the National Party is eyeing up.
Given what this would mean to Labour’s supporters in the public sector and wider union movement, and Labour’s record of breaking its spending limits the last time it was in government, it requires a bit of belief to think Labour can stick to the plan announced here – and a bit of belief to think that Labour’s supporters and coalition partners would stand for it.
It also requires Labour to prove it’s capable of implementing the kind of austerity its railed against for the past three years. It also creates a bit of dissonance to Labour’s campaign, which is ultimately about pushing back against the very austerity this plan relies upon.