28 Aug 2023

Watch: Government announces spending cuts and changes to 'save' $4b

4:03 pm on 28 August 2023

The government says changes it is making to spending will save nearly $4 billion, including cuts to contractors and consultants.

A cumulative $1b will be saved come from a reduction in spending allowances by $250m and $500m each for the 2025 and 2026 Budgets, about $1.4b from baseline savings, and more than $1.4b in operating and capital savings. It comes on top of the $4b saved in the Budget in May.

At Monday's post-Cabinet media briefing, Prime Minister Chris Hipkins said the steps were being taken to "fight inflation and ensure the government's books return to surplus as soon as possible".

He said a lot had changed in the months since Budget 2023 was released, including the Reserve Bank saying inflation could stay "stickier for longer".

"While the fundamentals remain sound, and it's clear the economic cycle we're in will at some point come to an end, what's important now is that the government maintains our balanced and responsible fiscal approach to set our economy up for success."

In a statement, Finance Minister Grant Robertson said a review of savings had found underspends and money set aside for programmes that was no longer required.

"Public sector agencies are being required to trim 1 or 2 percent off their existing baselines. They have been directed to do this while protecting frontline services. To ensure this, I have excluded several agencies from the exercise entirely," he said.

The agencies and areas off limits for spending reductions included: Superannuation, benefits and KiwiSaver; loans, finance costs, tax receivables; frontline health and education spending; NZDF, Police, NZSIS and GCSB, Whaikaka the Ministry of Disabled People, and the Offices of Parliament.

Robertson said this left 19 percent of government within scope for trimming baseline costs.

He said there would be ongoing funding reviews for agencies, to understand the drivers of baseline expenditure and look for efficiencies.

"We've also changed the processes around what is called out-of-cycle expenditure, i.e. calls for spending outside of the normal Budget cycle, where there will now be a higher bar for agreement."

He said the money saved would all be treated as savings rather than money available for new spending, to help curb inflation and make up for a worsening economic outlook.

"The government's published accounts for the 11 months to the end of May showed that tax revenue was more than $2b behind where Treasury had forecast it to be at the Budget. It should be noted that government spending was in line with forecasts during this period," he said.

"Since May we have seen further deterioration in the global economy, particularly in China. This will continue to have a direct impact on the New Zealand economy, and it is important that the government responds to meet our balanced and responsible fiscal goals."

Cuts to consultant and contractor spending

As had previously been reported, agencies were also being directed to cut spending on contractors and consultants.

"The government is committing to getting contractor and consultant spending to below 11 percent of public service workforce spending. This will save about $165 million per year, representing an 18 percent reduction on current spend."

Robertson said the government was committed to getting contractor and consultant spending to below 11 percent of public workforce spending, saving approximately $165m per year. He said Labour had brought spending on consultants and contractors down when it came into government, but more had needed to be spent on it during the Covid-19 response.

"After inheriting a spend of 13.4 percent in 2017/18, we reduced that to 10.4 percent in 2021 before it spiked - largely due to Covid-19 related expenditure in 2021/22 at 14.6 percent."

He said how that would affect public service headcounts was yet to be decided, but the government was already asking departments to reconsider whether they should fill vacancies.

"There isn't a specific headcount target here, there is a dollar target."

Hipkins, Robertson target National's tax cuts

Robertson said the level of savings "went as far as we can do in good conscience to meet the balance and protect frontline services".

"Going further would start to undermine the investments in public services that have been made and those that are needed to support New Zealanders.

"Those who would propose deeper cuts to pay for tax cuts skewed towards higher earners will be placing in jeopardy the public services that New Zealanders rely upon. To make that clear: The National Party would need around $11b across the forecast period to pay for their tax cut proposals, above and beyond these savings."

Robertson said that $11b was composed of the changes to tax brackets, and interest deductability, announced by National.

Hipkins also targeted National's tax cuts.

"Uncosted, untargeted tax cuts for millionaires like those promised by the opposition are simply not affordable," he said.

"Likewise, broad sweeping statements about slashing the number of public servants and abolishing entire government departments is destabilising and it also isn't upfront with New Zealanders."

Monday's post-Cabinet briefing follows Hipkins' speech on Sunday in which he ruled out working with New Zealand First following October's election, saying he could work with the Greens and Te Pati Māori, but not Winston Peters.

Peters told Morning Report on Monday morning he had ruled out working with Labour, calling Hipkins' speech "PR and excuses".

Recent polls have had ACT and National sitting pretty to form the next government, but the polls remain close - and NZ First is starting to register above the 5 percent threshold required to get into Parliament without winning an electorate seat.

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