9 Jun 2024

Unfunded roads and an unfinished tax: Treasury's fiscal risks

1:18 pm on 9 June 2024
Budget 2024: Composite of Nicola Willis holding Budget 2024 and maths paper background

Photo: RNZ

With a few notable exceptions, Budget 2024 largely does what it said it would do, and aims to limit spending into the future - but Treasury warnings point to a range of risks that could come back to bite the government in future.

Tax cuts and spending cuts took much of the attention but there were also plenty of new spending in line with coalition promises, requiring a total of about $12b in new borrowing.

Citing tough economic times, Finance Minister Nicola Willis pared back future operating allowances - the amount of new money available for spending - for the coalition's remaining Budgets until the next general election expected in 2026.

She set out a limit of $3.2b for 2024, and $2.4b through to 2027 - but some of these future funds have already been allocated, leaving just $882m for Budget 2025, and $1.03b for 2026.

This means money will be very tight for the government in future.

Part of the Budget Economic and Fiscal Update (BEFU) is dedicated to pointing out "specific fiscal risks": things that could mean more cost or lower revenue for the government (or in some cases, an unexpected windfall).

Some are the usual recurring risks - like unexpected court costs, Treaty settlements, inflating costs of running services - but others, translated from Treasury-speak below, identify possible problems arising from the coalition's decisions or hangovers from the previous administration.

Budget 2024

The BEFU is a document Treasury is required to produce each year as part of the Public Finance Act 1989, and outlines the current economic situation, forecasts, and possible risks. Photo: RNZ / Angus Dreaver

Before we even get to the specific risks, though, Treasury outlines a general concern about the accuracy of its forecasts and Willis' spending limits: that with recent Budgets putting a "large portion" of new funding into meeting rising costs, that kind of spending is "likely to crowd out funding available for new initiatives".

"Future Budget allowances are unlikely to be sufficient to cover future cost pressures on existing services," it says.

"The fiscal forecasts assume that most departmental expenditure stay fixed beyond the 2024/25 year. In reality we expect expenditure to grow, particularly to cover the impact of inflation and wage growth on inputs used to deliver the services provided by the government."

Willis remains confident the government will be able to find additional savings to fund the government's new programmes through future public sector cuts in other areas.

Note: Items listed in the BEFU chapter on specific fiscal risks are estimated to have possible negative effects of at least $100m. As is legally required, risks were kept secret if publishing them was considered likely to substantially prejudice New Zealand's economic interests, security, defence, international relations, litigation, commercial activity or negotiations, or lead to a material loss of value to the government. A range of related risks have been grouped together below according to subject matter. Not all risks identified by Treasury have been outlined here.

Coalition agreements and targets

Treasury has highlighted several commitments in the coalition agreements between National, ACT and NZ First which remain unfunded, including the 13 new cancer drugs and future funding for the Social Investment Fund.

The government has also signed up to a plan to set up a new medical school in collaboration with the University of Waikato in line with National's election policy, but - should the government agree with the business case next year - the costs of setting that up are still unknown.

Treasury also points to coalition commitments to try to reduce smoking rates to fewer than 5 percent of New Zealanders, alongside plans to decrease the amount of tax paid, which would mean less revenue for the government.

"This risk also reflects the level of uncertainty involved in forecasting such changes," Treasury says of the policies - the exact shape of which is still not clear.

The nine public sector targets Prime Minister Christopher Luxon announced in April could also pose a risk, if the agencies tasked with them end up needing more money to achieve them.

Transport projects and Cook Strait ferries

The analysis also notes several transport projects on top of what was outlined in the land transport policy statement, including the Auckland Transport Alignment project, Waitematā Harbour crossing, and rebuilds after the North Island weather events last year.

"These investments are largely unfunded, and some of these may fall outside the scope of the National Land Transport Fund or are only expected to be partially funded by the NLTF," Treasury says.

Another risk relates to the NLTF itself, with "revenue expected to be received .... not expected to be sufficient to cover the spending priorities".

"In addition, there is a risk of future fuel excise duty and/or road user charges increases or additional government funding in order to manage the potential pressure to deliver existing transport investments, the risk of greater volume of emergency work from weather events, and the need to meet loan repayment obligations."

Funding for the Roads of National Significance and Better Public Transport have also only been committed in principle for the first three of the year that the Government Policy Statement on land transport covers.

In Auckland, the City Rail Link project is also nearing completion, which will mean transferral off the government's books to Auckland Transport and KiwiRail late next year. However, the value of assets received by the Crown may end up being different to what was assumed in forecasts - resulting in either extra money or less than was expected.

Then there's the Interislander ferry for which no replacement solution has yet appeared. Willis last year refused to provide further government funding for the project to replace the ferries and related wharf infrastructure, prompting KiwiRail to cancel it. Treasury says "any future fiscal implications" from other possible solutions are unknown.

Separately, it also notes costs associated with winding the project down, which may end up being more than expected.

Climate change

After seeing the devastation of Cyclone Gabrielle and the Auckland flooding last year, perhaps the biggest risk relating from climate change is another severe weather event.

"There is an increasing risk that, in responding to the increased frequency of adverse weather events, the government will incur additional costs across a range of portfolios," Treasury warns, highlighting emergency management, transport, EQC, Housing, and social development.

"The likelihood, timing and fiscal impact are uncertain."

A shed in Esk Valley is filled with silt and debris from Cyclone Gabrielle

Damage from Cyclone Gabrielle to a shed in Esk Valley. Photo: RNZ / Angus Dreaver

With the Paris Climate Agreement targets for 2021 to 2030 coming due soon, Treasury also advises "sizeable offshore abatement will be needed". This means that - because New Zealand's reductions are too slow - the country will need to pay for reduction efforts overseas.

It means "significant costs to the government, starting within the current fiscal forecast period".

The Emissions Trading scheme could also pose a problem, with current rules meaning extra ETS units would be released if the price goes too high - and the government would need to find more emissions reductions to match the amount of extra units released.

Alternatively, the annual auctions of ETS units could end up with too few buyers or an unacceptably low price (which would mean no sale), in turn meaning less revenue for the government.

Treasury also separately identifies the unknown cost involved with the next Emissions Reduction Plan - the government's overarching plan for how it will reduce emissions, due in December - as a risk.

Housing and other lodgings

Treasury warns that because "advice on this is yet to be developed", it's not certain just how much the government would have to put towards local councils under its Going for Housing Growth policy.

The policy set out before the election allows councils to opt out of the medium-density rules brought in during the last government's term, and provide zoning for the next 30 years of housing demand. This would be backed by a $1 billion incentive fund for councils that do deliver more housing.

However, coalition negotiations required the government to also at least consider ACT's policy of sharing GST on new-build houses with councils.

The government's also put a big emphasis on trying to reduce the use of hotels as emergency housing but in some areas there may be few alternatives "resulting in a residual cost pressure".

Some other facilities and infrastructure projects could end up being costly for the government, including the Chateau Tongariro Hotel which was transferred to the government after its lease expired last year, additional cost to the upgrade to New Zealand's Scott Base in Antarctica due to the "inherently risky operating environment", and Kāinga Ora's large-scale redevelopments.

Prisons are also an area of concern, with populations increasing significantly since April last year and policy changes "likely to further increase the prison population" meaning the increase may be higher than allowed for, so more funding would be needed to maintain safe staffing and capital.

It must be noted however that this year's Budget also included $1.94b extra for Corrections including for cost pressures, hiring more officers, rehabilitation services, and an expansion of Waikeria prison.

Finally, other government-owned buildings could need earthquake strengthening or unexpected maintenance which may not be covered by baseline spending.

Taxing the tech giants

Budget 2024 includes an estimated $320m over four years coming from a digital services tax the previous government started work on but never completed.

It aimed to start taxing multinational tech companies like Apple, Meta and Google if they made more than €750 million a year globally (NZ$1.37b) and more than $3.5m locally and at the time was expected to bring in $222m over four years, beginning from 1 January next year.

Sankt-Petersburg, Russia, January 24, 2018: Twitter application icon on Apple iPhone 8 smartphone screen close-up. Twitter app icon. Twitter is an online social networking and microblogging service .

Photo: 123rf

In the meantime, the Organisation for Economic Cooperation and Development (OECD) is still finalising its own approach on a similar tax member countries could apply.

The coalition has yet to decide if it will use the previous government's approach, a revised version, or the OECD's - and the different settings could mean different levels of income.

Higher education (costs)

With the government planning to reverse the merger which established Te Pūkenga but the exact shape of that still unknown, Treasury has warned that polytechs and institutes of technology may still need further funding to keep them afloat. After all, the merger was meant to be a solution to deficits because of declining enrolments.

Universities are in a better position - but are still facing what Treasury describes as "heightened financial pressures" and while it's not enough to mean closures just now, several may call for more funding, putting pressure on the government.

See also the section on fiscal cliffs below on time-limited funding. Money for tertiary tuition and training has been provided through to 2026, but the combination of stronger demand and inflation above 2 percent could raise sector expectations of a taxpayer-funded top-up.

Fiscal cliffs

Willis has repeatedly railed against the previous government for using time-limited funding and leaving the coalition with a series of "fiscal cliffs" including top-up funding for Pharmac and the school lunches programme Ka Ora Ka Ako.

Some time-limited funding set out in this year's Budget has also won the label of "fiscal risk" from Treasury, including for Ka Ora Ka Ako, Police cost pressure funding, international climate financing funding, the Ministry of Social Development's transformation programme Te Pae Tawhiti, tertiary training and tuition, the Rail Network Investment Programme, and Screen Production Rebate.

Hospital pass

Various hospitals and other health facilities are in line for repairs and replacement including some with plans fairly far along in Dunedin, Whangārei and Nelson. Cost blowouts or increases on any of these is a risk.

The government did however set aside $103.1m for capital costs as a contingency (just in case) fund, and has committed nearly $16.7b across Budgets 2024 to 2026 for new investment into health services.

Technical difficulties

Another concern is the large number of government agencies and departments planning to replace their outdated IT systems - and the possibility of cost increases.

"It is likely that the resourcing required to deliver the level of transformation being planned will exceed what is available in agencies' baselines and balance sheets," Treasury says.

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