Labour's plan to spend an extra $17 bln, and still be in surplus

Labour candidate Paul Eagle, Labour Leader Andrew Little and Labour Finance spokesman Grant Robertson announcing Labour's fiscal plan with the Mitikulena family of doctors in Kilbirnie in Wellington on July 19. Photo by Bernard Hickey for Newsroom.

Labour has unleashed a budget plan to spend $17 billion over four years on education, health and income support - hoping to convince voters that is better for them than tax cuts.

But it's also unleashing that spending without going into deficit, and may yet announce even more spending in late August when Treasury announces how much the Budget outlook has improved since May. A big chunk (nearly $8.5 billion) of the extra spending also hasn't been allocated, and $800 million has been put aside in the first year to meet the as yet uncosted policy demands of New Zealand First and the Greens in any coalition deal.

The key to Labour's spending plan is its decision to forgo tax cuts costing almost $8 billion over the next four years, and to reduce slightly the size of surpluses and debt reduction planned by the National Government.

"We are very clear that now is not the time for a tax cut. Now is the time to invest in the public and social services that will give New Zealanders a good life," Labour Finance spokesman Grant Robertson said at a launch event at a Kilbirnie Medical Centre in Wellington, which is run by a family of Nuiean-born doctors.

The end result is a Budget surplus of $7.4 billion by 2021/22, which would be $1.2 billion smaller than National's plans unveiled in its May Budget. Net debt under a Labour Government would be 20 percent of GDP by 2021/22, while it would be 17.9 percent of GDP under National. That 20 percent net debt figure by 2021/22 compares with the National Government's long-held target of getting debt below 20 percent by 2020/21. The Government announced in April it had changed its debt target from 20 percent to 10 to15 percent of GDP by 2025.

Labour said its plans had to fit into the budget responsibility rules it agreed with the Greens earlier this year as part of their memorandum of understanding to change the Government. Those rules specify that any Labour-Green Government would have to run budget surpluses over the economic cycle and get net debt down to 20 percent of GDP within five years of taking office.

Robertson said he thought New Zealanders wanted social progress and budget responsibility.

"They want a government that understands that we need to rebuild our social foundations, but they want that done in such a way that we balance the books and we produce a Budget that is sustainable," he said.

Labour's plans also depend on the same economic growth forecasts used in Budget 2017 by the Government.

Here's where it plans to spend the money over four years:

  1. $8 billion more on health than the Government planned in Budget 2017, including paying back what Labour said was $293 million worth of underfunding due to inflation and population growth and an unannounced plan to spend $6.7 billion on "delivering a modern health system."

  2. $5 billion on its families package, which includes spending more on Working For Families, offering a baby bonus and paying beneficiaries and superannuitants a winter energy payment.

  3. $4 billion more on education, including its plan for three years free tertiary education, increased funds to put fully qualified teachers in early childhood education centres and $1.8 billion for an unannounced plan for 'delivering a modern education system."

  4. $2.4 billion extra in contributions to the New Zealand Superannuation Fund, which Labour would restart three years earlier than the current National Government.

  5. $1.4 billion on research and development tax credits, regional development and its 'Ready For Work' scheme to offer 10,000 young people six months of on-the-job training.

  6. $2 billion to fund Kiwibuild in the first year of Government.

Here's how Labour is planning to offset most of the spending with extra revenue over four years:

  1. Reversing the National Government's tax cuts, which increases revenue by $8.3 billion over five years.

  2. Extending the 'bright line' test for taxing the capital gains of rental property investors from two to five years and increasing tax collection from multinationals, which it forecast would raise an extra $1.1 billion over four years. It also plugged in unidentified 'other revenue charges' line of $420 million over four years. This is expected to cover a border levy on foreign visitors to pay for tourism infrastructure.

The rest of the gap is made up with slightly smaller surpluses, and therefore less debt repayment over the next four years totalling $7.2 billion. That increases total interest costs for a Labour Government, relative to the National Government's Budget plans, of $936 million over the next four years.

But this is not the end of the story.

The Treasury is scheduled to release its Pre-Election Fiscal Update (PREFU) on August 23 and is expected to announce there is an extra $1.5 billion worth of budget surpluses available for the respective parties to either spend or save through faster debt repayment. As recently as July 6, Treasury reported that the Budget surplus for the 11 months to the end of May was already $1.547 billion better than forecast in the May 25 Budget. Robertson said he would revise this current budget plan after the PREFU.

Asked whether any extra surplus would be used for debt repayment or spending, Robertson indicated it would go on social spending.

"We are working on some plans at the moment around where that investment will go. I think everyone here is clear what our priorities are: there is major need in social services, health, education and housing," he said.

"We will continue to prioritise those, making sure people have the incomes they need to be able to live good and decent lives. They are the priorities we have put out: reducing inequality, reducing poverty and when the time comes, we will look at the sustainability of further spending in those areas."

Finance Minister and National Campaign Manager Steven Joyce criticised Labour's decision to not repay $7.2 billion of debt.

"It's a classic Labour tax and spend approach, but this is the wrong time to be building up debt. We need to be reducing debt now to be ready for the next rainy day," Joyce said.

“And the most telling aspect of the whole document is they’ve managed to put out 17 pages without referencing the importance of the economy once, yet no government initiatives are possible without a strong economy," he said.

Labour's budget is based on the same economic forecasts as the Government's Budget 2017 released in May.