Any minister of finance would find this month’s Budget a challenge.

The problem is chronic deficit spending. It exists because extraordinary expenditure increases in part due to Covid-19 have not been reversed. The government’s operating spending is now running at around $150 billion a year, which is around $75,000 a household.

Far too much of it is ill-justified. For years, the Controller and Auditor‑General have warned that value‑for‑money checks are weak in too much of government spending.

At the same time as not doing enough to bring greater discipline to spending, governments have failed to raise taxes by enough to fund that spending. To do that would be to expose the degree to which household incomes are artificially high because of this deficit spending.

The upshot is that future burdens on taxpayers and spending beneficiaries are rising. They are rising because the public debt burden is rising. Net core Crown public debt was 19% of GDP before Covid-19. In December last year, Treasury expected it to be 43% of GDP in June 2026.

The events this year in the Middle East make the challenge much greater. The blocking of the Strait of Hormuz is a major event. It cuts New Zealanders real household incomes even if no jobs are lost.

Avoiding a downturn is unlikely. Treasury’s recently released scenarios anticipate even slower output growth than before. The budget surplus challenge is greater now.

Higher oil prices increase the consumers price index. Central banks could lift interest rates. Higher interest costs on the public debt increase the surplus challenge.

The looming general election is another constraint; National is already polling poorly. A bold Budget 2026 to cut spending and/or raise revenue is unlikely to appeal to voters.

My generation has seen this before. In the 1975 general election, the quadrupling of global oil prices in 1973-74 and big increases in government spending, created large fiscal deficits. The government was frozen into a policy of “borrow and hope”.

The opposition leader at the time, later Sir Robert Muldoon, promised effective deficit-reducing action. He tried, but by 1983-84, he was taking his turn to preside over large fiscal deficits and heavy overseas borrowing.

From 1984 to 1995, successive governments took tough and far-reaching measures to turn fiscal deficits into surpluses and to reduce extensive economic controls.

The need was great and the pain very real. The unemployment rate peaked at 11%.

To their considerable credit, the leaders at the time did their best to make sure New Zealanders would not have to go through such pain again. The key measure was a Fiscal Responsibility Act. It was led by then Minister of Finance Ruth Richardson.

Now inside the Public Finance Act, its measures require governments to target fiscal surpluses in normal circumstances. They have to declare a prudent level for public debt and show how their policies aim to achieve and sustain that. Reasons for departures must be given.

But here is the thing. The only real sanction is public opinion.

Compliance is lacking. Public opinion is proving to be quite weak. Treasury’s forecasts late last year showed deficits every year for the eleven years to 2030. This is on the most cited measure. Now that looks too optimistic.

The higher global oil prices this year raise the future costs of deferring effective action, piling up the public debt even more. But poor polling could be a constraint.

Why the poor polling? The government actually deserves credit on several important fronts. It has been tackling the regulatory red tape that chokes infrastructure investment, house building and productivity.

Its moves to increase literacy and numeracy teaching in schools are bold and coherent. It is increasing school choice. It has made it somewhat easier to attract capital from overseas; more capital per worker makes higher wages more affordable.

Against this, there are many areas where the government has likely been disappointing its supporters.

These include its weakness in addressing the over-sized and the “not fit for purpose” public service. There are too many reported problems of patronage, poor performance and capture by factional interests.

There is plenty more “unfinished business”. Work by The New Zealand Initiative has shown that New Zealand has many more government agencies and portfolio ministers than appears to be necessary or desirable.

It is too easy for the public sector to thwart ministers’ initiatives. Its convoluted internal “process” requirements can hold things up to a major degree. In excess, they are a recipe for inertia and reduced accountability.

The compromises built into MMP do not help. Coherence can be lost.

Whatever its contents, Budget 2026 should make the deficit-spending problem more visible to the public. Deficit spending to fund poor-quality programmes builds future pain.

Budget 2026 will be a compromise, likely an uncomfortable one.

To read the article on the NZ Herald website, click here.