Last week, New Zealand’s Reserve Bank (RBNZ) cut interest rates to 3.0 percent. The government was quick to take the credit. “Taking the pressure off inflation has allowed the Reserve Bank to lower the OCR when it needs to be adjusted,” a media release claimed. “The Government’s responsible economic management is making a difference.”

The RBNZ saw things a little differently, though. Its statement pointed to subdued domestic activity and significant spare capacity. It cut rates because the economy is struggling and needs help, not because it is doing well.

This was not the first time there has been a discrepancy between reality and the government’s messaging. Take the August credit rating. Unsurprisingly, Ministers celebrated when Fitch kept New Zealand’s AA+ rating.

But Fitch also warned that net core Crown debt will hit 46 percent of GDP by 2027/28, a level that would have sparked emergency cabinet meetings a generation ago.

The same pattern of selective interpretation appears in New Zealand’s inflation story. The headline rate is 2.7 percent, which is just inside the Reserve Bank’s target range. But can the government claim this as a success?

In fact, the inflation outcome was to a large part attributable to lower oil prices. In any case, inflation actually rose between March and June, with the Reserve Bank expecting it to hit 3.0 percent in September. Once again, economists are becoming concerned about inflation expectations settling in.

Economic growth, public debt and inflation all remain unsatisfactory, but New Zealand’s productivity is an even larger concern.

Productivity has been New Zealand’s Achilles heel for decades, and the decline continues. Output per hour fell 0.9 percent in the year to March 2023, then another 0.7 percent to March 2024, and there are no signs the trend is reversing. New Zealand remains in the bottom quarter of the OECD for GDP per hour worked.

Unemployment has hit 5.2 percent, the highest since COVID. The weak economy is driving people away. Last year, 30,000 more people left for Australia than returned, the worst exodus since 2012. These are engineers, nurses, teachers, builders: people any economy needs to thrive.

To be fair, the government has launched serious reforms in education, planning and regulation. The comprehensive education overhaul, the replacement of the Resource Management Act (RMA), and the new Ministry of Regulation all target long-term productivity.

But these are precisely that: long-term. The RMA replacement will not be operational until 2027. Education reforms will take a generation to show results. In the meantime, the fiscal pressures keep mounting.

Although the government claims fiscal discipline, its spending increased from NZ$180.1 billion to a projected NZ$184.1 billion this year.

Crown expenses now account for around 33 percent of GDP. Before the pandemic, it was in the high twenties. Even if that drifts down to 31 percent by 2028/29 as forecast, it will remain well above historical norms.

So why does government spending keep rising despite talk of cuts? A large part of the answer is demographics. More people retiring and living longer push up superannuation costs every year. Healthcare also gets more expensive as the population ages.

This trend will continue for decades. Treasury’s long-term projections show that if nothing changes, health and superannuation will add six percentage points of GDP to spending by the 2060s.

These fiscal pressures require politically difficult reforms to superannuation and welfare that successive governments keep deferring.

But it is not just demographics. The proportion of working-age New Zealanders on a main benefit has risen from under 10 percent in 2017 to over 12 percent today: nearly 400,000 people, well above Australia’s 6 percent.

The total welfare bill has ballooned by NZ$20 billion since 2017, from NZ$19.8 billion to NZ$40.4 billion. The previous government’s promises have become the current government’s liabilities.

Public service costs are another factor. Though the staff count fell from nearly 66,000 in December 2023 to about 63,000 now, this is only a modest reduction. In 2017, the public service employed 47,000 people, and so today’s “smaller” workforce is still 34 percent bigger. The 16,000 extra positions since 2017 cost NZ$1.6 billion annually

If the government wants to get serious about fixing New Zealand’s public finances, just a few adjustments here and there will not do. Yes, the government has cut operating allowances to their lowest in years, which means genuine restraint on new spending.

But the problem is not in any new initiatives; it is in those big budget items that have ballooned under the previous Ardern government, and which the current administration has not dealt with yet.

Here is a back-of-the-envelope calculation: If the government managed to reduce the number of beneficiaries to the level before the Ardern years, that would save around NZ$7 billion per year.

Treasury estimated that increasing the super age from 65 to 67 would ultimately save about $3 billion, or 0.7% of GDP.

Shrinking the public service by those 16,000 extra positions created since 2017 would deliver another NZ$1.6 billion annually.

Taken together, these three measures would yield more than NZ$11 billion per year – or roughly 2.5% of GDP. Admittedly, achieving these changes would not happen overnight. Changes to the retirement age need to be phased in, welfare reform is notoriously hard, and even reducing public service headcount takes time (unless you are in Argentina and take a chainsaw). But they could be declared a target.

And what is the alternative? The government cannot continue to claim to be fixing fiscal challenges while Treasury projects alarming debt dynamics, take credit for rate cuts that reflect economic weakness, or declare victory over inflation when prices keep creeping up.

Two years ago, New Zealanders voted for change. Not just a change of government but a change of direction. They were promised fiscal discipline, economic renewal and a productive economy.

The New Zealand government has shown it can reform when it wants to. Now it must also reform what matters most: the unsustainable growth in public spending.

To read the article on The Australian website, click here.