In the face of a deteriorating global economy and tax revenue failing to meet Treasury’s forecasts, the Government is requiring public agencies to find permanent savings including through cutting back on contractors. It is also reducing future budget allowances, trimming back some programmes, and taking back underspends.
“The Government’s published accounts for the eleven months to the end of May showed that tax revenue was more than $2 billion 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.” Grant Robertson 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.
“In the May Budget we launched a Fiscal Sustainability and Effectiveness Programme to support our return to a more sustainable fiscal position as we remove the necessary spending that supported New Zealand through the COVID pandemic.
“It is clear given the economic conditions that we need this work to happen more than ever. Today we are announcing further actions as part of that programme.
“Overall, this savings and efficiency exercise will benefit taxpayers by almost $4 billion over the forecast period. This money will all be treated as savings – it isn’t being made available for any other new spending. The economy is turning a corner, but inflation remains sticky. It is trending down but is doing so slower than we would like so we are doing our bit to help nudge it downwards faster,” Grant Robertson said.
“The big policy changes that the Government had been working on – like RMA, water infrastructure and the health reforms are coming to an end. Along with the COVID response ending, this will take pressure off the public service, so there is room now to reduce reliance on consultants and contractors as the Government returns to focussing on delivering core public services.
“We are directing public agencies to cut back on spending on consultants and contractors to pre-COVID levels.”
The Public Service Commission’s main contractor and consultant measure is operating expenditure as a proportion of workforce spend. This measure was trending down, after inheriting a spend of 13.4 percent in 2017/18 we reduced it to 10.4 percent in 2020/21, before it spiked (largely due to COVID-19) in 2021/22 at 14.6 percent.
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.
“Public sector agencies are being required to trim one or two percent off their existing baselines. They have been directed to do this while protecting front line services. To ensure this, I have excluded several agencies from the exercise entirely. These permanent savings will apply to about 19 percent of the government’s expenditure,” Grant Robertson said.
“Alongside these baseline savings, an immediate savings review has also been undertaken which has resulted in a number of underspends being identified and some money that had been set aside for programmes no longer being required.
“I have also decided to trim back the Budget allowances in the 2025/26 (by $250 million) and 2026/27 (by $500 million) years. We can do this as inflation falls and still be able to meet the cost pressures we face as inflation declines and solid economic growth is forecast.
“All these measures taken together will help ensure we meet our fiscal goals to keep debt under 30 percent of GDP and get the books back into surplus in the forecast period.
“We have been clear that this cannot be a big-spending election. Uncosted, untargeted tax cuts like those promised by the opposition are simply not affordable. Likewise broad sweeping statements about slashing public services is also destabilising and disingenuous.
“We need a balanced approach that protects the public services that New Zealanders rely upon, while making sure we cut our cloth and have a sustainable financial base to take forward,” Grant Robertson said.