National's fiscal gambit: forcing Labour to break promises it once kept

Finance Minister Nicola Willis stood up this week to announce her government's Budget Responsibility Rules—a framework for fiscal management that her own party had spent the previous election attacking. The irony was deliberate. National had campaigned in 2023 on three concrete promises: bend the debt curve, keep government spending below 30 percent of GDP, and return to surplus by the end of the current financial year. The surplus target, the most politically potent of the three, has been missed so thoroughly that even after redefining how the operating balance is calculated, the coalition still falls short. Yet here was Willis, drawing public attention to these very rules, essentially advertising her own failure.

The strategy becomes clear only when you look at what National is trying to force Labour to do. Opposition parties enjoy a peculiar privilege: they can promise almost anything without spelling out how to pay for it. They have less information than the government, fewer resources, and the luxury of delay. Labour has been using this advantage expertly, building an $18.2 billion gap between what it says it will spend and the new taxes it has announced to cover the cost. National's calculation is straightforward. By publicly committing to fiscal rules and highlighting Labour's unfunded commitments, National is trying to force the opposition to make hard choices before the election—to break promises, raise taxes, or borrow more—while voters are still paying attention. Labour would prefer to delay this reckoning until after polling day, when the damage to its political brand might be contained.

Willis faced this same bind when she took office. Treasury had downgraded the economic outlook repeatedly, which meant less tax revenue than expected. She could not keep both her promise of tax cuts and her promise to return to surplus. She chose to protect the tax cuts and break the fiscal promise instead, a decision that has cost her politically ever since. Labour now faces an identical trap. The party has committed to pay equity increases, spending on various programs, and tax policies that do not add up without either raising taxes significantly, borrowing more, or cutting promises. National wants Labour to make these choices visible and soon.

The question of what Budget Responsibility Rules actually are reveals something deeper about how governments manage fiscal commitments. The rules are a campaign name for something called a Fiscal Strategy, which the Public Finance Act requires any government to publish. A Fiscal Strategy sets out short- and long-term goals for surplus, debt management, and spending. There is no legal requirement for a party to publish Budget Responsibility Rules before an election, but once in government, those campaign promises typically become the formal Fiscal Strategy. The Taxpayers' Union has pointed out that Willis's rules do not legally bind the government to follow them. If she were serious, the union argued, she would legislate them—put them into primary legislation where courts could theoretically enforce them.

This raises a constitutional question that Parliament debated thirty years ago. In the early 1990s, after successive governments had left New Zealand with unsustainable debt, Parliament considered whether to legislate explicit fiscal targets that would be legally binding. Some economists and business groups submitted that the law should require a specific debt target or a AAA credit rating by a certain date. The danger was obvious: if Parliament legislated a fiscal target, a future government that wanted to borrow heavily could potentially be taken to court and ordered to cut spending to meet the target. This raised a deeper principle. Budgets are passed by Parliament, and it is a constitutional convention that one Parliament cannot bind another. Tomorrow's voters, through tomorrow's Parliament, have the right to borrow if they choose, regardless of what today's Parliament legislates.

The finance and expenditure committee in 1994 ultimately rejected explicit fiscal targets in legislation, siding with those who argued that governments should not legislate to bind future governments. The requirements that made it into law were vague enough to give governments considerable flexibility. Ironically, the person who chaired that committee is Ruth Richardson, who now chairs the Taxpayers' Union and is calling for Willis to legislate her fiscal rules. The debate, then, is not really about whether rules work. It is about whether a government should be able to lock itself—and its successors—into fiscal commitments that courts could enforce. National has chosen not to legislate its rules, which means they remain what they have always been: campaign promises that can be adjusted when reality intervenes. Labour will face the same choice, and the same pressure from National to make that choice before voters go to the polls.