Will a Labour victory in the 2026 election mean an end to austerity? To meet the strict spending targets outlined in their fiscal plan, Elliot Crossan argues that Chris Hipkins and Barbara Edmonds will need to underinvest in health, cut the rest of the public sector, and betray Ardern’s legacy on child poverty.
The phrase “fiscal policy” must be one of the most tedious terms in the English language. When political parties announce their “fiscal rules”, they are relying on most voters tuning out; their aim is to sound as credible as possible while throwing around enough numbers and jargon that the electorate will simply take their word for it.
Far too often, all the media cares about is whether one finance spokesperson or the other has found an error on a spreadsheet. Yet the devil is so often in the detail of these dry documents.
Every issue you care about in the 2026 election that involves the government spending money — whether it be on housing, healthcare, education, welfare, you name it — is a hostage to these fiscal rules that parties impose upon themselves. A 1% or 2% difference in a spending target may look minor, but it can mean a difference worth billions of dollars of investment into public services. Conversely, promises of $10 billion on this or $15 billion on that can sound impressive until you put them into context.
Chris Hipkins and Barbara Edmonds announced Labour’s fiscal plan at the beginning of October. The ramifications of this document could destroy any chance of a Labour-led government delivering any significant social or economic progress in office.
Nicola Willis set a trap; Hipkins and Edmonds walked right into it. Having imposed punishing austerity in her first two Budgets, the incumbent Finance Minister eased off the cuts in election year in the hope that voters would give the National Party another three years in office, while setting the direction of travel towards deeper cuts over the next four years. According to the Treasury’s Pre-election Economic and Fiscal Update (PREFU), Willis’ spending plans will see Core Crown expenditure1 as a share of GDP fall from 32.2% in June 2027 down to 29.8% in 2031.
That’s a 2.4% drop in government spending over just four years. After spending the last three years denouncing the Coalition’s austerity, what is Labour’s alternative to this? To reduce expenditure to 30.4%: a 1.8% reduction relative to GDP. The Opposition’s fiscal plan accepts three-quarters of the austerity that Willis has planned.
Reducing government spending as a share of the total economy is austerity in relative terms, but that doesn’t necessarily mean services have to be cut, does it? After all, the expected economic growth rate according to PREFU indicates that Labour will be able to increase government spending by $5.6bn per year. But adjust that figure for the Treasury’s rather optimistic forecasts on inflation, and it falls to $2.1bn. Factor in anticipated population growth, and Labour is only allowing for spending to rise by $0.29bn per year.
Even so, government spending will still technically be rising rather than falling, so has Labour really signed up for austerity? It depends which area of government we’re talking about.
Demographic Ageing and the Health Crisis
Regardless of who is in power, Treasury forecasts that finance costs in real, per capita terms will increase by $0.43bn per year due to globally high interest rates. In addition, our ageing population means that Core Crown spending on superannuation will increase by $0.6bn per year. As a share of GDP, these two areas of expenditure will equate to 2.4% and 5.7% respectively by 2031; 8% combined, and 1.8% above the pre-Covid average (1997-2019).
Demographic ageing also means that we need to spend more on healthcare. Doctors and nurses are sounding the alarm with increasing desperation on the crisis in our public health system, the result of decades of chronic underfunding; it’s become one of the key battleground issues in this election. Both parties have responded by throwing out big numbers in terms of health spending — around $15.5bn each — with both committing to meet the Treasury’s estimation on the spending needed to meet “cost pressures” over the next three years. National extended this funding out to a fourth year, and Willis has accused Edmonds of making an error by omitting the additional funding uplift for 2031.
Assuming this was indeed an error, then Labour’s big spending promise to save our health system from imminent collapse is to invest $0.71bn per year, while National is promising $0.59bn per year. This amounts to a 2.1% annual real, per-capita increase in health spending in Labour’s plan, and 1.8% in National’s. For the sake of comparison, Helen Clark’s government increased health spending by 4.7% per year, while Jacinda Ardern’s government — excluding funding for the Covid response — invested 4.6% per year into healthcare.
Both parties are effectively promising to keep health spending stable relative to GDP at around the current level of 7%; 7.1% under National, 7.2% under Labour. This is woefully inadequate to meet the scale of the healthcare crisis we face. This level of health spending is also higher than the pre-Covid average by 1.2-1.3%; such are the demands of demographic ageing that this additional spending is simply not enough.
Insufficient though they may be, these promises on health spending by both Labour and National are as good as it gets. 88% of the new spending in National’s fiscal plan is devoted to healthcare, compared to 63% of the new spending promised by Labour.
Zoom out, and it is clear why. Labour and National are both continuing to follow, as they have for the last 40 years, what journalist and economic commentator Bernard Hickey calls the “30/30 rule” — that is, to reduce government debt down to roughly 20-40% of GDP, and to reduce Core Crown expenditure down to 30%. The debt target varies each election depending on the economic conditions and the metric, but the bipartisan target on government spending is very strict; the pre-Covid average was indeed 30.2%, and both Willis and Edmonds are determined to return to this norm.
Yet the combined total for spending on superannuation, finance costs and healthcare will be 15.1-15.2% of GDP by 2031. That takes up half of the 30% target, whereas from 1997-2019 this part of government only accounted for 12.1% of the economy. Strict adherence to the 30/30 rule in this context produces what Hickey calls the “sinking lid effect;” healthcare spending growth has to be contained as much as possible whilst the rest of government shrinks to make up for the unavoidable costs of high interest rates and an ageing population.
Welfare, Poverty and the Legacy of Ardern
Under the spending plans of both Labour and National, welfare expenditure (excluding superannuation) will have to fall in line with Treasury’s forecast drop in unemployment and beneficiary numbers — a forecast that has been consistently wrong for several years running. As a share of GDP, spending on welfare will have to drop below 5%. The only time this has happened in the last 30 years was in 2015-2019, after years of benefits being allowed to fall relative to wages at the same time as John Key’s government imposed punitive sanctions to restrict access to benefits.
From her maiden speech as an MP to her debut as Labour leader and all the way through to her valedictory as she left Parliament in 2023, Jacinda Ardern reiterated that her biggest motivation to enter politics was to eradicate child poverty. She may not have achieved this goal, but progress was made in poverty reduction from 2018 to 2022. Ardern was the first Prime Minister in decades to raise main benefit rates.
The current Labour leadership has been evasive on most commitments surrounding welfare policy. The only costed commitments in their fiscal plan are to reverse the Coalition’s recent cuts to Income Related Rent Subsidies — though they plan to offset this by also reversing the increase in the maximum Accommodation Supplement allowance — and to build 6,000 new state houses to be provided at Income Related Rents.
But Hipkins made a shocking admission three days after the release of the fiscal plan: that Labour does not intend to reverse the government’s harsh restrictions on 18- to 19-year-olds being able to access Jobseeker.
“Oh, it’s unfair. It’s mean spirited. We got youth unemployment at a record high under the watch of this government — and what they seem to be doing is punching down, trying to make savings, trying to deflect blame onto those young people who can’t find employment in a labour market that is really tight at the moment.”
Labour’s deputy leader Carmel Sepuloni said this of the youth benefit restrictions less than two months ago. Willie Jackson, who at the time was the party’s Social Development spokesperson, condemned the effect this change would have on Māori and Pacific whānau — youth unemployment is more than twice as high for Māori youth than the national average, and even higher for Pasifika youth.
Hipkins now claims that Labour intends to “focus on creating jobs for those 18- and 19-year-olds to go into.” The reality is that this u-turn is not only breathtaking, but downright cruel.
This astonishing inconsistency from Labour appears inexplicable — until you pick apart their fiscal plan. Once superannuation, health and finance costs are out of the picture, welfare expenditure makes up a third of the remainder; and spending on welfare must therefore fall in line with the “sinking lid.” To achieve this, not only does unemployment need to fall; the Coalition’s punitive sanctions regime must stay in place.
After factoring in the minor welfare policy tweaks in Labour’s fiscal plan, and the welfare policies National has costed — a boost to paid parental leave offset by forecast savings from “stronger welfare expectations and case management” — PREFU predicts that welfare spending will fall by $0.6bn per year under Labour to 4.8% of GDP, and $0.7bn per year under National to 4.7%, down from the current 5.6%.
Labour must therefore betray the legacy of the Ardern government. All progress on child poverty must take a back seat to the objective of reducing the size of government to 30% of GDP. The targets established in the 2018 Child Poverty Reduction Act have already been made a mockery of by the Coalition this term. Now if Hipkins is returned to the role of Prime Minister, his government must wilfully ignore Ardern’s proudest legislative achievement because of entirely self-imposed fiscal rules.
Harsh Public Sector Austerity
The rest of the public sector, however, is where the hammer blow must fall the hardest. Excluding healthcare, public services make up 11.9% of GDP currently — already below the pre-Covid average of 12.3%. Two-fifths of that expenditure is on education, while the rest covers: core government services; law & order; defence; transport & communications; economic & industrial services; housing & community development; environmental protection; primary services; and heritage, culture & recreation.
Spending on these vital public services will have to shrink to a record low share of the economy under the fiscal plans of both major parties; 10.4% under Labour, and 10% under National. The next round of austerity planned by Willis will slash the public sector by $1.34bn per year on a real, per-capita basis; Edmonds will have to cut services by $0.85bn per year. Labour has therefore accepted two-thirds of National’s public sector austerity plans, on top of the cuts Willis has already made this term.
This is before factoring in new spending, which will have to replace existing spending. National’s spending commitments outside of health are light, but Labour has promised $1.45bn per year in new spending. This omits $0.59bn per year by 2029 dedicated to “reversing the cuts;” truly impressive accounting wizardry will be necessary to honour this particular pledge.
Furthermore, as several pundits have pointed out, there is a glaring omission on Labour’s single biggest commitment this term — to reverse the Coalition’s scrapping of the pay equity regime, one of the government’s most unpopular austerity measures. $0.56bn per year has been allocated to giving an immediate $4 per hour pay rise to care and support workers. But the Treasury costed the restoration of the Ardern government’s pay equity scheme at $2.67bn by 2028/29; on a per capita basis, Labour must find an additional $2bn to honour its most cast-iron promise.
The Herald’s Thomas Coughlan opined a weekend after Labour’s fiscal plan was announced that a Hipkins-led government will have to choose between either funding public services or restoring pay equity. The reality is worse than that. Labour will have to cut public services before implementing the spending promises costed in its fiscal plan, let alone before restoring pay equity.
Labour may have to implement even bigger cuts to the public sector than Willis plans to make in order to achieve its fiscal targets and honour all of its promises. The only scenario worse for the public sector is if National is serious about imposing its fiscal targets whilst doubling defence spending as a share of GDP.
A War with the Unions?
The base of the National Party is big business. When National implements austerity, even if it alienates many voters, it is in line with the interests of its key supporters. New Zealand’s wealthy elite wants to see government spending curtailed, and rewards National for pursuing this agenda by bankrolling the party’s election campaigns through big-money donations that have been growing ever-larger in recent years.
A key section of National’s base believes that the party is not taking austerity far enough. Former Finance Ministers Roger Douglas and Ruth Richardson, the chief architects of New Zealand’s neoliberal economic model, both publicly denounced Willis last year on this basis; Richardson (the current chair of the Taxpayers’ Union) had a mini-row with the incumbent Finance Minister, while Douglas called openly for Willis’ resignation. If the billionaire backers of the Taxpayers’ Union and the ACT Party had their way, much of what remains of the public sector would be privatised, and the pension age would be raised in order to slash taxes on the rich lower and lower.
While National risks paying a political price if it doesn’t take austerity far enough, Labour faces pressure in the opposite direction. The base of the Labour Party lies in the trade unions. Union density in the private sector may be low these days, but government employees remain heavily unionised, and workers across the public sector have spent the last three years fighting hard to protect jobs, working conditions and the quality of the services they provide. To impose the public sector austerity necessary to meet their fiscal targets, Hipkins and his Cabinet will have to go to war with these unions.
It is impossible for Labour to implement this plan without alienating its base. From union leaders in the public sector to church and community leaders expecting action on child poverty, the section of civil society that is the bedrock of the Labour Party will be beyond furious with the cuts necessary to reduce the size of government back down to 30% of GDP.
That is not to say that the Labour leadership won’t go through with this plan. The party has taken even more drastic action within living memory. The Rogernomics revolution of the 1980s is what first brought neoliberalism to these shores; the rapid free market reforms introduced without warning or mandate by the Fourth Labour Government nearly destroyed the party.
Observers of overseas politics will be all-too familiar with the recent history of social democratic parties imploding in government after implementing deeply unpopular austerity measures in a direct betrayal of their core supporters. From George Papandreou in Greece to François Hollande in France to Keir Starmer in Britain, it has been repeatedly demonstrated that out-of-touch leaders of centre-left parties are more than willing to commit political suicide in this way. Hipkins and Edmonds will experience the exact same fate if they attempt such austerity measures in this country.
Who exactly are they trying to impress? It’s not like it’s helping electorally — Labour’s support has nosedived since the middle of the year, and the party is now polling at around 28%, a single percentage point above its disastrous 2023 election result. After Labour restricted its policy platform to a barely-there tax reform policy and a shockingly conservative fiscal plan, Luxon and Willis are crying bloody murder about fiscal credibility anyway; the National Party has based its entire election campaign on blatantly lying about the “nine new taxes” that would be introduced under a Labour government.
Wealthy donors don’t seem impressed either by Labour’s self-moderation; they’re funnelling money into ACT and National’s campaign coffers like there’s no tomorrow. Both parties have received more than twice as much in donations worth over $20,000 than Labour as of 1 October. Hipkins has moved his party further and further to the right in the last three years; in doing so he has failed to inspire any enthusiasm from core supporters; and yet no matter how obsequiously he behaves towards corporate elites, they’re just not interested in him. They want the most right-wing government that money can buy, and they’re as hostile to the Labour Party as ever.
The Austerity Doomloop
I was planning on making the following phrase the title of this section until I stumbled upon Chris Hipkins using these exact words to critique the government’s 2026 Budget: “You cannot cut your way to growth.”
Austerity during a period of economic stagnation does not bring back growth. Fiscal restraint in the public sector has a chilling effect on the rest of the economy; it stalls growth even further. This results in higher unemployment, meaning higher welfare spending, and meaning the size of government does not fall by the forecast amount because GDP growth is too slow — and on and on until after years of chronic underinvestment, the entire system starts to freeze up.
We’ve already experienced decades of underinvestment in public services and infrastructure; we already have a healthcare system on the brink of collapse, a housing crisis and growing poverty. More austerity will simply make every problem we have worse — and by the sound of their rhetoric, you’d think Labour’s leaders know this.
Treasury’s forecasts on growth, inflation and job creation are likely far too optimistic. That means that the austerity necessary to reduce welfare spending and meet these fiscal targets will only get worse. The only way out is to abandon the illusion that you can cut your way to prosperity.
No Justification
New Zealand has amongst the lowest levels of public debt in the developed world. Our gross debt is 57.1% of GDP, slightly higher than Australia and miles behind most major OECD economies; our net debt is 28.3%, lower than Australia. This makes us the envy of the world.
Nicola Willis’ justification for austerity is to spin the narrative that we are one wrong move away from a public debt crisis. Accepting your enemy’s framing is always a trap, and Labour has fallen for this one hook, line and sinker; in spite of previous rhetoric, the party leadership has capitulated in its fiscal plan to National’s narrative that there is no alternative to austerity.
If a Labour-led government goes back on its promises to run surpluses, reduce debt and shrink the state, they will be pilloried by National, the media and the right-wing lobby machine. Hipkins and Edmonds have staked their credibility on a promise to make unjustifiable and entirely unnecessary reductions in government spending that cannot be fulfilled without alienating most of their support base.
Labour’s own projection expects them to reach a surplus in 2028/29 worth 0.4% of GDP, once Core Crown expenses have been reduced to 31.2%; the forecast surpluses only increase from there. Even accepting as Edmonds has the need to “balance the books,” this fiscal plan clearly shows that there is no need to reduce the size of government below 31.6% of GDP. The first 0.6% reduction in spending is to eliminate the deficit, and the other 1.2% is to prioritise shrinking the state over every other policy area.
But the New Zealand government does not need to balance the books. We are a rich country with many assets and very low public debt. We can afford to run deficits to tackle the real crises in our society — poverty, inequality, homelessness, the health crisis, climate change, and the alarming level of private debt that has built up over years of public austerity.
If the books must be balanced, then Labour has already shown us where to find the money. The 2023 IRD report commissioned by then-Revenue Minister and wealth tax supporter David Parker revealed that the 311 wealthiest families in Aotearoa pay less than half the tax rate of the average Kiwi household. Even a very modest wealth tax, as proposed by Parker or by the Greens in this election, would raise significant revenue that would reduce the justification for austerity even further.
Austerity harms people; it harms the economy; it is politically poisonous for any social democratic government to pursue. Whether they win or lose this election, Labour’s 2026 fiscal rules must be cast where they belong — into the dustbin of history.
Elliot Crossan is a socialist writer, researcher and activist. He is the Chair of System Change Aotearoa and Co-Chair of Auckland Action Against Poverty. Subscribe to his Substack page to read more.
You can view Elliot’s full report comparing Labour and National’s fiscal plans through a series of charts here. You can also watch his interview about this subject with Bernard Hickey here.
- Core Crown expenditure is the Treasury’s way of measuring day-to-day government spending. It excludes Crown entities and state-owned enterprises. ↩︎