Meeting promises on quicksand
Budget 2024 narrowly delivers on election promises, prioritising fiscal neutrality amid declining revenue projections, according to Kiwibank economists.
Finance Minister Nicola Willis faces a challenging economic landscape, with a downgraded economic outlook and lower-than-expected tax revenue.
“The economy is smaller than expected, and the outlook received a downgrade,” said Kiwibank’s Mary Jo Vergara and Sabrina Delgado (pictured above, left to right).
This means the actual tax take, and the forecast tax take, keep sinking.
Rising debt and fiscal constraints
Treasury expects lower growth, weaker productivity, and more debt. Economic growth is projected to lift slightly in 2025 but remains subdued.
The operating surplus is forecasted for 2028, with the debt management office needing to issue an additional $12 billion beyond 2025.
Net debt is expected to rise to 43.5%, staying above previous projections.
The debt management office will need to issue an additional $12 billion from 2025 to 2028. Consequently, net debt will rise to 43.5%, remaining above previous projections.
“It’s a difficult budget for any government to deliver,” Vergara and Delgado said. “We’ve been through a recession, so the temptation is to expand and spend. But inflation remains too high and the RBNZ is on the war path with restrictive interest rates. So, delivering a fiscally expansive budget would have fuelled inflation and poked the RBNZ bear.”
Tax relief and spending adjustments
The government delivered on tax cuts and introduced new personal income tax thresholds, an increase in the working for families in-work tax credit, and adjustments to the independent earner tax credit.
The tax package, which includes measures for property investors, will cost $3.7 billion but is balanced by savings and other revenue initiatives.
Investments in infrastructure and social services
Budget 2024 includes a $7bn top-up to the multi-year capital allowance, with significant investments in regional infrastructure, roads, rail, and public transport.
Additionally, $8.15bn is allocated to health over the next four years, primarily to cover cost pressures, and $3bn for education to create new schools and classrooms.
Softer economic outlook
Treasury has revised its forecasts for the New Zealand economy.
Treasury now expects the economy to shrink by 0.2% in the year to June 2024, down from the previous forecast of 1.5% growth. Growth is projected to be 1.7% in 2025, lower than the earlier estimate of 2.1%, and then average 2.9% over the next three years as interest rates ease and the tax package boosts demand.
“Rightly so, Treasury made the point to attribute the soft economic environment to a mixture of high interest rates, still high inflation, and weak domestic and global demand,” the economists said.
Productivity concerns
Lower productivity estimates, particularly in labour productivity, are a major factor in the softer economic outlook.
“New Zealand has seen slowing productivity growth of just 0.2% per annum over the past 10 years – compared to the 1.4% per annum rate over the prior 20 years,” the Kiwibank economists said.
Fiscal and inflation implications
The budget faces deeper operating deficits and lower forecasts for tax revenue. The government’s books have deteriorated, with core Crown revenues falling short of forecasts.
Smaller operating allowances provide some offset, but fiscal settings are expected to remain contractionary, posing challenges for the Reserve Bank’s inflation control efforts.
“Deeper operating deficits and a smaller forecast tax base mean a lift in the debt profile,” the Kiwibank economists said. “The planned issuance profile is below.”
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
