Fiscal caution amid challenges
The New Zealand government closed out May with the release of a much-anticipated budget, characterised by its lack of “bells, whistles, or lamingtons,” according to Kiwibank economists, Jarrod Kerr, Mary Jo Vergara, Sabrina Delgado (pictured above, from left to right).
The budget, which Prime Minister Christopher Luxon described as straightforward, followed through on election promises of tax cuts, though it included no extra frills or traditional celebrations.
Fiscal restraint amid economic challenges
Finance Minister Nicola Willis presented the budget during what Kiwibank economists described as standing on economic quicksand, with the nation facing a smaller-than-expected economy and downgraded forecasts.
This revised outlook necessitates deeper cuts and more borrowing, with Treasury projecting weaker growth, lower productivity, and rising debt levels. Notably, the debt management office will need to issue an additional $12 billion from 2025 to 2028, as net debt is expected to rise to 43.5%.
Tax changes and policy adjustments
The government’s fiscal strategy was to balance the tax cuts with other financial adjustments to remain neutral.
“The promised tax cuts appear to be fiscally neutral,” the Kiwibank economists said. “That means they gave (tax cuts) with one hand and took (spending cuts and some other tax hikes) with the other hand.”
Significant changes include new personal income tax thresholds starting July 31, adjustments to the Working for Families in-work tax credit, and changes to property investment taxation, including the restoration of interest deductibility and a reduction in the Brightline test duration.
Global economic outlook
Looking beyond New Zealand, the week ahead is anticipated to be eventful on the global stage, with central banks in Europe and Canada expected to adjust interest rates in response to their respective economic conditions.
The European Central Bank is poised for a 25-basis point cut, while the Bank of Canada is also expected to cut rates amid easing inflation, with economists predicting a reduction to 4.75% from 5%, Kiwibank reported.
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