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For many New Zealanders, the big question in Thursday’s Budget will be: how big is my tax cut?
But for economists, and the international rating agencies that assess the country’s financial position, the big focus is on the state of the Crown accounts.
How big willthe deficit be? How long until the Government can get back to surplus? And how much will it need to borrow in the meantime?
The overall fiscal impulse of the Budget will also play a part in the equations of the Reserve Bank (RBNZ) as it judges the impact of inflation and what that might do to its interest rate moves.
“The tax cut package will be sold as being fiscally and economically neutral, with spending cutbacks broadly matching the tax cut package. This may not be the case,” said ASB senior economist Mark Smith.
“The RBNZ has shown little tolerance for fiscal largesse and will be hoping that the Budget delivers a more front-loaded and larger contractionary impact. If not, OCR cuts could be pushed further back undoing much of the support tax cuts were meant to deliver.”
The main focus of Budget 2024 would be on delivering key election promises and whether the Government succeeded in delivering a fiscally neutral tax package, said ANZ senior economist Miles Workman.
“But the real test of the new Government lies ahead: a credible path back to surplus needs to be signalled and the Government needs to stick to it. That implies the Government will probably need to get better at doing more with less and reprioritising from within existing baselines.”
Workman said an obegal surplus for the 2027/28 fiscal year is achievable despite the weaker economy but will require lower operating allowances beyond Budget 2024 than signalled in the half-year economic and fiscal update (HYEFU).
Obegal is the operating balance before gains and losses, in other words, the difference between revenue and expenses – determining whether the Government is dealing with a deficit or a surplus.
“If the Treasury do forecast a surplus in the 2027/28 fiscal year, it’ll probably be wafer-thin and therefore vulnerable to being revised away in subsequent forecast updates,” Workman said.
Compared to Treasury’s HYEFU, ANZ has estimated a $10 billion increase in borrowing (via bond issuance) will be required to cover deficits to June 2028.
“Net core Crown debt is expected to remain on a clear trajectory to 40 per cent of GDP, but may not hit that milestone over the Treasury’s forecast horizon given the outlook for a smaller nominal economy and more debt,” Workman said.
Westpac senior economist Darren Gibbs agreed that a projected surplus for 2027/28 was likely but estimated higher levels of bond issuance might be needed.
“Budget 2024 will provide the first complete official costings of the new Government’s spending and revenue initiatives,” Gibbs said.
“A weaker operating balance and a topped-up capital allowance will likely increase the government’s borrowing requirement by about $15b over the four-year forecast period,” he said.
“The increase in the borrowing requirement could be smaller if tax cuts have been scaled back or spending control is tighter than we have assumed. But it could also be larger if the Treasury’s growth forecasts are revised down more than we have assumed.”
Regarding revenue, the focus would be on the Government’s tax cuts, he said.
“Specifically, whether the cost of the tax threshold indexation adjustment will be as large as the $9b (over four years) that was proposed by the National Party during the election campaign, or whether it has been pruned given the weaker fiscal backdrop that has emerged since the election.”
He noted Finance Minister Nicola Willis indicated in her pre-Budget speech that 83 per cent of income earners over the age of 15 would benefit from tax relief, but she did not indicate whether that relief would be as specified during the campaign.
Finance Minister Nicola Willis delivers a pre-Budget speech at the Employers and Manufacturers Association. She has said 83 per cent of income earners over the age of 15 will benefit from tax relief. Photo / Ben Dickens
The deteriorating economic outlook was not helping the Government, ASB’s Smith said.
“The run of bad news on the economy has considerably overshadowed any snippets of light. This will almost certainly result in the Budget showing larger fiscal deficits and higher Crown debt relative to the 2023 half-year economic and fiscal update. The initial fiscal hole is already larger.”
ASB has also estimated extra borrowing of between $10b and $15b will be required before the return to surplus.
“All in all, Budget 2024 is just the beginning of what’s likely to be a very challenging few years ahead as the Government focuses on getting the books in order,” ANZ’s Workman said.
“From a macroeconomic perspective, this could mark the beginning of a new phase in the post-Covid cycle where fiscal policy is set to become a better ally to monetary policy than it’s been over the past couple of years.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
