ANALYSIS
Finance Minister Nicola Willis has mostly delivered what she promised she would in Budget 2024, all the while making a last-minute commitment to running an even tighter ship than planned.
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Income tax brackets will be adjusted in line with what National campaigned on to save taxpayers up to about $1043 a year.
Changes will take effect on July 31 – a month later than what was promised.
While spending on health, education and infrastructure will get a boost, Willis hasn’t included any surprise spending initiatives in the Budget.
Nor has she unveiled major increases to taxes or levies to pay for the income tax relief.
Rather, spending across the public sector will likely need to continue being cut over the next few years, should the Government remain committed to getting the books out of the red in the near-term. This could result in a cut in services.
Willis committed an additional $3.2 billion to covering day-to-day operating costs in Budget 2024, the lowest amount since Budget 2018.
She had planned to increase operational expenditure by $3.5b, but changed her mind at some stage after April 5, when the Treasury finalised its forecasts.
She also downsized future operational allowances to only $2.4b for each of the next three Budgets.
The thorn in Willis’ side is that the economy is underperforming, meaning the Government is collecting less tax revenue than it was banking on.
Accordingly, it’s going to have to borrow more than was planned when the Treasury last published a full set of economic forecasts in December.
While Willis pledged to reduce debt, she is in fact going to have to borrow more.
The situation is a bit like a someone taking out an overdraft to cover their living costs, because they’ve taken a pay cut, and then stopping their Netflix subscription to pay for a new couch.
The Treasury expects the operating balance before gains and losses (Obegal) to return to surplus ($1.5b) in 2027-28, a year later than was forecast in December.
The delay comes as the Treasury has downgraded its gross domestic product (GDP) forecasts for 2023-24 and 2024-25.
It reckons this economic outlook downgrade will account for a third of the $28b reduction in tax revenue it foresees over the five-year forecast period.
It put another third of this reduction down to tax cuts and another third down to the tough economic environment seeing businesses pay “significantly” less tax than forecast.
The Government is going to have to borrow more to plug the gap.
Treasury increased its forecast New Zealand Government Bond issuance programme by $12b in the four years to 2027-28 to $126b.
This aligns with what economists were expecting.
The Treasury also forecast net core Crown debt peaking at 43.5 per cent of GDP in 2024-25, before tracking down to 41.8 per cent by 2027-28. In December, it believed this figure would have fallen to 37.6 per cent.
The adjustment means Willis won’t get net core Crown debt below 40 per cent of GDP anytime soon, as she pledged to do in her March Budget Policy Statement.
She said she ultimately wants this figure to sit between 20 and 40 per cent of GDP.
Coming back to Willis’ last-minute operational allowance squeeze, the Treasury warned this would likely leave the Government without enough money to meet cost pressures to maintain existing services.
It estimated the allowance would need to increase by $2.5b (rather than Willis’ $2.4b) in Budget 2025 simply to maintain the status quo.
“This means any shortfall and spending on new initiatives will need to be offset by expenditure savings, reprioritisation or revenue raising policy changes for each of the next three Budgets for the Government to manage within the signalled budget allowances,” the Treasury said.
“This will involve difficult choices and trade-offs for the Government which are likely to become harder over time.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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