Budget 2024: Budget unlikely to win friends at Reserve Bank

Reserve Bank of New Zealand Governor Adrian Orr. Photo / Mark Mitchell

Finance Minister Nicola Willis’ first Budget may not win any friends at the Reserve Bank as it struggles to get inflation under control.

Economists said the Budget could be inflationary, which might get in the way of the central bank’s quest to get the Consumers Price Index back to within its 1 to 3 per cent range from its last measured rate of 4 per cent.

ASB Bank said the weaker economic backdrop had translated into a softer fiscal outlook, with a delay in the return to surpluses until 2027/28 and a higher profile for Crown debt.

The Government’s bond tender programme increased by $12 billion over the five-year forecast period, which was around the middle of market expectations.

There was no reaction in the financial markets to the release.

“Fiscal policy settings do not appear to be as contractionary and front-loaded as in the December 2023 update,” ASB senior economist Mark Smith said.

“This will not be greeted fondly by the Reserve Bank, which is still battling to restrain domestically-generated inflation pressure,” he added.

Smith told the Herald the Government’s measures were “not as inflation friendly” as some people might have thought.

“The fiscal stance was not as contractionary as it was in the last fiscal update,” he said.

“And the Reserve Bank will be quite worried about the timing of those tax cuts coming through in July.”

Harbour Asset Management fixed interest and currency strategist Hamish Pepper said the Reserve Bank’s next decision on its official cash rate (OCR), due on July 10, could be telling. The OCR currently sits at 5.5 per cent.

“If they come out in July and say that the Budget was more inflationary than expected, then that’s the bit that will get the market going.”

Kiwibank chief economist Jarrod Kerr said the Reserve Bank would have been keen on a more modest Budget.

“I guess from the Reserve Bank’s point of view, they would have loved to have seen more restraint,” he said.

“But don’t think it’s too inflationary. In fact, I don’t think it’s a game-changer at all.”

Kerr said last week’s more hawkish-than-expected Monetary Policy Statement from the central bank was “a warning shot” to all in the economy that inflation is still a concern.

“Unfortunately I think the Government is standing on quicksand while I think they thought they might be standing on a beautiful Kiwi beach,” Kerr said.

BNZ said in a commentary that, despite the government’s conservatism, it looked like the “fiscal impulse” would be greater than the RBNZ had assumed, putting upward pressure on the cash rate while flying in the face of Treasury’s assumption that it starts falling this year.

S&P’s view

Ratings agency S&P Global said an anemic economy and forecasts for subdued tax receipts are further delaying New Zealand’s post-Covid fiscal consolidation.

“We still expect the country’s fiscal deficit to gradually narrow over the next few years, though net general government debt could stabilise at a higher level than we previously predicted,” S&P said in a report.

S&P noted a weaker economic outlook was weighing on tax revenue and that restrictive monetary policy has crimped household spending and sentiment.

Public debt is not a material constraint on New Zealand’s sovereign rating, S&P said.

“We anticipate net general government debt could stabilise at around 35 per cent of GDP, a few percentage points above our previous expectations.

“To achieve debt stabilisation, discipline on the expenditure side of the ledger will be crucial, in our view,” the agency said.

- Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.