Budget Policy Statement a sobering reality check - Jenée Tibshraeny

OPINION

The Government’s Budget Policy Statement makes for a sobering reality check that shouldn’t really surprise anyone.

The Treasury expects the economy to slow more quickly than expected.

Accordingly, the Government’s tax take is likely to underperform, making it more difficult for it to deliver on its promises without borrowing more and pushing out the return to surplus.

However, even if economic growth hadn’t slowed as much as it has, it was always going to be difficult for the coalition Government to cut taxes, reduce public sector spending, ramp up the delivery of infrastructure and get the books back to surplus by 2026-27.

As I said in late December, following the release of the Treasury’s Half-Year Economic and Fiscal Update - something is going to have to give.

The Government was going to need to make tradeoffs.

With the economy expected to be in a worse state than expected in December, those tradeoffs will now be starker.

Finance Minister Nicola Willis is adamant the Government will provide income tax cuts targeted at low and middle-income earners from July 1. Coalition parties are still working out exactly what these cuts will look like.

To provide tax relief (including for property investors), Willis accepts the books will likely have to stay in deficit for at least a year or two longer than previously expected.

No doubt she figured she’d take less of a hit politically, slowing the return to surplus (to 2027-28 or later) than telling people they can’t get the tax cut central to National’s election campaign.

Looking ahead, Willis will continue emphasising the deteriorating economic outlook to mask the fact delivering enough to keep three parties happy was always going to be tough.

The downgrade in gross domestic product (GDP) growth Treasury outlined on Wednesday is notable.

But there was always a risk growth was going to be super sluggish.

Finance Minister Nicola Willis accepts the books won't be back in surplus by 2026/27 - when National said it would get them back in the black by. Photo / Mark Mitchell

The Reserve Bank is openly using high interest rates to engineer a recession to curb inflation.

Globally, much of the debate over the past couple of years has centred on whether policymakers can bring economies back to equilibrium post-pandemic without causing too much damage in the process - huge job losses, mortgage defaults, etc.

New Zealand looks on track to achieving a “soft landing”, but a “harder-than-expected soft landing” was always well within the realms of possibility.

The coalition parties may need to confront the fact they over-promised and risk under-delivering.

While there can be very good reasons for books to be in deficit, staying here for too long comes at a cost. Rather than repay debt, it’s simply rolled over, all the while new debt is issued to pay for new spending commitments, as well as interest on the old debt.

Bank economists believe the Treasury may need to issue $10-15 billion (9-13 per cent) more bonds (debt) in the four years to 2027-28 than was forecast in December.

These estimates are still highly uncertain, as Willis is yet to detail exactly what the income tax cuts will look like, and how they will be funded.

We will have to wait until the Budget is released on May 30 to better understand who will pay for the tax relief on offer.

Among other things, we know government departments have to identify spending cuts of up to 7.5 per cent, commercial and industrial property owners will be taxed an extra $575 million a year, as they’ll no longer be able to write off depreciation as an expense, and welfare recipients will likely receive smaller increases to their benefits due to a change to the way they’re indexed.

It’s difficult putting together a Budget when you’re in a three-party coalition and the economy is still in a state of flux after seismic interventions were made to keep things buoyed in the face of Covid.

While it’s turned out we have lower-than-expected growth, we could quite easily have had even higher-than-expected inflation.

But again, this uncertainty, or downside risk, wasn’t a secret going into the election.

The coalition Government might have to start reining in its attacks on the Labour-led Government for under-delivery, as it too might struggle to meet all its KPIs.

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.