The Government’s books are in worse shape than they were in May, when Finance Minister Grant Robertson released the Budget and the Treasury published its last set of forecasts.
While the Crown’s tax revenue grew to $112.4 billion in the year to June, it came in $2.9b lower than forecast in May, as the slowing economy saw businesses pay less tax than expected.
Consequently, the Government’s budget deficit was $3b deeper than anticipated, at $10b.
The Treasury now forecasts the books returning to a small surplus in 2026/27 – a year later than what was forecast in May.
If this eventuates, the books would have been in the red for seven years – a year longer than they were in the deficit in the wake of the Global Financial Crisis and Canterbury earthquakes.
The situation meant the Treasury expanded its forecast debt issuance programme again, in line with economists’ expectations.
It believes it will have to issue $129b of New Zealand Government Bonds in the four years to 2026/27 - $9b more than forecast in May and $29b more than forecast in December (before Cyclone Gabrielle and unrelated additional spending commitments were made in Budget 2023).
Importantly, the forecasts are based on a set of assumptions – one of which is that policies committed to by this Government eventuate.
The books could look very different depending on the policies the new Government implements and how the volatile global economy evolves.
The Treasury underlined this point in its Pre-election economic and fiscal update (Prefu).
It said if operational expenditure in Budget 2024 was increased by around $1b more than the $3.5b planned for 2024/25 (and operational allowances were a little larger thereafter), the Budget deficit would deepen and not return to surplus over the 10-year projected period.
Expanding operational expenditure by $4.5b, rather than $3.5b in Budget 2024 is a plausible prospect. The Government increased its operational expenditure by $4.8b in this year’s Budget.
The Treasury also noted that in recent times, the Government consistently ended up spending more than planned.
“If this trend was to continue and there was no corresponding offset from either an increase in revenue or a reduction in expenses, there would be an adverse impact on the fiscal outlook,” it said.
Fulfilling existing commitments without more debt or tax hikes will be tough.
The Treasury noted “the remaining Budget operating allowances should be broadly sufficient to meet remaining critical cost pressures not already funded, however, significant trade-offs will be required”.
“There could also be additional demand (eg, population changes) that could add pressure to future Budget allowances.”
Looking towards the October 14 election, political parties may struggle to credibly argue they can deliver on their promises without compromising the state of the books.
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.
