Incoming Government given ratings warning not to let surplus slip

The incoming Government has been warned by ratings agency Fitch it must stick to its spending promises.

In a note published over the weekend, Fitch gave the finances of the outgoing Government and the fiscal plan of the incoming Government the seal of approval, but warned the new Government should stick to its plan of delivering a surplus in 2027.

Labour went to the election with a promise to deliver a surplus of $2.1 billion in 2027. National’s fiscal plan said it would deliver a surplus of $2.9b that year.

Fitch warned the incoming Government against “slippage”, which would see the return to surplus kicked out yet again.

The outgoing Government’s 2027 surplus had slipped multiple times. In December 2021, a surplus was forecast for 2024.

New Zealand currently has an AA+ rating from Fitch, with a stable outlook. The note said an “important” factor in awarding this good rating was a “commitment to return to fiscal surplus and putting the ratio of government debt/GDP on a downward trajectory”.

But the agency warned there were “risks” to its rating, in particular New Zealand’s recent record of pushing out the return to surplus.

“[P]ersistent fiscal slippage (the May target of returning to fiscal surplus in FY26 was itself one year later than previously forecast) and a more challenging macroeconomic backdrop have raised risks to Fitch’s deficit and debt projections at our August sovereign review,” the note said.

Fitch still forecasts debt to peak at about 47 per cent of GDP in 2024.

The note said there was “a long-standing commitment to prudent fiscal policies across the political spectrum, and the National and Labour parties outlined similar fiscal plans in their election campaigns, both pledging to return to surplus by FY27″.

The note described National’s tax cut package as “modest” and funded through “expenditure reductions and efficiencies”. It did not comment on the doubts expressed about the affordability of the plan during the election campaign.

The note came as New Zealanders wait for the next Government to be formed.

The three parties have some alignment on fiscal policy, with both Act and National agreeing that spending cuts and reprioritisations will be needed.

All three likely governing partners are committed to reinstating deductions for interest costs from landlords’ tax bills. Act and National want to pare back the bright line test, a form of capital gains tax, with Act wanting it gone completely.

The parties are all offering income tax cuts of some kind, although Act and National have theirs taking effect immediately, with New Zealand First wanting to wait until the books were in slightly better shape.

At this stage, National Party leader and the next Prime Minister Christopher Luxon has said Nicola Willis will be his Finance Minister. Willis is the only person to have had her portfolio confirmed.

Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.