Job of returning to surplus has ‘got a whole lot harder’, says Finance Minister

Wednesday, 20 December 2023

Finance Minister Nicola Willis has accused the former government of financial “vandalism” after the Treasury confirmed the outlook for the economy and the Crown’s fiscal position were both deteriorating before the coalition government took power.

Willis said the Treasury’s new forecasts revealed a shrunken surplus, bigger borrowing requirements, ”greater fiscal risks“ and higher debt than forecast.

She accused the former government of having an attitude problem, promising a “new chapter”.

“The culture of fiscal discipline has been degraded and it is critical we rebuild that culture for the long term.

“Kiwis should approach Christmas knowing better economic management has arrived and lower taxes are on the way.”

When it released its pre-election forecasts in September, the Treasury had predicted the government would return to an operating surplus of $2.1 billion in the year to June 2027.

But that was revised down to a wafer thin $140m surplus in its Half Year Economic and Fiscal Update (Hyefu), which was released on Wednesday and which captured Treasury’s predictions during November, before the formation of the new government.

Treasury secretary Caralee McLiesh said the deterioration from its previous forecast was mainly due to a reduction in expected tax revenue and higher finance costs.

“Higher interest rates are weighing on consumer expenditure and investment,” she said.

The Treasury forecast in its Hyefu that the economy would grow by a lacklustre 1.5% annually over the next two years, with McLiesh saying that would be driven “entirely by population growth”.

But she cautioned that downward revisions to past economic growth reported by Stats NZ earlier this month, pointed to “even lower growth”, than that.

The weaker economic forecast flowed through to a deterioration in the Government’s fiscal outlook, she said.

The Treasury said that as of November 24, before the formation of the new government, it was estimating the Government would need to increase its bond borrowing programme by an extra $7 billion over the next 2.5 years.

Net debt was expected to peak at almost $108b or 23.2% of GDP in the year to June 2026.

That was up from a forecast peak of almost $104b in its pre-election forecast, and of less than $96b at the time of the last Budget in May.

Willis said it remained the Government’s intention to return to surplus as soon as possible, but the job of delivering a surplus in 2027 had got a whole lot harder and would require “all hands on deck”.

The country was grappling with a “toxic trio” of high and sticky inflation, high interest rates and reduced economic output, she said.

Willis accused the former government of leaving numerous “fiscal cliffs”, including over funding for the GeoNet seismic monitoring service and the Civil Aviation Authority’s Aviation Security Service.

The Treasury said new risks to the government accounts included an increase in the prison population since April and higher education costs driven by “curriculum changes, inflation and population growth”.

Labour finance spokesperson Grant Robertson said Willis’ “fictional narrative” about the previous government ignored the reports of global credit-ratings agencies which increased or maintained their ratings during the former government’s tenure.

“The facts are that the New Zealand economy is around 7% larger than before Covid, unemployment has been at record lows, wages are rising and our debt levels are lower than most of the economies we compare ourselves too,” he said.