Tight Budget confirmed as Willis says surplus even by 2028 ‘not a given’

Wednesday, 27 March 2024

The Government will provide “urgently-needed” tax relief in the Budget but will have less than the previously expected $3.5 billion to allocate to new spending initiatives, Finance Minister Nicola says.

Despite the tough circumstances, Willis said it would be a “great Budget” that put money into people’s pockets.

“Front-line services such health, education and law and order will get more funding,” but any funding would be “targeted and within our means”, she said.

The Government would not need to “borrow extra” to fund its tax relief and that would not add to inflationary pressures as that would be paid for through a combination of “savings, reprioritisations and additional revenue sources”, she said.

Releasing the Government’s Budget Policy Statement, Willis said its goal would be to restore fiscal discipline and “right-size the Government’s footprint”.

But she said returning the Government’s accounts to surplus by the year ending June 2027 would “almost certainly not be achievable” and doing so by the following year was “not a given”.

The Treasury had forecast in December that the Government would return to surplus by June 2027. As late as December 2022, it had been forecasting a return to surplus by the year ending June 2025.

The International Money Fund along with many bank economists had already assumed the 2027 target would not be met, but had not appeared to begin questioning whether a surplus might be pushed back as late as June 2029.

Willis said the Government would not chase a surplus “in any one year at any cost”, given the implications that could have for spending on front-line services.

ANZ chief economist Sharon Zollner said it couldn’t be assumed that just because the Government was saying it wouldn’t need to borrow extra for tax cuts that there would be no additional borrowing announced in the Budget.

Westpac senior economist Darren Gibbs forecast ahead of the Budget Policy Statement that the Treasury would need to increase the size of its bond-borrowing programme by $7 billion to $10b.

But Gibbs said the forecasts in the Budget Policy Statement were “pretty poor” and it was possible the level of additional borrowing might need to be higher.

ANZ senior economist Miles Workman said that could now fall in the range of $10b to $12b over four years.

Commenting on Willis’ assurance there would not need to be any extra borrowing for tax relief, Gibbs said that could be subjective.

“It’s all a bit ‘smoke and mirrors’. They are borrowing for ‘something’. You can decide yourself what you think they are borrowing for.”

Willis said the Treasury had downgraded its forecast for economic activity because downward revisions of GDP data last year had shown the economy was doing “worse than expected” in the past.

The Treasury had concluded as a result that “the productive capacity of the economy” was lower than it had thought, she said.

It is now forecasting economy activity will total nearly $43 billion less in the period up to June 2028 than it had expected in December and that tax revenues up to then would be almost $14b lower than it thought then.

Willis said the Government would return to using “net core Crown debt” as its headline measure of reporting the Government’s net debt.

She said that was more meaningful than the alternative debt-measure highlighted by the former government that incorporates assets such as funds accumulated by the NZ Super fund and which can therefore be thrown around by sharemarket movements.

The Government’s goal would be to reduce net core Crown debt from its current level of 44% of GDP down to a band of between 20% and 40% of GDP and then keep it there, the Budget Policy Statement said, but without stipulating a time frame.

Zollner said the Government was giving itself some wiggle room and doubted its stance would influence financial markets, which would instead be waiting on the figures in the Budget.