Budget 2024: $12 billion of extra borrowing, return to surplus delayed a year

Thursday, 30 May 2024

The Government expects to need to borrow an extra $12 billion over the next four years, over and above its previous borrowing plans, and has delayed its projected return to surplus by a year to June 2028 as a result of the economy hitting a pot hole.

Finance Minister Nicola Willis was insistent it did not view its package of tax cuts, which will cost a net $9.7b over the period, as being funded by the extra borrowing, but rather from savings it is also making.

The chief culprit for the worse forecasts is that Treasury is predicting the Government will bring in much less tax than expected, but the Government also appears to be having a tough job bringing down government expenses as fast as it would like.

Willis said the Government was “reducing core Crown expenses towards 30% of GDP” but Treasury’s projections see those still accounting for 31.1% of GDP in four years’ time, down from 32.3% in the year to June last year.

“We did have a choice in this Budget; we could have taken extremely dramatic moves to radically cut spending in a short period of time. The judgment we collectively made in Cabinet was that would be bad for New Zealand and for New Zealanders,” she said.

Updated forecasts released by the Treasury on Budget Day tip GDP, which is the main measure of economic activity, will have declined by 0.2% in the year to June.

But the Treasury is forecasting the economy will gradually strengthen from the second half of this year, thanks to a recovery in tourism and declining inflation and interest rates.

It is forecasting GDP will rise 1.7% in the year to June next year and at the respectable annual rate of 2.9%, on average, between July 2025 and June 2028.

Willis took heart from that.

“We are able to see better times ahead. While times may feel tough for everyday Kiwis right now, the economy will recover and inflation will come down,” she said.

The Treasury is predicting the Government will bring in about $28b less tax than previously expected in the five-year period ending June 2028 than it had forecast as recently as December.

Only a little over a third of that could be attributed to the tax cuts announced in the Budget.

The tax shortfall, and continued high growth in the Government’s core expenses, would see the Government’s deficit continue to rise in the near term, the Treasury warned.

It now expects the wafer-thin $140 million operating (OBEGAL) surplus it had pencilled in for the year ending June 2027 to turn into a $3.1b deficit, before returning to a $1.5b surplus the following year.

The bottom line is it expects the Government’s net core debt will have climbed by a whopping $54b between June last year and June 2028, when the Treasury’s forecast ends, to hit almost $210b or 41.8% of GDP.

The Treasury said the key reason it had downgraded its economic growth forecasts was that it had “reassessed” the country’s future productivity growth.

The deterioration in the Government’s position, including the extra borrowing and the delayed return to surplus, would come as no surprise to financial markets, Infometrics principal economist Brad Olsen said.

“The declines in the economy are steep,” and the Government was not reducing spending by as much as the decline in the tax take, he said.

“The Government hasn’t wielded the sword as much as it perhaps could have.”

But the fiscal outlook meant it would need to stay in “a very narrow lane” in future Budgets, he said.

Olsen noted the Government had its cut operating allowances in the period up to June 2028 by $5.5b, from the Treasury’s December forecasts.

“There may be some new initiatives but there will need to be just as many cuts each and every year.”