Budget serves up few dramas, no sizzle and ‘a squishy bit in the middle’

Friday, 31 May 2024

ANALYSIS: Nicola Willis’ first Budget proved a straightforward affair, delivering tax relief, additional spending on infrastructure and heavier borrowing that was much as expected.

There was little sign of the extra “sizzle” that Auckland Chamber of Commerce chief executive Simon Bridges was hoping might give businesses’ flagging spirits a lift.

Instead, the Government appears to be banking on fiscal discipline and the natural swing of the business cycle to lift the economy out of the gloom.

The Treasury expects the Government will need to borrow an extra $12 billion over four years over and above its previous forecasts, but whether that is to pay for tax cuts, as Labour leader Chris Hipkins immediately claimed, is an existential question.

It’s about as productive as asking which came first, the chicken or the egg.

The cost of the extra borrowing is in the same ballpark as the $9.7b net cost of tax changes that Willis announced in the Budget.

But it is also very similar to the savings the Government is making through spending cuts, so when it comes to “which is paying for what“, anyone can take their pick.

Of more practical concern to most Kiwis may be whether the Budget will be viewed as fiscally responsible, given the Government has — as expected — pushed out the planned return to government surplus by yet another year, to the year ending June 2028.

If it gets the thumbs down from financial markets or the Reserve Bank, borrowers could expect an even longer road to lower interest rates.

In a bad case scenario, a credit downgrade from international rating agencies could increase borrowing costs and cause a slower return to economic growth.

ANZ chief economist Sharon Zollner saw no major surprises in the Budget and observed little immediate market reaction on the currency and the bond markets.

The bank had expected “only” an extra $10b of borrowing, but Zoller says she doesn’t believe the Budget will be a game changer for the Reserve Bank.

“They would probably have preferred tax cuts to be deferred. But on the other hand, they’ll be pleased to see the discipline of a public commitment to getting back to surplus by 2027-28,” she says.

Moody’s Analytics associate economist Shannon Nicoll also doesn’t see the Budget moving the dial on interest rates, but he says it is a bit less contractionary that he had expected, meaning it was less likely to have a dampening effect on inflation.

The $1.5b surplus the Treasury has forecast for the year ending June 2028 was a bit healthier than his pre-Budget forecast of a $400m surplus.

“But there's this ‘squishy middle’ in the forecast period as well, where the deficits are a little larger,” he says.

BNZ research head Stephen Toplis is perhaps a little more downbeat.

“If you ignore everything else and just look at the policy measures, then the Budget looks roughly fiscally neutral, which means it's not going to have any impact on inflation,” he says.

But the problem lies in the Treasury’s forecast of lower economic growth, which has cut the Government’s forecast tax take by $28 billion over the five years to June 2028, he says.

“They've got a bigger ‘hole’, which they have to fund”, and he notes the Reserve Bank said in its last monetary policy statement that it had reduced its estimate of the growth the economy was capable of.

“The same level of spending will be more inflationary than it was before they made that change. Put those two things together, and you'd have to say that the whole thing to them will look a little bit more inflationary,” Toplis forecasts.

In the same vein, he notes that while the Treasury concluded the Government’s fiscal policy was contractionary, it also said it had “and will continue to make a greater contribution to inflation pressures than previously assessed”.

“What we do know from the Budget is that the ‘fiscal impulse’ for the two years ended June 2025 is greater than the Treasury had estimated in its Half Year Economic and Fiscal Update in December, by a reasonable amount,” he says.

Toplis doesn’t believe that will be enough to tip the Reserve Bank into further raising interest rates.

“But the way I would voice it, is there's absolutely nothing in the Budget that would make the Reserve Bank more relaxed, and quite possibly it will feel a bit more nervous.”

As for the absence of sizzle, Zollner notes that not every policy initiative the Government comes out with needs to be in the Budget.

“The emphasis was certainly on prudence rather than ‘going for growth’,” she says.

“But the Budget isn't everywhere you would expect to see all policy initiatives. There are policies they can do that are separate from the Budget.”