Nicola Willis: ‘Difficult trade offs’ lie ahead

Tuesday, 17 December 2024

The half year budget update has confirmed a weaker-than-expected economy, driven by weak productivity growth which has hit tax revenues and has pushed back the Government’s forecast return to surplus.

Tax revenue is down, deficits are up and the surplus projection has been pushed out to 2028/29, although the deficit starts narrowing from 2025/26.

Finance Minister Nicola Willis had already dropped strong hints that a forecast return to surplus would be pushed back once again, by at least a year, to the year ending June 2029.

Read Luke Malpass’ analysis here

Against a backdrop of weak economic growth and a worst per person recession since the GFC, the outlook, while forecast to improve, remains bleak although the economy is expected to start growing in the coming year.

Finance Minister Nicola Willis gives an overview of the Half Yearly Economic and Fiscal Update (HYEFU) at The Treasury.

The Government’s new fiscal indicator - operating balance before gains and losses excluding ACC - had a deficit that widened to $12.9 billion, while new core Crown debt increased to $192.8b at the end of 2024/25. New Zealand will continue to face an interest rate bill of over $10b per year.

To fund the shortfall, the Government is expected to borrow an extra $18b through its bond programme over the coming three years.

“We have a tough job on our hands,” Willis said as she delivered the Half Year Economic and Fiscal Update (HYEFU), and the budget policy statement which outlines the Government’s thinking ahead of the Budget in May.

“The task which is front of mind for me is to deliver on what we’ve previously committed, that is a considerable job involving reprioritisation and difficult trade offs.

“You’ll see what those are in the Budget.”

The situation has left the Government scratching everywhere for money - and with a few exceptions, government departments will not be receiving additional funding in next year’s budget, Willis said.

“They have been asked to put together performance plans to ensure that they can operate within that environment.”

Adrian Orr explains the decision to lower the official cash rate by 50 basis points to 4.25%. He discusses easing inflation and a subdued economy, but with a recovery expected by 2025. The Bank remains prepared to respond to future shocks.

Willis was not able to lay out the projected savings of that, but signalled more job cuts could be on the table, outlining a targeted savings programme lies ahead.

She said she did not want to implement “rash” measures at this stage, using a capital gains tax and a wealth tax as an example, but confirmed a charities tax was part of the revenue agenda.

On a foreign buyer’s tax, Willis said, “the coalition agreement currently rules that out, however I’m always open to people changing their minds, so I suggest you put that question to Winston Peters”.

Weaker labour productivity flowed through to a smaller tax base, with weaker outturns of some tax - namely GST - changing the tax outlook. Core Crown tax revenue was $13b lower than the previous forecast.

There were also increases to core Crown expenses - $1.4b higher a year on average. The weaker outlook increased benefit spending initially, especially job seeker support, and increases to school roll projections driving up education spending. Meanwhile, higher core Crown debt, and Crown entity expenses (excluding ACC) added to the higher expenses.

The changes saw a delay in the OBEGALx surplus return by two years. The Government chose to adopt a new financial indicator - adding an ‘x’ to the OBEGAL which translated to the removal of ACC’s revenue and expenses.

“If we made decisions on the basis of ACC, then we would be making bad decisions,” Willis said.

Willis said OBEGAL, which had been in use since 2008, had become “increasingly coloured by ACC’s deficits, which reached $4.1b in 2023/24”.

“As a long-term insurance scheme that is set up, for the most part, to be fully funded… ACC’s annual financial returns are not relevant to government tax and spending decisions in the near term.”

There was significant uncertainty with respect to the global conditions - but the forecasts did not incorporate any fallout.

Risks to the economic outlook included productivity impacting medium term growth, significant climatic events affecting primary production, unanticipated global developments, inflation and migration.