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Government Finances Deteriorate Over Forecast Horizon

NEW ZEALAND
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The new NZ government presented its first budget and delivered the income tax cuts it promised in 2023’s election. Finance minister Willis said that the cuts worth $14.7bn over 4 years will be offset fully by “savings and revenue initiatives” thus not adding to inflationary pressure. Slower growth has contributed to the deterioration in the budget position.

  • Treasury estimates that the average per annum cost of the government’s tax package ($3.7bn) and new spending initiatives (5.4bn) is $9.1bn which will be funded with $3.8bn of spending initiatives, $1.5bn revenue raising, $0.6bn NRP/CERF and the $3.2bn budget allowance.
  • The timing of measures is important to the RBNZ and the reduction in spending seems to be mainly from FY26, whereas tax policy changes will begin from FY25, which may concern them.
  • Growth has been revised down 0.3pp in FY24 to -0.2% and 0.4pp to 1.7% in FY25 while the outer years are moderately higher.
  • There is also little change to the inflation forecasts but they are below the RBNZ’s updated projections with FY24 at 3.4% vs 3.6% and FY25 2.2% vs 2.6%. They both expect 2% in FY26 and FY27.
  • The deficit and debt profiles have deteriorated over the forecast horizon due to lower revenue both tax and other sources. The deficit is now expected to be 0.5pp larger at 2.7% of GDP in FY24, then it widens to 3.1% in FY25 before narrowing to 1.9% in FY26. The surplus is now 0.3% in FY28 whereas in the half year update a small one was forecast for FY27.
  • The net core debt ratio is now expected to be above 40% of GDP over the forecast period with FY25 revised up 1.2pp to 43.5% before moderating to 41.8% in FY28 revised from 37.6%.
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The new NZ government presented its first budget and delivered the income tax cuts it promised in 2023’s election. Finance minister Willis said that the cuts worth $14.7bn over 4 years will be offset fully by “savings and revenue initiatives” thus not adding to inflationary pressure. Slower growth has contributed to the deterioration in the budget position.

  • Treasury estimates that the average per annum cost of the government’s tax package ($3.7bn) and new spending initiatives (5.4bn) is $9.1bn which will be funded with $3.8bn of spending initiatives, $1.5bn revenue raising, $0.6bn NRP/CERF and the $3.2bn budget allowance.
  • The timing of measures is important to the RBNZ and the reduction in spending seems to be mainly from FY26, whereas tax policy changes will begin from FY25, which may concern them.
  • Growth has been revised down 0.3pp in FY24 to -0.2% and 0.4pp to 1.7% in FY25 while the outer years are moderately higher.
  • There is also little change to the inflation forecasts but they are below the RBNZ’s updated projections with FY24 at 3.4% vs 3.6% and FY25 2.2% vs 2.6%. They both expect 2% in FY26 and FY27.
  • The deficit and debt profiles have deteriorated over the forecast horizon due to lower revenue both tax and other sources. The deficit is now expected to be 0.5pp larger at 2.7% of GDP in FY24, then it widens to 3.1% in FY25 before narrowing to 1.9% in FY26. The surplus is now 0.3% in FY28 whereas in the half year update a small one was forecast for FY27.
  • The net core debt ratio is now expected to be above 40% of GDP over the forecast period with FY25 revised up 1.2pp to 43.5% before moderating to 41.8% in FY28 revised from 37.6%.