Finance Minister Nicola Willis has been forced back to the drawing board after fresh forecasts suggested her party’s fiscal plan would leave New Zealand in deficit for another four years.
The 2024 Budget Policy Statement, released on Wednesday, threw up more questions than it did answers with a number of key details conspicuously absent.
Usually, a policy statement would set out the operating allowance for the coming budget and also a non-binding indication of future allowances.
Willis’ statement wouldn’t even commit to an exact figure for Budget 2024, only saying that it would be less than the $3.5 billion planned by the ousted Labour Government.
Simply extending Labour’s time-limited funding would exceed that operating allowance as two-thirds of it had already been pre-committed, she said.
National’s fiscal plan had suggested trimming the allowances to bolster the small surpluses that had been forecast for the 2026/27 and 2027/28 fiscal years prior to the election.
However, Willis said operating allowances for these future budgets will not be signalled until the Fiscal Strategy Report is published alongside Budget 2024 in May.
Deficit, deficit, deficit, deficit
If Willis stuck to the original spending plan, it is likely that the Crown accounts would still be in deficit in the 2027/28 fiscal year — according to preliminary Treasury forecasts.
The Budget Policy Statement included some information about the Treasury's current understanding of the economy, which has evolved significantly since December.
When the analysts finalised forecasts for the half-year economic and fiscal update, they had not yet seen the weak GDP data for the September quarter and Statistics NZ’s historical revisions.
Additionally, they have revised their inflation forecast downwards. While that was welcome news, it also means lower nominal GDP growth which flows through to tax revenue.
The new forecast shows the nominal economy in June 2028 could be $42.8 billion smaller than previously thought, and cumulative tax revenue could have been $13.9 billion lower.
This would more than wipe out the $2.9 billion and $1.8 billion surpluses forecast for Budget’s 2026 and 2027 in National’s fiscal plan.
That said, the Treasury did not provide fiscal forecasts in the Budget Policy Statement due to not yet having Government spending decisions and other information.
A structural increase in spending under Labour meant that the Government would be running a deficit even if the economy was operating at its full capacity, Willis said.
This was not sustainable but also could not be fixed in one single budget.
“International evidence is that reducing deficits is best done over the course of several years and should be focused on structural reforms to expenditure and revenue settings”.
The Coalition Government plans to bring core Crown expenses back to 30% of GDP over the long-term. This year spending was forecast to be 33.3%.
Despite deficits stretching across the unofficial forecast, the Coalition Government still plans to include tax cuts in the May Budget.
It was one of the policy priorities outlined in the statement alongside public spending cuts, shifting remaining spending to higher-value areas, and investing in infrastructure.
The exact shape of those tax cuts and how they will be funded is still to be determined.
Same debt, different measure
Willis also announced the Government would revert back to using a 2009 definition of net core Crown debt as its headline indicator.
In 2022, Labour shifted to an internationally comparable net debt measure which included investment assets held by the New Zealand Super Fund.
The new Government said it was concerned that including these financial assets made net debt too volatile to serve as a long-term fiscal indicator.
While Willis and her colleagues will swap back to focusing on the old measure, they will kept the equivalent debt ceiling as Labour was using.
The 30% of GDP net debt limit translates into a 50% net core Crown debt limit, although the Coalition Government aspires to stay between 20% and 40% in the long term.
“While the Government accepts that 50% of GDP can be considered the upper bound of prudence on debt sustainability grounds … it should not be a target,” Willis said.
Net core Crown debt was forecast to peak at 44% of GDP in 2024 and decline thereafter in Treasury’s pre-election update, which was based on the Labour Government's fiscal plans.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.