New Zealand's freshly-elected government is predicted to declare increased deficits and higher borrowing levels in its inaugural budget. This follows a decision to plough on with tax reductions, regardless of declining income. Experts anticipate a larger deficit for the fiscal year ending in June, in contrast to the NZ$9.3 billion ($5.7 billion) previously forecast by the Treasury. The gap is also predicted to grow over the following three years, which will potentially slow down the country's return to surplus until 2028, a year later than initially projected. This could cause a rise in bond issuance by up to NZ$15 billion over the next four years.
"The real challenge for the new government is creating a believable roadmap back to surplus and adhering to this plan," said Miles Workman, a senior economist at ANZ Bank in Wellington. He pointed out that the central focus of the 2024 Budget will be the delivery of key electoral pledges.
Job cuts in the public sector embody the center-right government's new spending cut initiative. Several policies implemented by the previous, left-leaning government are also to be reversed in an attempt to control the debt. Alongside these measures, they also are proceeding with proposed tax cuts intended to relieve financial stress on households in the low to medium-income bracket, regardless of tax revenues being affected by recessive conditions.
The Finance Minister, Nicola Willis, stated that the new tax package, due for introduction from July 1, will have a neutral fiscal impact and avoid adding to inflation rates. She says this will be possible thanks to funding from savings and additional revenue avenues. The budget, which will be unveiled tomorrow afternoon in Wellington, will reflect these plans.
The National Party, headed by Prime Minister Christopher Luxon, emerged victorious from the October elections after making promises to increase take-home pay for workers by adjusting income tax thresholds, costing an estimated NZ$9 billion during the next four years. The provision of tax credits for low-income families and earners and the return of tax breaks for landlords would increase the package's total cost to NZ$14.6 billion.
Kiwibank economists noted that in order to keep inflation in check, the Reserve Bank would need to scrutinize whether such tax cuts will increase price pressure. They say, "To control the effects on inflation, tax cuts need to be launched in tandem with reductions in public spending."
The initial tax relief plan by the National Party, which relied partially on levies imposed on foreigners purchasing houses worth over NZ$2 million, was thwarted in negotiations with the coalition partner, the New Zealand First Party.
The gloomy economic scenario has worsened the country's fiscal outlook. Treasury's March statement outlined a sluggish growth expectation of just 0.1% up to June 2024. It also revealed that tax revenues up to 2028 would be NZ$13.9 billion less than expected.
The new government's approach to controlling the debt, as conveyed by Willis, will be to prioritize debt reduction, which will also bring down finance costs. She mentioned that the current debt is approximately 43% of GDP and that the aim is to bring it within a range of 20-40% of GDP over time. However, economists are not expecting the country's debt to fall to 40% of GDP within the next four years, despite the likely focus of the budget on a downward debt trajectory.