Big task: Willis speaks in Parliament in Wellington. The New Zealand’s Finance Minister acknowledges that the government has a big job to do to get the books back in surplus by 2027, but adds that it remains confident it can achieve the target. — Bloomberg
WELLINGTON: New Zealand’s government pledges to cut spending and return the budget to surplus even as economic growth slows and it faces the extra cost of paying for tax cuts from the middle of next year.Finance Minister Nicola Willis outlined NZ$7.5bil (US$4.7bil) of new revenue initiatives and spending cuts over the next five years in a mini-budget released yesterday in Wellington.
At the same time, the Treasury Department published its half-year economic and financial outlook that showed the budget would return to surplus in 2027, the same year as its previous projection.
“The update showed a worsening economic picture,” Willis said. “We have a big job to do to get the books back in surplus by 2027. That remains our intention.”
The government, a coalition of three centre-right parties, has promised to get on top of a cost-of-living crisis by stopping wasteful spending and refocusing the central bank solely on price stability.
It argued that a tight financial policy would help the Reserve Bank of New Zealand (RBNZ) to return inflation to its target and allow it to begin to lower borrowing costs.
The savings package includes NZ$2.6bil from stopping work on existing projects and programmes, and NZ$2.1bil directed from the Emissions Trading Scheme that will no longer be used just for climate-related reforms.
Further savings within government agencies will be pursued.
The cost cutting will not amount to an austerity programme, Willis said.
“I reject austerity,” she said. “We are taking the responsible steps to protect front-line services and we’re going to put more money into people’s bank accounts.
“The reason we are doing that is because it’s both the right thing to do and because we believe it is affordable.”
The National Party, which leads the government, campaigned on income tax cuts targeted at families and middle-income earners.
The party will lift tax brackets to compensate for inflation, capping the changes at NZ$78,100 so that everyone earning over that amount will receive the same tax reduction.
The plan, costed at NZ$14.6bil when it was announced in August, will be funded by reducing government spending and new revenue generation, including ending a commercial building depreciation tax break.
The government is committed to tax cuts, with details to come in 2024, Willis said.
“Tax reduction is coming, but first we have to do the work,” she said. “We’ve made a significant down payment on tax reduction, NZ$7.5bil worth of savings already. We’ve committed to the actions needed to find the rest of the money.”
Yesterday’s financial projections showed the deficit will be NZ$9.3bil in the year through June 2024, less than the NZ$11.4 billion gap forecast in the pre-election update published mid-September.
The Treasury expects that budget will be in surplus in 2027 but only by NZ$140mil rather than the NZ$2.1bil seen previously.
The projections exclude the impact of the government’s decisions announced yesterday, and don’t take into account downward revisions to gross domestic product revealed last week that showed the economy is weaker than initially thought.
The department estimated that the decisions will reduce the deficit by NZ$2.5bil in 2026 and boost the surplus by NZ$1.5bil a year later.
But it said that once combined with other policy plans, such as income tax cuts, the overall impact would be broadly neutral over the forecast period.
The Treasury expects interest rates to stay higher for longer, cooling growth and slowing the increase in tax revenue. At the same time, debt servicing costs are projected to increase. — Bloomberg
