Governments usually give specific operating allowances for their upcoming Budgets in the Budget Policy Statement (BPS). This BPS was already delayed due to coalition negotiations.
She said the Government believed it was “sensible” to not show the exact operating allowance until the Budget so those latest projections are taken into account. Willis denied the Coalition parties were in disagreement over what the operating allowance should be.
Willis also said the former Government tended to publish an operating allowance in the BPS and then increased it at the actual Budget.
Due to the deteriorating economic circumstances, expectations of when New Zealand will return to surplus are changing. The Government is now looking at a path back to surplus in 2027/28, rather than 2026/27 as previously expected. A more specific timeline will be provided in the Budget.
Willis said the Government won’t chase a surplus in any one year at the cost of frontline services.
While no exact operating allowance was provided, the Budget Policy Statement laid out the Government’s key priorities for the Budget.
These included delivering tax reductions, identifying savings across departments and agencies, focusing new spending on areas like health, education and law and order, keeping tight control of spending while funding some high-priority commitments and urgent cost pressures, and developing a long-term, sustainable pipeline of infrastructure investments.
“Tax reductions will be funded within the operating allowance through a mixture of savings, reprioritisations and additional revenue sources,” said Willis.
“Funding tax relief in this way means we won’t have to borrow extra to provide tax relief and we won’t be adding to inflationary pressures.”
Willis said the Government’s fiscal strategy will be getting New Zealand back into surplus, putting net core Crown debt on a downward trajectory towards 40 percent of GDP (it’s currently at 43.5 percent), and reducing core Crown expenditure towards 30 percent of GDP (it’s currently at 33.4 percent)
Alongside the BPS, Treasury provided a forecast scenario for growth which indicated New Zealand’s economic outlook has deteriorated since the Half Year Economic and Fiscal Update (HYEFU) in December last year. This doesn’t take into account any Government policy changes made since December.
“Economic activity has been weaker than previously thought and inflation has eased more quickly,” a Treasury document said. “There is also increasing evidence that labour productivity growth, which plays an important role in the potential capacity of the economy, is lower than previously thought.”
“As a result, we are expecting a weaker economic and tax outlook over the next five years.”
For example, the annual average percentage change for real production GDP in 2024 is expected to be 0.1, rather than 1.5 percent projected in HYEFU. Core Crown tax revenue for 2024 is expected to be $1.2 billion less than forecast in the HYEFU. For 2028, it is expected to be $4.2 billion less.
“The now-weaker picture of GDP over 2023 and the somewhat faster decline in inflation are consistent with the slowing in tax revenue over the past couple of months, while the weaker growth outlook has implications across the period to June 2028,” Treasury said.
“Overall, compared to the Half Year Update, tax revenue in this scenario is cumulatively $13.9 billion lower in the five years to 2027/28.”