The Government’s first Budget Policy Statement confirms that Budget 2024 will unveil a markedly weaker fiscal outlook and a further increase in the government’s borrowing requirement.
Today the new coalition Government released its first Budget Policy Statement (BPS). As expected, the BPS set out the Government’s priorities, an update on the economic outlook and its high-level fiscal goals. The BPS had virtually nothing to say about the operating spending allowances that it will work with in Budget 2024, but the capital allowance will be topped up much as expected.
The key points to note from the BPS are as follows:
- The Government remains committed to delivering “meaningful” personal tax relief in some form in Budget 2024, although as expected there were no new details regarding the quantum or timing of that relief. As tax cuts will be the centrepiece, we think that the detail is unlikely to be announced ahead of the release of the Budget on 30 May.
- The operating spending allowance will be less than $3.5bn in Budget 2024 (the Half-Year Economic and Fiscal Update (HYEFU) set the allowance at $3.5bn). Unusually, the Government declined to set out operating spending allowances for subsequent years, which will instead be revealed in Budget 2024. We suspect that these spending allowances will depend on how the fiscal bottom line is shaping up late in the forecast process.
- In Budget 2024 the Government will add up to $7bn to the Multi-Year Capital Allowance (MYCA) to fund new capital investment spending over the four-year Budget horizon. Not all this top-up will necessarily be funded within the four-year forecast horizon in Budget 2024. However, the top-up alone could lift the four-year government borrowing requirement by about $5bn compared with the HYEFU projection.
- As foreshadowed by the Minister, considering information received since the HYEFU, the Treasury has downgraded its view of the economic outlook. The BPS presents an updated forecast “scenario” based on data up until 15 March – so prior to the recent soft GDP outcome – that takes account of the expanded MYCA. The forecast takes no account of any policy changes that might be announced in the Budget.
- The Treasury now expects (annual average) real GDP growth of 0.1% in the 2023/24 fiscal year, down from 1.5% forecast in the HYEFU. Real growth is expected to pick up 2.1% in 2024/25 and 3.1% in 2025/26 – slightly firmer than expected in the HYEFU (and firmer than our own forecasts), but insufficient to offset the downward surprise in 2024/25. Moreover, growth beyond 2025/26 is forecast to be slightly slower than forecast in the HYEFU, reflecting a weaker assumed trend for productivity.
- In addition, the Treasury is now also forecasting a lower trajectory for inflation. With CPI inflation expected to be close to the RBNZ’s 2% midpoint by the middle of next year, the forecast for nominal GDP is significantly lower across the forecast horizon – indeed by a cumulative $42.8bn – implying a markedly smaller tax base.
- The weaker outlook for nominal GDP means that core Crown tax revenue in the current 2023/24 fiscal year is forecast to fall $1.2bn short of the HYEFU forecast – broadly in line with our own forecasts. The shortfall grows to $3.2bn by 2026/27 and to $4.2bn by 2027/28. The cumulative shortfall over the five years to 2027/28 is $13.9bn.
- Taken at face value, these revenue projections imply that the Government would not achieve an operating surplus in either 2026/27 or 2027/28 (OBEGAL surpluses of $0.1bn and $3.4bn were forecast for these years in the HYEFU).
- However, it is important to note that these revised tax revenue forecasts include neither the impact of the personal income tax cuts that the Government is seeking, nor as yet unknown potential new revenue measures. The outlook for OBEGAL will also depend on the size of the spending cuts and reprioritisations that the Government is able to achieve in Budget 2024, including those already announced in December’s “mini-Budget”, and any further changes to the Treasury’s underlying economic forecast. We expect that the Government will seek to forecast at least a small surplus in 2027/28 – a goal that the Minister of Finance has described as “achievable but not a given”. However, it remains to be seen whether this can be accomplished by Budget 2024.
- The government has set a long-term goal of reducing net core Crown debt (i.e., net debt excluding certain assets like the NZ Super Fund) to below 40% of GDP, compared with the forecast level of around 44% of GDP in 2023/24. Once there, the Government intends to maintain core net Crown debt in a range of 20-40% of GDP. Given the starting point, this debt target will be more binding than that pursued by the Government’s predecessor.
- The government has set a long-term goal of achieving an operating (OBEGAL) surplus that is sufficient to ensure consistency with the debt objective. In part it will do this by managing core Crown expenses down towards 30% of GDP from 33% at present.
In summary, today’s news confirms that the government borrowing programme will likely be raised significantly when Budget 2024 is released on 30 May. Given the extent of the downgrade in the tax forecasts, the size of that increase could be as much as $15bn across four years rather than the $7-10bn we surmised in our BPS Preview. However, much will depend upon decisions taken between now and the Budget, especially regarding the size and timing of tax cuts. Ahead of the Budget, amongst other things we will be keeping an eye on the Government’s monthly financial statements (released on 4 April and 7 May) to see how tax revenue is tracking compared to the revised forecasts in today’s BPS.
