(From left) PM Christopher Luxon; Associate Finance Minister Chris Bishop; Finance Minister Nicola Willis; ACT Leader David Seymour and NZ First Leader, Winston Peters head to Parliament's Chamber for the Budget

A slowing economy and, consequently, a lower tax take means we are looking at three years of economic austerity from the Government.

That austerity will be the product of what will need to be more deep cuts to Government spending.

That much was evident from yesterday’s Budget, which showed tax revenue was down 13 per cent from what was forecast in Grant Robertson’s Budget just over 12 months ago.

In response, Finance Minister Nicola Willis has set tough new spending limits for the next two years, which the Treasury says are actually below the amount needed to meet inflation and wage pressures.

Her goal is to get the Government books back to surplus as soon as possible, thus giving the Reserve Bank’s monetary policy a “fiscal mate,” which she hopes will allow the Bank to lower interest rates.

She is now forecasting that the first surplus will appear in 2028, a year later than she forecast just before Christmas and two years later than Robertson forecast in his Budget last year.

But getting there is going to be tough and fraught with challenges.

There will be little room for the Government to indulge in “nice to haves”, and deep Government departmental cost-cutting will need to continue.

All this will be set against a political landscape which is seeing support for the coalition whither.

Political pressures from the National Caucus and party for Willis to ease her tough stance may be a significant defining factor in politics from now on up to the next election.

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Meanwhile, Willis played her big card yesterday: the much-promised tax cuts.

The Prime Minister, Christopher Luxon, said the cuts would give the average income household up to $102 per fortnight plus childcare payments of up to $150 for an estimated 100,000 eligible families.

The tax reductions have been achieved by raising tax thresholds.

Willis said ACT leader David Seymour had played a major role in this restructuring.

POLITIK ACT Leader David Seymour at the Budget lockup

She said these would be the last tax cuts until the country returned to surplus, but Seymour was not so emphatic.

“I believe New Zealand needs a low and flatter tax system than it has,” he said at the Budget lockup media briefing.

He said he had agreed to National’s version of tax cuts because there was not the ambition to make the spending cuts that ACT’s version of tax cuts would have required.

“Therefore, we will pursue the next version of tax cuts.”

That would seem unlikely given that  Willis will have her work cut out, achieving the forecast spending cuts over the next two years.

The operating allowance is the amount for new spending right across the Government. National’s election manifesto and the coalition agreements were predicated on an operating allowance of $3.2 billion annually.

Willis has met that target with this year’s Budget.

But she has dropped that figure to $2.4 billion for the next two years’ Budgets , which appears to have been

a last-minute decision.

Treasury reported in the BEFU that the decision to lower the future operating allowances was made after the economic forecasts for the Budget had been finalised on April 5.

In recent weeks, Willis has repeatedly told audiences that new economic data showed that the economy was slowing more than anticipated.

“At the time the Budget Update economic forecasts were finalised, operating allowances were $3.5 billion per annum for Budget 2024, $3.25 billion per annum for Budget 2025 and $3.0 billion per annum for each of Budgets 2026 and 2027,” the BEFU said.

“Final Budget decisions taken by the Government after the economic forecasts were finalised included a Budget 2024 package that averaged $3.2 billion annually.

“Operating allowances for future budgets were also reduced to $2.4 billion annually. In aggregate, this implies that government spending over the forecast period may be lower than forecast by $5.5 billion, with the largest impact in the year to June 2028 when expenditure could be just over $2 billion lower.”.

Even the Treasury says that does not add up, estimating that $2.5 billion could be required to meet inflation and wage pressures across all expense areas in 2025/26.

Managing within $2.4 billion allowances will therefore be challenging,” Willis said in the Fiscal Strategy Report release yesterday.”

“The Government has committed $1.4 billion in each of Budgets 2025 and 2026 to meet cost and volume pressures in the health sector.

“Savings and reprioritisation will be a feature of future Budgets, just as they have been in Budget 2024.

“The Government will make savings and reprioritisation a business-as-usual activity through:

  • Requiring government departments to prepare performance plans that focus on operating within baselines, highlighting options to manage cost pressures through reprioritisation, and mitigating fiscal risks.
  • Targeted savings and revenue initiatives, including deep-dive reviews and
  • system reform to increase fiscal discipline, including by amending the Public Finance Act

Had the allowances not been lowered, Willis would still have been in deficit in 2028.

POLITIK Associate Finance Minister Chris Bishop and Treasury Secretary Caralee McLiesh at the Budget lockup

However, adding to the challenge of meeting those allowances will be some substantial items that have now appeared in the list of fiscal risks included in the Budget Economic and Fiscal Update.

Potentially big ones include a possible contract break fee for the now-cancelled interisland ferries, funding for the institutes of technology that will replace Te Kupenga, and the cost of the “Going for Housing Growth” policy, which will offer incentives to Councils to build more housing.

The BEFU says: “The quantum of financial incentives has not been determined as advice on this has yet to be developed.”

There is also a question over the cost of the University of Waikato Medical School “if progressed.”

All up, the Treasury has listed 22 pages of fiscal risks confronting the Government.

Not all will become reality.

But even so, within such a tight operating allowance even one risk may be one risk too many.

“We are going to have to manage all of those fiscal challenges very carefully. It’s going to require ongoing fiscal discipline,” said Willis.

Another challenge facing Willis is the need to manage her coalition partners.

She said that Seymour had not only played a role in defining the tax cuts but also had worked on the $332,470,000 of savings achieved in the Ministry of Business Science and Innovation (MBIE).

POLITIK Associate Finance Ministers Chris Bishop and Shane Jones at the Budget lockup

And Willis said that the $1.2 billion fund for regional infrastructure, administered by New Zealand First Minister Shane Jones,  had a focus on increasing access to capital for Maori development.

Jones said the fund flowed out of the Provincial Growth Fund.

The big hope in this Budget is that the tough fiscal discipline will see interest rates drop sooner, allowing growth to return to the New Zealand economy.

Treasury’s growth forecasts are not encouraging.

They have revised GDP growth this year down from the 1.5 percent they forecast in December to negative 0.2 percent.

“After a strong initial bounce back from the COVID-19 pandemic, economic activity in New Zealand has flattened since late 2022,” the BEFU said.

“High interest rates, necessary to reduce inflation, have constrained private demand.

“Strong population growth has provided an offsetting impetus to the economy.

“The result has been a slight decline in GDP and a sharp decline in GDP per capita.

“Economic conditions remain soft but are expected to gradually strengthen from the second half of 2024 with the easing inflation outlook enabling a gradual reduction in interest rates.”

However, bank economists are not convinced.

“Overall, we see the risks to the Treasury’s economic outlook as tilted to the downside.,” said the ANZ economics team.

“As noted in the Budget Policy Statement, the Treasury has revised lower its productivity growth assumption, though we still see its forecast as optimistic in the outer years.

“The Treasury is also forecasting an earlier and faster-easing cycle from the RBNZ.

“We still see the risks as tilted to a shallower easing cycle and a more subdued recovery in real activity.”

Kiwibank said: “Treasury has had the tendency to view the economy with more optimism than most forecasters, including ourselves. Importantly, previous Treasury forecasts have failed to foresee the two recessions we have recorded over the past five quarters.”

However, ultimately, Willi’s return to surplus and, therefore, an easing of interest rates from the Reserve Bank will depend on the coalition government’s political willingness to deliver some of the toughest spending restraints we have seen in recent years.

It will be a hard ask.