Finance Minister Nicola Willis

Finance Minister Nicola Willis seemed anxious to talk down the economy during Parliament’s Question Time yesterday.

Things have gone downhill since December 20.

It is now clear the Government is caught in a squeeze between lower-than-expected revenue and higher-than-expected cost projections, made more difficult to resolve by the promise of tax cuts.

Willis said the lower-than-expected tax revenue revealed in the Crown Accounts published yesterday was consistent with the economy being weaker than forecast in the Half-Yearly Economic and Fiscal Update (HYEFU).

“Since the half-year update, GDP results indicate that New Zealand’s economic slowdown occurred earlier and more deeply than previously thought,” she said.

“As a result, the economy will almost certainly be in a weaker position this year than was anticipated before Christmas, and this has a direct flow-on to tax revenue.”

Not just tax revenue.

Lower than-expected tax revenue would also impact the Government’s spending plans to be unveiled in the Budget.

POLITIK understands from reliable and well-placed Beehive sources that there is a growing realisation that the slowdown, along with the proposed tax cuts, will now severely restrict the choices open to Willis and Ministers as they consider next year’s departmental budgets.

Those budgets are under intense pressure as the Government unveils more unfunded future commitments made by Labour and areas of neglect within departments.

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But National and ACT cannot back off the tax cuts if they want to maintain their political credibility.

Thus, they are trapped into either making deeper spending cuts than they planned or conceding that a larger deficit might have to be tolerated.

Willis is expected to release the Budget Policy Statement on March 27, which will provide a clearer view of how the estimates might progress.

The key message in the Crown accounts yesterday was that Core Crown tax revenue, at $69.0 billion, was $0.8 billion (1.1%) below forecast.

The main variances related to:

  • Corporate tax revenue and net other individuals’ tax revenue were $0.5 billion and $0.3 billion below forecast, driven by lower terminal tax revenue for corporate tax and reduced assessed and estimated taxable profits.
  • GST revenue was $0.2 billion below forecast, hinting at potential weakness in March quarter consumption.
  • Source deduction revenue was $0.2 billion above forecast due to deviations from the expected seasonal pattern.

Core Crown revenue was $0.6 billion below forecast, with weaker Core Crown tax revenue being offset by higher-than-expected interest revenue of $0.2 billion. This increase is mainly due to higher yields on foreign currency bond investments.

Core Crown expenses at $78.6 billion were $1.0 billion (0.8%) lower than forecast. Excluding the top-down adjustment and finance costs, core Crown expenditure was $1.9 billion lower than forecast.

The operating balance before gains and losses (OBEGAL) deficit of $3.7 billion was $0.1 billion, smaller than the forecast deficit. State-Owned Enterprises’ results were $0.5 billion weaker than forecast, primarily due to the impairment of assets associated with KiwiRail’s Inter-island Resilient Connection (iReX) project.

Speaking to reporters, Willis said the economy wasn’t growing as fast as the Government had hoped before Christmas.

“When the economy grows slower, that means least tax revenue. That makes it harder to put together a balanced set of books,” she said.

The Half Year Economic and Fiscal Update (HYEFU) published on December 20 forecast  2023-24 GDP growth to be 1.5 per cent and CPI inflation to be 4.1 per cent.

StatsNZ’s latest GDP report, for the September quarter last year showed GDP running at an annual rate of 1.5 per cent but a whole series of other indicators suggest it has slowed since.

And Stats reported CPI inflation at 4.7 per cent in the 12 months to December 31, well ahead of the HYEFU forecast of 4.1 per cent.

The irony in all this is the same slowing of the economy that is reducing Willis’s tax take is the same lever that Reserve Bank Governor Adrian Orr is using to try and bring inflation back to its target range.

The Reserve Bank’s Monetary Policy Statement on February 28 pointed to its intention to try and slow the economy down.

“The (Monetary Policy) Committee remains confident that the current level of the OCR is restricting demand,” Orr said.

“However, a sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3 per cent target.”

That is the warning to Willis, which is one of the reasons she is now crying poor.

But she said yesterday there was also new information from the Treasury.

“They’re updating the forecasts,” she said.

“They’ve got new data about GDP and about what’s happening in the economy, and you’re seeing that reflected in the forecasts and this data with the declining tax revenue is all part of the data they’re feeding into the forward projections.

“So it does paint a picture.”

And Willis indicated that the picture might mean that the Government might not meet its pledge to get the books back in surplus by 2027.

“I was genuine in our commitment that we want to get the books back in order, and we set a goal, before the budget, that we wanted to stick to that surplus goal,” she said.

“What I’ve been sharing with New Zealanders in recent times is the forecast for growth, and revenue have declined significantly, making the task a lot harder.”