Key announcements from Budget 2024
Budget 2024: Economic outlook
Balancing the country’s books has never been easy - but in the context of the current economic environment, it’s time for some difficult decisions.
New Zealand experienced two technical recessions over the last year. While there are glimpses of hope in the economy – inflation expectations are falling, and contractions in real GDP have been mild – we are yet to see the full impact of high interest rates as households continue to re-price onto higher mortgage rates and confidence begins to fall. Treasury is forecasting the economy to contract by 0.2% in real terms in the year to June 2024 but grow by 1.75% in the year to June 2025. However, in nominal terms, which influences the tax take base, GDP is expected to grow by 4.4% and 4.2% (compared to 6.1% and 4.7% in previous forecasts, approximately a 2% drop in expectations).
How big is the deficit? And how long until we get back to surplus?
The Budget is centred on providing cost-of-living relief and investing with an eye on the future while combatting wasteful spending to support economic growth. The result is a deficit for 2024-25 before the budget balance returns to surplus in 2027-28. While the return to surplus is positive, it is a year later than previously forecast, driven by a weaker economic and fiscal outlook.
Core Crown tax revenue is projected to be 28.8% of GDP in 2024-25, compared to projections of 29.7% in Budget 2023, while Core Crown expenditure is projected to be 33.5% compared to 33.0% in Budget 2023. Net debt per cent of GDP is projected to be 20.9% compared to 22% in Budget 2023. Compared to Budget 2023, net debt is tracking in the right direction. However, we note the need for additional borrowing, to the tune of $12 billion over the forecast period, compared to forecast borrowing estimated in the Half Year Economic and Fiscal Update. The increased borrowing raises the possibility of a problem brewing in the background.
Tax relief – but at a risk
Over the last two decades, New Zealand has experienced tax bracket creep, also known as ‘fiscal drag’, i.e., the inflation-driven movement of taxpayers into higher tax brackets without any fundamental changes in their earnings. To address this, Budget 2024 has increased the personal income tax bracket thresholds and tweaked eligibility for certain tax credits to provide tax relief to $3.7 billion per year. This tax relief will be welcomed by households and businesses feeling the cost-of-living pinch.
Sounds good. What’s the twist?
While the tax relief package is funded through savings and additional revenue, Budget 2024 requires additional borrowing going forward, indicating an inflationary trade-off at play.
However, whether the tax relief will have a material impact on inflation, which could risk forcing the Reserve Bank to adopt a ‘higher for longer’ monetary policy stance, depends on how much of the tax cuts households will spend:
- If, for example, households spend 97 cents instead of 80 cents out of every dollar, spending will not be as weak as hoped for and could add to inflationary pressure. This is particularly true for lower-income households.
- Households might also target spending on stickier price groups, such as non-tradable products, which the RBNZ struggled to tame.
- Further, it is important to consider the timing of tax relief and when any reduction in government expenditure is realised. If tax relief occurs before the decrease in government expenditure, the impact could be inflationary in the short term.
Overall, the actual tax relief is modest so the impact may be limited. Treasury’s inflation forecast in Budget 2024 is slightly lower than the Reserve Bank’s in their May Monetary Policy Statement, indicating that Treasury is not expecting the tax relief to be materially inflationary.
And an eye to the future
Budget 2024 provides for spending to address some of the country’s long-term infrastructure needs, focusing on transport, the Regional Infrastructure Fund, the rebuild and recovery of communities affected by Cyclone Gabrielle and the 2023 Auckland Anniversary flooding. We note that the spending is front-loaded in the near term, which presents risks to inflation and threatens to make work for the Reserve Bank more difficult.
New Zealand’s productivity and innovation levels are low compared to similar economies. We view tackling productivity and innovation as the key to unlocking the next stage of New Zealand’s economic success and a necessary step in ensuring international competitiveness. The 2024 Budget missed this opportunity. It is clear more needs to be done in this space, and we hope to see further investment and prioritisation in the future in successive budgets.
Overall, the outcomes from Budget 2024 – intended and unintended – are yet to reveal themselves fully.
