The Labour government is expected to curb spending in its upcoming “no-frills” budget following a larger-than-expected budget deficit forecast. Government coffers are set to take a major hit as plans are made to rebuild infrastructure following recent severe weather events and social welfare assistance is extended to those struggling to keep up with the higher cost of living.
A NZ$6.96 billion deficit is anticipated for the year ending in June 2023, compared to earlier projections of a NZ$3.63 deficit. As a percentage of GDP, the country’s net debt is expected to peak at 22% in 2023-24 and drop to 18.4% by 2026-27.
An estimated NZ$23.5 billion in damages was wrought during the severe weather events at the beginning of the year, with the government being expected to cover half the costs. NZ$6 billion has already been allocated for infrastructure funding, part of which will go toward rebuilding after the cyclone. Finance Minister Grant Robertson has confirmed that there will be an additional NZ$748 million allocated to defence salaries and equipment upgrades as security becomes a growing concern.
While there are worries that significant government spending could add to inflation at a time when the Reserve Bank has been increasing interest rates to address the problem, Robertson has pointed out that there has been an influx of funding to the tune of NZ$4 billion from budget cuts.
However, even with this news, the government is not expected to achieve its planned surplus in 2024-25, but rather downgrade economic forecasts. More so when recent data indicates that actual tax collection was 2.7% less than targeted for the nine months leading up to March 2023 and reports that the economy is weaker than expected. The government has also confirmed plans to boost its bond programme with the issuance of up to NZ$120 billion over the next four years.
The Reserve Bank has cautioned that boosting government spending could add to high inflation. However, Treasury remains optimistic that inflation will slow down to 3.3% by mid-2024 and that the economy will grow by 1% in the next 12 months. It does not expect the economy to fall into a recession. Treasury has indicated that the rebuilding activities and surge in tourist numbers as borders reopen are contributors to the more positive economic outlook.
The budget is a few months ahead of an election to be undertaken in October. However, the polls do not indicate a clear leader as yet. PM Chris Hipkins confirmed that there will be no tax cuts or other major tax changes for now as the current economic situation is not ideal for tax relief.
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