But the maiden Budget goes frontline, shutting backwaters
Venkat Raman
Auckland, May 30, 2024
From all accounts, the first Budget of the Coalition government is a populist measure and Finance Minister Nicola Willis has been careful in setting the tone for a possible return to surplus over the next three or four years. The rhetoric continues to be ‘pulling back the economy from the wrong track.’
Ms Willis introduced the Budget, incorporating the Fiscal Policy for 2024-2025 to Parliament on May 30, 2024, aiming to reduce new spending over the next three financial years and accrue Operating Balance before Gains and Losses (OBEGAL) of $5.5 billion. Government borrowing will continue to rise, which Opposition Leader Chris Hipkins said ‘was to pay for tax cuts.’
Indian Newslink has analyses and commentaries on New Zealand’s Budget 2024 on its website (www.indiannewslink.co.nz), in its June 1, 2024 Digital Edition and on various digital platforms.
Growing Crown Debt
The government’s accumulated residual cash deficits would reach $50.6 billion across the forecast period (2027-2028) with the gap filled by additional borrowings.
“As a result, net core Crown debt is forecast to increase from $155.3 billion in 2022-2023, to reach $209.9 billion by 2027-2028. Although net core Crown debt does not reduce in nominal terms over the forecast period, it is expected to decline as a share of GDP after 2024-2025. After peaking at 43.5% of GDP, net core Crown debt is expected to drop to 41.8% of GDP by the last year of the forecast period,” Ms Willis told Parliament.
The government will inevitably turn towards bonds to raise additional cash.
Government borrowing is not necessarily a bad thing, as economists have observed, but its share of the Gross Domestic Product (GDP) needs a careful watch. Many of the larger economies including the US, the UK, Germany and India are struggling to manage their public debt and trade deficit. The Coalition government’s ‘confession’ that borrowing is essential at the current state of the economy and the need to save is begging the question.
Budget 2024 provides some relief to the taxpayers but falls short. In essence, it is a painkiller and not a remedy to the prevailing cost of living crisis. While there is no change in the bottom ($14,000 and below) to the top ($180,000 and above) rung of the income ladder, taxable levels have been effected in the -in-between ranges.
Tax Cuts and Savings
In real terms, an average New Zealander earning a minimum wage of $48,152 per annum can expect a tax cut of $12.50 a week or ($650 per year); a single adult earning $55,000 will get $25.50 a week, a sole parent with two teenage children will have $45 more every week, while a retired couple under Superannuation will have additional $4.50 a week, which an elderly described as ‘less than the cost of a cup of coffee as of now.’
Ms Willis said that her Budget will benefit households with children ($39 per week) and support about 100,000 families with about $75 per week under the new FamilyBoost Scheme.
In essence, the government is lifting the income tax thresholds from July 31, 2024.
They will rise from $14,000 to $15,600; from $48,000 to $53,500; and from $70,000 to $78,100.
“This reduces income tax for anyone earning over $14,000,” she said.
From 31 July, eligibility for the Independent Earner Tax Credit will be extended from $48,000 a year to $70,000 a year of income. Ms Willis said that the move will help an estimated 420,000 additional people, most of whom will get the full $20 a fortnight.
“The in-work tax credit which helps support low-to-middle income working families with children will be increased by $50 a fortnight. Families will get up to $50 a fortnight extra, depending on their family size and income,” she said.
Westpac Senior Economist Darren Gibbs found no surprises in the Budget, with the revised level of bond issuance in line with the Bank’s sense of the midpoint of market expectations, albeit helped by additional short-term borrowing.
“Markets were braced for a fiscal starting point that had worsened since the release of the Half-Year Economic and Fiscal Update (HYEFU), with the broad parameters of that deterioration laid out in the partial update that accompanied the Budget Policy Statement (BPS) in late March. Ms Willis had made clear that Budget 2024 would set out a path back to an operating surplus, last seen in the 2018-2019 fiscal year with promised tax cuts paid for by savings and other revenue initiatives. Budget 2024 begins that path, although the OBEGAL deficit in the coming 2024-2025 is forecast to be larger than the current year, in part reflecting the deterioration of the economy,” he said.
Bond Issuance Up
The government has raised its expectations of bond issuance to go up by $12 billion, including a $38 billion programme in the current financial year.
According to the Treasury, economic conditions are expected to remain subdued in the near term as the New Zealand economy continues to rebalance from a period of strong demand, tight supply and historically high inflation.
Real GDP is forecast to contract by 0.2% in the year to June 2024. Coupled with weaker year-to-date tax outturns, this translates to soft growth in tax revenue in the near term, while growth in core Crown expenses remains high. The combination of these factors sees OBEGAL deficits remain elevated and net core Crown debt continue to rise in the near term.
Extra money for Health, Education
The Budget provides for an additional $8.2 billion in the health system, including $665 million of reprioritisation. The single biggest portion of this is for Health New Zealand, with $3.4 billion earmarked for hospital and specialist services, and $2.1 billion for primary care, community and public health. The Budget also provides $1.77 billion to Pharmac. The Breast Screening Programme will see gradual addition of $31 million to cover about 60,000 women aged between 70-74 years. Mental Health services will receive $24 million to fund the Gumboot Initiative over the next four years.
Ms Willis said that the government will invest $2.9 billion in schools and early childhood education, including $441 million for reprioritisation. The investment programme will cover Kōhanga Reo, Playcentres, Kindergartens, Kura Kaupapa Māori, Special Schools, Intermediate Schools, Secondary Schools, Charter Schools and classroom work. About $1.5 billion from this allocation will be used to build new schools and classrooms and upgrade existing facilities.
There are more Budget Stories in our Budget Special and Leader.
