The Coalition Government’s first budget policy statement has confirmed the Crown accounts are on track to stay in deficit throughout the next three years.
Finance Minister Nicola Willis unveiled the Coalition's priorities, operating allowances, and updated Treasury forecasts at Parliament on Wednesday afternoon.
While the National Party promised to deliver a $2.9 billion surplus in Budget 2026 during the election campaign, it has found that may not be possible now in Government.
Willis has said the softening economy would make it harder to achieve that surplus as it would result in less tax revenue and trigger more income support costs.
GDP
The New Zealand economy was forecast to grow 1.5% in the Treasury's half year fiscal and economic update three months ago, but has been downgraded.
Real gross domestic product is now expected to be just 0.1% in the coming year, closer to a downside scenario Treasury outlined as part of its December forecasts.
Tax revenue is more closely tied to nominal GDP which is also forecast to grow more slowly than previously thought.
Treasury said the cumulative level of nominal GDP would be $42.8 billion lower than forecast in December and core Crown tax revenue would be $13.9 billion lower.
This would have a $3 billion impact on the operating balance in the 2026/27 financial year and another $4 billion impact on the 2027/2028 year.
These would wipe out the surpluses previously forecast in those years, based on spending plans signalled in the general election.
Willis said in the budget policy statement that a plan to get back into surplus would be outlined later when more information was available.
Operating allowances
Despite the worsening economic picture, Willis has opted to set the Coalition’s annual operating allowances above the level promised in National’s fiscal plan for Budget 2023.
She planned to set this year’s allowance at $3.2 billion during the campaign but signalled the allowance will be up to $3.5 billion in the actual budget.
The operating allowance is the amount of new money available to be spent on new policies and cover cost increases in each budget.
Treasury warned in its pre-election update that Labour’s operating allowances, which were slightly larger than these, were enough to fund future cost pressures but not much more.
Surplus
Lower revenue and similar spending means the Crown accounts are likely to stay in deficit for one year longer than promised during the election campaign.
Treasury has been forecasting then delaying an operating surplus for four years. In December 2022, it said the Labour Government was on track for a surplus in the 2024/25 financial year.
The 2023 Budget Policy Statement, released in December 2022, showed the Crown accounts were on track for a surplus in the coming 2024/25 financial year.
That forecast quickly evaporated and by late 2023 the surplus wasn’t expected until the 2026/27 year, and it would be tight even then.
Now, the surplus may be pushed back another year which would mean Crown accounts would have been in deficit for a total of seven years — longer than after the global financial crisis.
Politics
Treasury advised Willis to prioritise returning to surplus in the 2026/27 financial year “at the latest” as it would help with inflation, the current account deficit, and signal responsibility.
But in addition to the worsening economic conditions, National has also been struggling with funding for its proposed tax package.
Official estimates for the costs and revenues measures have varied widely from what was expected during the campaign and left the Coalition looking for some extra cash.
The Budget Policy Statement doesn’t outline specific spending but reiterated the promise of delivering fully-funded tax relief as one of the Government's priorities.
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