ANALYSIS: Finance Minister Nicola Willis read her third Budget for this parliamentary term this afternoon, and with most of the changes having already been announced over the past 2-3 weeks, there were few surprises. One measure that hadn't been flagged, though, is the special levy on financial institutions, which is expected to bring in $209m over the next four years to help cover the cost of monitoring their activities. It doesn’t add up to a levy aimed at clawing back the high profits the Aussie-owned banks have accumulated, but it is a small step in that direction for a future government.
The focus of this year’s Budget was decidedly on improving the long-term course for Crown accounts, not on altering the immediate outlook for economic growth (fiscal stimulus/contraction), or on altering the current impact of the Government on different groups in society. That is, it can in virtually no way be described as a traditional pre-election Budget involving goodies allocated to favoured groups.
This was what had largely been expected. In fact, it is noteworthy that, unlike most other years in recent times, there was virtually no surveying of ordinary people and businesses by media outlets and other groups ahead of the release to find out what favours they wanted from the Minister.
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If there is a “winner” from the Budget, it is probably the health sector, where spending has been boosted by another $5.5 billion over the next four years.
Thankfully, based on what look to be a reasonable set of economic forecasts (assumptions in these uncertain times), the Minister has projected that the Government’s budget deficit will shrink. It is set to go from an estimated 2.6% in the financial year soon to end and reach a small 0.5% of GDP surplus come the year to June 2029, then reach 1.1% over 2029/30.
This projected achievement of a surplus is one year earlier than indicated in the most recent Treasury review undertaken last December and helps to explain why, for the first time since 2021, there has been a slight ($6b) downward revision to projected bond issuance over the next four years.
Independent economist Tony Alexander: "The focus of this year’s Budget was decidedly on improving the long-term course for Crown accounts." Photo / Fiona Goodall
From the point of view of credit rating agencies that are increasingly wary of New Zealand’s fiscal outlook partly as a result of the ageing population, the Budget is a welcome change in direction. However, as Treasury has been at pains to note, every ten years or so New Zealand receives a shock that can cost the Government a debt blowout of near 10% of GDP.
The projected fiscal track leaves the country still vulnerable to a further worsening of net debt levels in the event of a shock, and that is why a change in the credit rating outlooks which the agencies have is not on the cards.
That means we have seen very little impact in financial markets from the Budget. The positive news of a fiscal surplus potentially being achieved a year earlier than expected is somewhat offset by Treasury repeatedly noting the uncertain outlook facing our economy and the downside risks to the growth outlook being greater than the upside risks.
For borrowers, then, there are no worthwhile implications. Instead, the focus needs to return to gauging how much of the Middle East shock will feed through into inflation, how long the effects will last, and when the Reserve Bank starts pushing back via a higher official cash rate.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
