| As was widely expected the Budget showed that the worsening economic outlook has delivered a fiscal hit.
The return to an OBEGAL (Operating Balance before Gains and Losses) surplus will still be earmarked but not until 2027/28. Net core Crown debt is unlikely to fall below 40% of GDP by then. Gross government bond issuance over the 2024/28 period is expected to be $12bn higher than projected in the December 2023 Half Year Economic and Fiscal Update (HYEFU).
Budget 2024 contained a fiscal policy pivot towards tax relief that was balanced by cutbacks in operational spending. The scale of the tax cuts was trimmed, but only modestly so.
Moreover, the timing of the income tax cut package was only delayed by a month. The introduction of a tax cut package before spending cuts are instigated would not be helpful for the RBNZ which is desperately trying to rein in domestically-generated inflationary pressures.
Moreover, the profile of the fiscal impulse suggests that fiscal policy was not as contractionary as the 2023 HYEFU, with the fiscal tightening occurring earlier. This will not be greeted fondly by the RBNZ.
The risk is that OCR cuts we expect for early 2025 get pushed further back, undoing much of the support that the tax cuts were trying to deliver.
Budget 2024 was a solid start, but more work needs to be done. Fiscal policy has a key part to play in the economy, and the restoration of fiscal buffers is needed given future challenges.
-ASB |
