NZ shuns ‘sugar hits’ in budget, cuts growth forecast
New Zealand has unveiled a budget with few voter incentives ahead of what will become a tightly contested election as policymakers focus on maintaining fiscal firepower in the face of rising risks linked to the Iran conflict.
While New Zealand Finance Minister Nicola Willis warned in a statement that the Middle East war was increasing inflation and slowing the recovery in the trade-dependent economy, she said, “This budget takes careful steps to support New Zealanders now while strengthening the economy in the years to come.”
While Willis has promised to increase capital spending on defence, schools and hospitals, he has downplayed the need for “sugar hits” as he keeps new business spending under tight control and signals deeper cuts to public services that could put thousands of jobs at risk.
The government projects a budget deficit of NZ$15.06 billion (US$12.44 billion) for the financial year ending June 30, 2026; This is narrower than the budget deficit of NZ$16.93 billion (US$13.99 billion) in December’s half-year update.
Willis said policymakers were focused on getting the books back into surplus and a return to surplus was now forecast in 2029/30, compared to a small deficit previously envisaged.
“I think from a fiscal outlook perspective this is an unexpectedly positive budget,” Westpac chief economist Kelly Eckhold said.
“I think the assumption of how rich the tax-rich outlook is probably involves downside risks,” he added, noting that tax revenues could fall short of forecasts due to the uncertain geopolitical environment.
S&P Global Ratings has warned that there may be pressure on New Zealand’s credit ratings due to the economy’s exposure to the Iran conflict.
“Downside risks could cause the country’s wealth gap and fiscal deficits to widen compared to other developed, highly rated states. If this situation persists, it could put downward pressure on the sovereign rating,” it said in the statement.
The challenges are very serious, with Iranian battleboxing policymakers backed into a corner.
Since the Undersecretariat of Treasury’s last forecast in December, global shocks have distorted the outlook, fuel prices have pushed inflation above the central bank’s 1-3 percent target, and growth is expected to soften, reducing tax revenues.
When the government called the election for November 7 in January, it expected the economy to be on a sustainable growth path, inflation to be around two percent and unemployment to fall.
However, this has not yet yielded results. The Treasury currently projects that gross domestic product will rise 2.3 percent in the year ending June 30, 2027; This is well below the 3.4 percent growth forecast in the December update.
The Reserve Bank of New Zealand kept the official cash rate at 2.25 per cent in a tight vote on Wednesday, but marked increases were imminent to offset the energy shock and predicted softer economic growth and higher unemployment in the long term.
The kiwi dollar lost 0.2 percent to $0.5892, while government bond yields fell to previously high levels.
In his budget speech on Thursday, Willis said some would push for a “band-aid and sugar cure” in an election year but the government had chosen a “responsible and lasting approach”.
The opposition Labor Party criticized the budget for failing to address sectors hit by rising costs and unemployment.
“National is holding New Zealand back,” said Labor finance spokeswoman Barbara Edmonds.
The Treasury now expects inflation to run at 4.0 percent this fiscal year and slow to 1.6 percent next year.
It has announced plans to reduce its bond issuance by NZ$6 billion (A$5 billion) while reducing debt.
Many of the new initiatives stemmed from government agency cuts, while the plan to pay students for their final year of college was scrapped.
The government also announced plans to introduce a prudential tax that would provide refunds of around NZ$209 million (US$173 million) to banks, non-bank deposit takers, insurers and other financial market participants.
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