Economic and fiscal update
Budget 2024: Tax cuts remain despite a weaker outlook
30 May 2024
Our take on the latest Economic and fiscal update (Thu 30 May 2024)
Tax cuts delivered, costing $14.7b over four years
Government spending remains above 31% of GDP
Return to surplus in 2027/28
The key numbers...
- Economic conditions have deteriorated further, contributing to a $32.7b reduction in forecast Core Crown revenue between 2024 and 2028, compared to expectations in December’s Half Year Economic and Fiscal Update (HYEFU).
- One third of the revenue reduction is from the weaker economy, one third from persistently lower business tax payments, and one third from the cost of the tax package.
- Expectations for Core Crown expenses have fallen too, down $15.9b over the same period. However, with the weaker economic track, spending will still be more than 31% of GDP in 2028, compared to a pre-pandemic share of 29% of GDP.
- As promised, personal income tax brackets have been adjusted to address fiscal drag for the first time in 14 years, coming into effect on 31 July 2024, in a package costing $14.7b over four years. For example, a single adult earning $55,000 will be better off by $51 dollars per fortnight, and a minimum wage worker working 40 hours per week by around $25 per fortnight.
- This combination of expected revenue reducing by more than the fall in expenses means more borrowing to bridge the gap, with an additional $11b in net debt at the end of the forecast period compared to the HYEFU. This funding gap also means a slower and smaller return to surplus, with a $1.5b OBEGAL surplus forecast in 2027/28.
Core Crown Expenses
Core Crown expenses, % of GDP
...and our reaction
- Budget 2024 gave us the details of an economic and fiscal outlook we already knew – the economy is set to be weaker, government revenue will be lower as a consequence, tax cuts will create a further hole in revenue, and spending cuts will drag back government expenditure too.
- Many of the key policies in Budget 2024 had already been announced or were exactly as expected. The tax changes announced are unchanged from the ones National had campaigned on ahead of last year’s election.
- The weakness in the economy has seen additional borrowing required to fill the gap, given the cutbacks in spending have been used to fund tax cuts for households, leaving net debt higher at the end of the forecast period than was expected back in December.
- The government is set to effectively run zero-budgets in the next few years, with the operating allowances being slashed to $2.4b per year from 2025 – a $5.5b reduction in the spending allowance over the four-year forecast period. Treasury has warned that these smaller additions might only be enough to account for general spending pressures (related to rising costs or the growing population), meaning “hard choices” between existing programmes and new spending each and every year.
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