- The government's 2026 budget is about getting the books in order
- The Middle East conflict is clouding economy, forecasts, income, spending
- Higher deficit expected in near term, no surplus until 2030
- Spending to be constrained and reprioritised, new policy finance negligible
- As much as $10b extra borrowing expected
- The length of the Iran conflict may result in radical rewrite of forecasts/policies in pre-election fiscal update
Government budgets invariably get branded - the Black budget of 1958, the Mother of All Budgets in 1991, the Wellbeing Budget of 2019.
Finance Minister Nicola Willis has yet to pen a catchy title for forthcoming one on Thursday, but ASB senior economist Mark Smith already has a suggestion.
"Budget 2026 is likely to be more about fiscal repair, spending prioritisation and bolstering New Zealand's economic security against a highly fluid global backdrop."
Willis has to tackle the realities of a slowing economy hit by the Middle East conflict, denting the tax take, inflating expenses, producing deficits until the end of the decade, and higher borrowing, he said.
"The Middle East conflict is expected to delay but not derail the foreshadowed economic recovery and eventual path back to surplus."
At the most basic level households and governments face similar challenges - balancing income against expenses, and prioritising needs against resources.
Willis has spent a lot energy over the past two years criticising the state of the government finances inherited from the previous Labour government, with large deficits and increased debt incurred during the Covid-19 pandemic.
"We're still carrying a deficit from the Covid spend-up and international credit rating agencies are watching us closely," she said in a recent speech to an Auckland business group.
"Now, more than ever, you need your government to hold a steady hand on the tiller, ensuring the country's finances are in fit condition to withstand whatever comes our way."
The government is forecast to have a deficit of $13.9 billion for the current financial year ending in June, with the deficit reducing over the following three years to a surplus of $2.3b in 2030.
But that was before the Middle East conflict - which Westpac senior economist Darren Gibbs says has changed everything.
"The conflict in the Middle East will negatively affect the government's finances through a variety of channels that sit outside of its immediate control."
That included the inflation surge caused by higher fuel and other prices, which will costs such as inflation-indexed benefits, while the conflict will likely dampen tax revenue because of possibly higher unemployment and reduced consumer spending, he said.
"There is significant uncertainty about the key economic assumptions ... most notably about the path of the conflict from here and the implications for energy prices, global growth and the impact on New Zealand's economic outlook."
Budget deficits are expected to be bigger in the near term touching more than $13b in the coming financial year, but then reducing steadily to an eventual surplus about a billion dollars in 2030, the first in a decade.
Cutting the cloth
Willis has been vocal about the repair job needed on government finances and said there will be no tempting but illusory budget day goodies.
The operational allowance, the money available for new day to day initiatives, has been trimmed by $300m to $2.1b and much of that is already committed to pre-announced moves.
The saving has been transferred to long term capital spending which has been increased to $5.7b for major projects such as schools, highways, hospitals and defence projects, which Willis said will be "job-rich".
The government may have something of boost from the $2b of underspending in the current year which has meant a smaller deficit than forecast for the nine months ended March.
ANZ senior economist Miles Workman said the government was between a rock and a hard place - needing to support the economy, but not stoke inflation, at a time its finances were pressured.
"The best fiscal response for the long-run health of the New Zealand economy would also be the most politically difficult in the here and now, even without the oil shock hitting the economy: reducing discretionary spending or increasing taxes.
Economists were generally agreed that the government will borrow more, as much as $10b extra over the next four years, which would lift the net debt level to around 48% of the value of the economy.
Gibbs said uncertainty caused by the Middle East conflict might result in this budget having a short shelf life.
"Given the impending General Election, the Treasury will need to publish a fiscal update (the PREFU) by early October. Depending on the path of the conflict, this could lead to marked changes to the Budget forecasts."
This story was first published on rnz.co.nz |  |
