NZ on Track for Worse Than Predicted Deficit Despite Slashing Government Spending

National Party deputy leader Nicola Willis speaks at the National Party election campaign launch at Manukau Events Centre on September 03, 2023 in Auckland, New Zealand. New Zealand will go to the polls in a general election on October 14. Photo by Fiona Goodall/Getty Images

Although it has slashed public service numbers and ended some programmes, New Zealand’s coalition government is heading towards its first budget with forecasts of a higher-than-expected deficit.

The National-NZ First-ACT government took office with an ambitious agenda centred on major cuts to public servant numbers.

To date, over 4,000 people have lost their jobs as a result, with more expected. ACT Leader and Minister for Regulation David Seymour has previously indicated the total could reach 7,500.

But the reduction in expenditure isn’t enough to balance a sharp fall in the tax take from an economy officially in recession.

Treasury figures show a deficit of $5.04 billion (US$3 billion) for the nine months ended March, which is $619 million more than forecast in the December financial update.

Core tax revenue was $88.5 billion, $1.2 billion below forecast. Weaker income from corporate taxes and GST were partly offset by a rise in taxes on investment returns.

However, overall tax revenue was about six percent higher than at the same time in 2023, reflecting the strong labour market and resultant income tax returns, although GST returns increased less than the rate of inflation.

“[This is] indicating that consumers have cut back their real spending in response to mortgage interest rate and price increases,” Treasury said.

Expenses were nearly $1.4 billion less than forecast at $101 billion. Net debt was slightly lower than expected at $173.7 billion—or 42.9 percent of the economy’s value—while gross debt was above forecast due to the government increasing short-term borrowing to meet normal expenses.

The latest Organisation for Economic Co-operation and Development (OECD) report strongly advised the government to balance its books as quickly as possible and warned that any tax cuts should be fully funded by spending cuts and increased revenue.

Independent calculations say the government’s current cost-saving measures fall $1.5 billion short of the $9 billion needed to pay for the pre-election tax cut promises, and it will have no choice but to borrow to keep its promises.

Aside from the fall in tax incomes, this is partly due to the dumping of some of National’s revenue-gathering policies during coalition negotiations, in particular, the dropping of a “foreign buyer tax” that had been budgeted to raise $2.9 billion a year.

Officials have found that others will raise less money than the party had predicted. Added to that are increased costs from an acceleration of special tax cuts for landlords, worth $2.9 billion.

Finance Minister Nicola Willis has said tax cuts in the Budget—due to be delivered on May 30—will be fully funded and will proceed.

However, Prime Minister Christopher Luxon told reporters in March that, while the government would deliver some form of tax relief this year, the public would need to wait until the Budget in May to find out if it was as much as promised at the election.