Times are tough, and the media frenzy leading up to Budget 2024 reflected the big questions many had in their minds – would the Coalition Government deliver on their promises? And would they go far enough to make a difference?
For the first, Finance Minister Nicola Willis did deliver tax cuts – the linchpin of the fiscal promises to Kiwis in National’s election campaigns.
For the second... it’s early days, and many spending commitments were already baked in. There’s only so much you can stop midstream. Like a new winemaker arriving late in the season, the grapes have been picked, crushed and the wine barrelled – just the bottling, labelling and retailing to be done. Time will have to tell how impactful any changes are, but let’s examine the situation we’re in now that the fiscal tone has been set.
The Background: NZ’s Fiscal Reality
There’s no mistake about it – the fiscal situation the Coalition Government inherited was a dire one, and it will take some serious mahi (and hard calls) to turn it around.
Spending increased hugely between 2017-2023, ballooning 70% during that time period alone while debt shot up from $60bn to $155bn. We took on a generation or two of new debt in the space of a just few years. Unfortunately, the returns in the form of improved government services have not seemed to match this investment.
We’re also the only nation out of major trading partners in a recession, which is an entirely unenviable position we haven’t found ourselves in for almost four decades.
Add to that the tumult we’re all too familiar with – Gabrielle, Covid, cost of living crisis etc. – and there’s quite the mess to be dealt with on our fair shores.
What the 2024 Budget Delivers
Many will argue that Willis’ Budget is lighter than anticipated – big on rhetoric, small on outcome. The very thing they criticised the last Government for when they were in Opposition.
There’s a $16.3B increase in spending from the previous Labour budget, and an increased delay in getting to surplus.[i]
The tax cuts only go halfway to where they need to in order to ease the impacts of inflation. And these cuts could well be inflationary.[ii] [iii]
A strong statement from the Budget announcement: “Our tax package is fully funded through savings and new revenue measures and will not add to Government debt.”
This is questionable at worst, optimistic at best – and as with many things in this new Budget, its success will only become apparent in the fullness of time. One thing is certain, our debt is set to soar.[iv]
The 2024 Budget comes in hot with the savings angle. How does it do this? By removing 2000+ roles and 1000+ vacancies from government departments, making 3900 job losses so far in a sector that had ballooned by 18,418 since 2017. Critics argue that the Budget is heavy on rhetoric but light on results – cuts should have be deeper given the expansion was disproportionate to population growth and failed to deliver any meaningful measurable outcomes.
Good news for natural disaster relief: This gets a $939.3m boost over four years to repair roads and upgrade flood infrastructure which woefully failed during Cyclone Gabrielle and other weather events last year. It needed to be done, and many Bay residents will be relieved by the confirmation that this is a priority for the Government.
From 31 July this year, New Zealanders will experience the first tax relief in 14 years. This will give the average household up to $102 per fortnight, with the addition of FamilyBoost of up to $150 for eligible families.
That’s an 8% reduction in tax for those earning $60k (the best in the lot), 2% for those earning over $150k, and 1% for those earning over $230k.
However, given the meteoric rise of rates elsewhere, it’s unlikely to stay in anyone’s pocket for long. With Hawke’s Bay Regional Council ratepayers staring down the barrel of a 54% rate increase over the next three years, Napier City 42.2% and Hastings District 50%, any spare change from tax cuts (while undoubtedly welcome) will be a flash in the pan rather than significant aid.
Another consideration is that these tax cuts only go halfway to covering the impact of 14 years of fiscal drag, and they’re not attached to inflation or wage growth… which indicates that the income tax workers must pay will rise over time. Again, something Willis criticised the previous Government for.[v]
Still, better than nothing – and any action to adjust tax thresholds was sorely overdue, though it would be a shame to stop progress here.
Market Reaction
Meanwhile, the NZX50 closed at a near low for the year to date: the index fell by 121.46 points, or 1.04%, to close at 11,557. This level mirrors the pre-COVID era, with the local bourse ending 2019 at 11,602. [vi] It's a sobering statistic for a domestically focused and patriotic Kiwi investor.
To The Future
The way out of our dire economic straits is going to be through productivity. So will these measures boost it?
Sort of.
In terms of wasteful spending and reallocating funds into the hands of those who earn it, yes. There is also better funding for things like transport and education, which adds a hopeful note for future. But if you were looking for a reformative budget a la the ‘Lange-Douglas’ years, you will not get it from what was presented this week.
What we see in this budget is a mopping of the decks. It seeks to stem the fiscal mess the Coalition Government inherited by cutting waste, but it will take some time before the waters recede to a comfortable level for the average New Zealander.
But – we should not be despondent just yet. By continuing to streamline where possible and returning money to households, productivity and real economic growth can eventually be achieved. This is how we can get to higher living standards and world-class public services we all desire – by building it up block by block after reinforcing the structures it depends on.
by Nick Stewart (CEO and Financial Adviser at Stewart Group)
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 358.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] Budget 2024: Debt set to explode under Nicola Willis - Matthew Hooton - NZ Herald
[ii] Could Budget 2024 keep inflation up? | Stuff
[iii] https://businessdesk.co.nz/article/economy/budget-2024-may-ruffle-the-rbnzs-feathers
[iv] Bernard Hickey on the budget: ‘They’ve talked their way into a deeper recession’ | The Spinoff
[v]https://www.taxpayers.org.nz/taxes_by_stealth?utm_campaign=240530_budget2024&utm_medium=email&utm_source=taxpayers
[vi]https://www.google.com/search?q=nzx50+close+today&sca_esv=cd3ec118dfb68f5c&sca_upv=1&rlz=1C1CHBF_enNZ970NZ970&sxsrf=ADLYWIKF7Wem1vRdiySdUrUqT5FkgVNg7w%3A1717069441963&ei=gWZYZtO8OsHvseMP-NuXsAk&ved=0ahUKEwiTgZKRprWGAxXBd2wGHfjtBZYQ4dUDCBA&uact=5&oq=nzx50+close+today&gs_lp=Egxnd3Mtd2l6LXNlcnAiEW56eDUwIGNsb3NlIHRvZGF5MggQABiABBiiBDIIEAAYgAQYogQyCBAAGIAEGKIEMggQABiiBBiJBUjJC1DGCFjJCXABeACQAQCYAfcBoAHEBaoBAzItM7gBA8gBAPgBAZgCAqAC_QHCAgoQABiwAxjWBBhHmAMAiAYBkAYIkgcFMS4wLjGgB-oJ&sclient=gws-wiz-serp
