New Zealand government provides modest tax breaks and lower spending in the face of economic problems

Author: Lucy Craymer

WELLINGTON (Reuters) – New Zealand’s government on Thursday reported a weak economy, rising unemployment and a weaker balance sheet, after providing modest tax breaks but cutting new spending, and faced criticism for neglecting the country’s indigenous people.

“This budget will not solve all of New Zealand’s economic challenges alone and there is much work to be done, but it shows what is possible with caution and discipline,” New Zealand Finance Minister Nicola Willis said in her inaugural budget statement.

Since its election last October, the center-right coalition government has faced a deteriorating economic situation, with New Zealand now in a technical recession and domestic inflation remaining persistently high.

Prime Minister Christopher Luxon’s National Party has promised financial help for middle-income New Zealanders struggling with rising living costs, high mortgage rates and record home rental prices.

Changes to personal income thresholds and tax credits would give people on lower and middle incomes a boost of NZ$3.7 billion.

“Even as wages struggle to keep pace with inflation, Kiwis are being dragged into ever higher tax brackets,” Luxon said in a statement.

The changes are partly funded by cuts to administrative functions and initiatives introduced by the previous government, with the government facing criticism that they unfairly targeted New Zealand’s indigenous Maori people.

Protesters supporting Māori rights gathered across the country on Thursday, including a large group gathered outside Parliament Buildings waving Māori sovereignty flags.

Protester Christina Taurua said she felt the government’s new policy restricted Māori economic and political rights.

“We are here to raise our voices and support those who are working together to make things right, not just for us Māori, but for the people of New Zealand,” she said.

Willis rejected criticism that funding for programs benefiting Māori had been cut more and argued the new initiatives would benefit all New Zealanders.

The budget, which limited new operating spending and included big savings in housing, higher education, conservation and environmental spending, as well as smaller cuts across many agencies, included NZ$2.68 billion for roads, rail and public transport and 2.1 billion New Zealand dollars for law and order.

Chris Hipkins, leader of New Zealand’s largest opposition Labor party, said the budget provided modest capital spending in the important areas of health and education.

“In New Zealand we work together for the good of the many, not the few. This budget does not deliver in that spirit,” Hipkins said in a statement.

THE DEFICIT INCREASES

The government has forecast a budget deficit of NZ$11.07 billion, or 2.7% of gross domestic product, for 2023/24 and now expects to return to surplus in 2027-28, a year later than its December forecast.

Martin Foo, an analyst at S&P Global Ratings, said public debt was not a material drag on New Zealand’s sovereign rating and forecast net public debt to stabilize at around 35% of GDP, a few percentage points above previous expectations.

The government stressed that curbing new spending would help contain inflation, which is currently at 4.0% and above the central bank’s target of 1-3%.

Zoe Wallis, investment strategy officer at Forsyth Barry, said the overall impact of fiscal policy would remain limited, although less than expected in the December update.

“It will be difficult for the numbers to come out exactly as they expect, and the downside risk is quite high and could come from further economic weakness, lower productivity or fewer savings being realized,” she said.

The Treasury Department forecasts the economy will contract in the first half before returning to growth in the second half of the year, and expects inflation to return to the central bank’s target band by the third quarter of this year.

($1 = NZ$1.6375)

(Reporting by Lucy Craymer; Editing by Lincoln Feast)