(Bloomberg) -- New Zealand’s new government is likely to announce bigger deficits and increased borrowing in its first budget as it presses ahead with tax cuts despite weaker revenue.

The deficit in the year through June will be larger than the NZ$9.3 billion ($5.7 billion) forecast by Treasury in December and shortfalls in the next three years will also widen, delaying a return to surplus by a year to 2028, economists said ahead of Thursday’s budget. They expect the government to increase bond issuance by as much as NZ$15 billion over the four-year forecast period.

“The main focus of Budget 2024 will be on delivering key election promises,” said Miles Workman, senior economist at ANZ Bank in Wellington. “But the real test of the new government lies ahead — a credible path back to surplus needs to be signaled and the government needs to stick to it.”

The center-right government is slashing spending by cutting thousands of jobs in the public sector and reversing initiatives introduced by the previous left-leaning administration, saying it needs to rein in debt. But it is also delivering promised tax cuts to alleviate cost-of-living pressures on low and middle-income households, even as recessionary conditions curb tax receipts. 

Finance Minister Nicola Willis has said the tax package will be fiscally neutral and won’t add to inflation because it will be fully funded by savings and new revenue streams. She will present the budget at 2 p.m. tomorrow in Wellington.

Prime Minister Christopher Luxon’s National Party won the October election after pledging to lift income tax thresholds to boost workers’ take-home pay at a cost of NZ$9 billion over four years. Additional tax credits for low earners and families and the reintroduction of tax breaks for landlords would take the overall cost of the package to NZ$14.6 billion.

It is unclear whether the government has changed the plan in light of the worsening economic and fiscal outlook, but Willis has said the package, due to take effect from July 1, will be “relatively modest.”

The Reserve Bank, which has already said it needs to keep interest rates high for longer to tame inflation, will need to assess whether the tax cuts add to price pressures, Kiwibank economists said.

“To mitigate the impact on inflation, the introduction of tax cuts will have to coincide with the timing of public spending cuts,” they said. 

Tax Relief

National had initially planned to partly fund tax relief by allowing foreigners to buy houses worth more than NZ$2 million subject to a 15% levy, but that was scuppered in coalition negotiations with the nationalist New Zealand First Party.

Its leader, Winston Peters, has since said he’s open to allowing sales of homes to foreigners as long as they invest in the country, but there have been no further indications that such a policy could be included in the budget.

The economy was in recession in the second half of last year and latest data suggest it will struggle to grow this year. 

In the government’s Budget Policy Statement in March, Treasury projected annual average growth of just 0.1% in the year through June 2024. Tax revenue in the five years to 2028 would be NZ$13.9 billion less than previously expected, it said.

Willis said then that the government will target debt reduction, partly in an effort to reduce finance costs. Debt is currently about 43% of gross domestic product and the government’s desire is to get it into a band of 20-40% of GDP over time, she said.

While economists expect the budget to show debt on a downward trajectory, they don’t see it reaching 40% of GDP in the next four years.

©2024 Bloomberg L.P.