A weakening economy will provide a sobering backdrop when Finance Minister Nicola Willis delivers her first budget this Thursday.
Willis has promised that it will be "fiscally neutral", with no borrowing to fund promised tax relief. Instead she says tax cuts will be funded by savings, reprioritisations and other taxes.
In a preview note, Kiwibank said it will be like a "Goldilocks budget" with "no big spend-up and no austerity either".
During the election campaign, the National Party's tax threshold adjustment was costed at around $9 billion over four years. However, the economy has weakened since then with the forecast corporate tax take down $1.7 billion and GST returns down $0.3 billion.
"It's the shortfall of GST receipts that has us sitting up and paying attention. It's a clear signal of a slowdown in real economic activity," said Kiwibank.
In its budget preview, ASB expected the size of the income tax package to be scaled back or even delayed.
"With the foreign buyers' tax (on house purchases) in the dustbin additional funds need to be raised. The cost of restoring interest deductibility on residential investor lending also looks to be higher than originally costed," said ASB.
ASB is in line with other forecasters in predicting that a return to budget surplus, where the government earns more than it spends, will be pushed out by a year.
The New Zealand Institute of Economic Research will release its Quarterly Prediction for the economy tomorrow, and said the revised economic and tax outlook means "this will probably delay the timing of the Government returning to a Budget surplus by one year to 2027/28."
Economists also expect the government to borrow more to make up for a smaller tax take.
ANZ is expecting increased borrowings of $10 billion through to 2028, while Westpac is predicting a $15 billion increase. The bank said that borrowing could be smaller "if tax cuts have been scaled back or spending control is tighter than we have assumed. But it could also be larger if the Treasury's growth forecasts are revised down more than we have assumed."
What will this mean for interest rates?
ASB said the Reserve Bank will be hoping the government's move to improve the state of its books will happen quickly and is larger than previously forecast.
That way inflation could come down sooner. The RBNZ is currently pencilling in the first cut to the Official Cash Rate in mid-2025. ASB expects that to happen slightly sooner in February next year with successive drops taking the OCR down to 3 percent in mid-2026.
