The Government isn't laying out exactly what its operating allowance will be in the upcoming Budget in a breach of convention.
Instead, Finance Minister Nicola Willis says the amount of money that will be allocated to fund new spending and revenue initiatives will be specified in the Budget after Cabinet has considered updated forecasts being prepared currently by the Treasury.
However, she has said the operating allowance will be less than $3.5 billion for Budget 2024, which will be delivered on May 30.
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Governments usually give specific operating allowances for their upcoming Budgets in the Budget Policy Statement (BPS). This BPS was already delayed due to coalition negotiations.
She said the Government believed it was "sensible" to not show the exact operating allowance until the Budget so those latest projections are taken into account. Willis denied the Coalition parties were in disagreement over what the operating allowance should be.
Willis also said the former Government tended to publish an operating allowance in the BPS and then increased it at the actual Budget.
Due to the deteriorating economic circumstances, expectations of when New Zealand will return to surplus are changing. The Government is now looking at a path back to surplus in 2027/28, rather than 2026/27 as previously expected. A more specific timeline will be provided in the Budget.
Willis said the Government won't chase a surplus in any one year at the cost of frontline services.
While no exact operating allowance was provided, the Budget Policy Statement laid out the Government's key priorities for the Budget.
These included delivering tax reductions, identifying savings across departments and agencies, focusing new spending on areas like health, education and law and order, keeping tight control of spending while funding some high-priority commitments and urgent cost pressures, and developing a long-term, sustainable pipeline of infrastructure investments.
"Tax reductions will be funded within the operating allowance through a mixture of savings, reprioritisations and additional revenue sources," said Willis.
"Funding tax relief in this way means we won't have to borrow extra to provide tax relief and we won't be adding to inflationary pressures."
Willis said the Government's fiscal strategy will be getting New Zealand back into surplus, putting net core Crown debt on a downward trajectory towards 40 percent of GDP (it's currently at 43.5 percent), and reducing core Crown expenditure towards 30 percent of GDP (it's currently at 33.4 percent)
Alongside the BPS, Treasury provided a forecast scenario for growth which indicated New Zealand's economic outlook has deteriorated since the Half Year Economic and Fiscal Update (HYEFU) in December last year. This doesn't take into account any Government policy changes made since December.
"Economic activity has been weaker than previously thought and inflation has eased more quickly," a Treasury document said. "There is also increasing evidence that labour productivity growth, which plays an important role in the potential capacity of the economy, is lower than previously thought."
"As a result, we are expecting a weaker economic and tax outlook over the next five years."
For example, the annual average percentage change for real production GDP in 2024 is expected to be 0.1, rather than 1.5 percent projected in HYEFU. Core Crown tax revenue for 2024 is expected to be $1.2 billion less than forecast in the HYEFU. For 2028, it is expected to be $4.2 billion less.
"The now-weaker picture of GDP over 2023 and the somewhat faster decline in inflation are consistent with the slowing in tax revenue over the past couple of months, while the weaker growth outlook has implications across the period to June 2028," Treasury said.
"Overall, compared to the Half Year Update, tax revenue in this scenario is cumulatively $13.9 billion lower in the five years to 2027/28."
The upcoming Budget is expected to contain tax relief for low and middle-income New Zealanders, though the Government is not saying whether it will be the same amount as promised by National during the election campaign.
Ministers have been rolling out the line employed by all governments that Budget-related material isn't discussed publicly until the Budget. Some pre-Budget announcements are made, such as the Government on Monday confirming it will move ahead with the FamilyBoost scheme to give tax rebates on childcare costs.
Willis has been dampening down expectations that New Zealand's books will return to the black in 2026/27 as previously forecast due to worsening economic circumstances.
At the HYEFU last December, Willis said it was expected to be "wafer-thin" at just $140 million compared to $2.1 billion forecast in the pre-election update. She said at the time that would necessitate another increase to borrowing, with the net debt track higher than previously forecast.
In a speech at the Auckland Business Chamber earlier this month, Willis said growth forecasts would not "make happy reading". She said the outlook had become "even more pessimistic" since last year's forecast and gross domestic product revisions had showed the economy is smaller than previously thought.
"Treasury is now warning me that growth over the next few years is likely to be significantly slower than it had previously thought."
Last week, Stats NZ data showed GDP fell by 0.1 percent in the December 2023 quarter following the economy shrinking the quarter before. That meant New Zealand was in a technical recession.
Economists have suggested the Government not deliver tax cuts this year, allowing it to instead pay down debt.
"If we were lowering the fiscal deficit, cutting spending and not cutting taxes we would bring forward the time when the Reserve Bank would be able to be cutting the OCR," said former Reserve Bank economist Michael Reddell.
"I and plenty of others have argued that the priority should be getting back to surplus. You don't run tax cuts when you're running deficits."
Despite that, Willis has maintained the Government will provide tax relief.
The exact way those tax cuts will be funded is also expected to be revealed in the Budget. Government departments have been asked to look at finding savings of about 6.5 percent and either channel that back into the centre for tax cuts or into frontline services.
HYEFU was delivered alongside the mini-Budget which contained nearly $7.5 billion of savings that came from reversing some of the previous Government's policies, including half-price transport for those under 25 and extending 20 hours free early childhood education to two-year-olds.
The Government's also previously confirmed interest deductibility changes will start from April 1, though the full package is now expected to cost $2.9 billion, $800 million more than what National budgeted.
