IMF wants ‘tight’ Budget
The International Monetary Fund is pressing the Government to get its books back into balance and has reiterated its previous calls for major tax reforms, while appearing to voice caution over tax relief that is expected in the Budget.
The Washington-based UN agency said in a report released yesterday that, at about 20% of GDP, New Zealand’s net government debt was sustainable, but noted that it had risen “more rapidly than in many advanced economies in recent years”.
The debt, last measured at nearly $83 billion at the end of January, would continue rising without “decisive consolidation”, it said.
The Government’s goal should be to return to surplus “in the four-year forecast period”, the IMF said.
New Zealand mission chief Evan Papageorgiou clarified that by that the IMF meant returning to surplus by the year ending June 2028.
The Treasury has been forecasting a return to surplus a year earlier, in the year ending June 2027, but Finance Minister Nicola Willis warned in December that the Government would have its work cut out meeting that goal.
Westpac economist Darren Gibbs said on Monday that it suspected Treasury forecasts released in the May Budget would show that because of weaker-than-expected economic growth, it was not on target to achieve a surplus until a year later.
He expected the Government would announce a need for between $7b and $10b of extra borrowing on Budget day.
The IMF said the Government should keep this year’s Budget tight.
Papageorgiou said the IMF did not know the details of the tax relief the Government was planning but made clear it believed it was important it was fully offset by spending cuts, to avoid any upside pressure on inflation.
The IMF again called for New Zealand to introduce a comprehensive tax on capital gains, as well as a land tax and said it should “increase the progressivity of income tax”, which means widening the gap between lower and higher tax rates.
Tax policy reforms were needed to promote investment and productivity growth and bring in additional revenue, it said.
Measures to boost the supply of housing were “urgently needed”, it said, describing housing-affordability issues as “particularly severe”.
“Earlier efforts in NZ have shown that changes in zoning can be effective in boosting housing supply. Additional reforms of land use restrictions are essential for further construction.”
The IMF continues to expect New Zealand’s GDP growth to slow to 1.1% in 2024, in keeping with its previous forecasts, before picking up to at least 2% next year.
More encouragingly, it predicted the Reserve Bank would be able to start cutting interest rates later this year — earlier than the central bank itself is predicting — given its expectation that inflation would drop below 3% in the third quarter of this year.
The IMF released its report in the wake of claims that the Government would be $5.6 billion short in funding its previously proposed tax relief.
But Prime Minister Christopher Luxon flatly rejected the IMF’s advice on a comprehensive capital gains tax, saying that the Government did not believe introducing one would be a good idea.
ANZ chief economist Sharon Zollner said that from where ANZ sat, the IMF was “just another commentator”.
“But obviously, they are pretty high profile.”
ASB chief economist Nick Tuffley said IMF reports provided a snapshot of where it saw the economy. “In that sense it is part of a crowd of people assessing the state of the economy.”
Countries that were in financial trouble and in need of bail-outs from the IMF had in practice to take its advice on board, he said.
Elsewhere, governments could listen to what the IMF had to say “but at the end of the day governments will focus on what they see as their priorities”, he said.
Westpac chief economist Kelly Eckhold said it would be no surprise for the IMF to be calling for “fiscal consolidation”. But Westpac believed the economy was in the middle of a “pretty sharp downturn” which would limit the Government’s options, he said.