(Bloomberg) -- New Zealand Finance Minister Nicola Willis has cast doubt on her ability to return the budget to surplus by 2027, saying the weakening economy is likely to impact on tax revenue.

“I wouldn’t describe myself as optimistic about hitting the budget surplus” in the 2026-27 fiscal year that Treasury projected in December, Willis said in an interview Friday in Sydney. “I think it is realistic to say that given the downgraded forecast we’ve seen for the growth trajectory since then, you would expect that to have a revenue impact. And so that surplus position is challenged.”

After increasing government spending and borrowing during the pandemic, New Zealand is currently forecast to run seven straight years of budget deficits through 2026. The center-right coalition government, elected in October, has said it needs to get the books back into shape and will cut spending, but it still plans to deliver a tax cuts package worth NZ$14.6 billion ($9 billion). 

“It is important that we get the books back to surplus in the medium term, and that remains a goal” Willis said. “I can do so much with my fiscals in my first budget, but there are some factors that remain outside our control.”

Read More: New Zealand Treasury Secretary Warns of Growing Fiscal Pressures

The budget is due on May 30, and Willis will outline fiscal strategy in a budget policy statement on March 27.

Interest Rates

Balancing the budget has become more difficult as the central bank keeps interest rates elevated to tame inflation, curbing demand and reducing growth in tax revenue. Willis said higher borrowing costs are being felt across the economy.

“High interest rates are really kicking in,” she said. “We have unemployment ticking up, we have the growth forecast ticking down. Certainly businesses are telling me that they are seeing redundancies, they are seeing retrenchment.”

Willis also said the government will press ahead with its plan to raise income tax thresholds because rising wages meant too many workers were being lifted into higher tax brackets.

“A median wage earner in New Zealand used to be taxed at 17.5 cents on their marginal dollar, that’s now 30 cents due to bracket creep,” she said. “So we have to adjust that to make sure that we are encouraging and rewarding work.”

She reiterated that the tax package is fiscally neutral because it will be funded by a combination of spending reprioritizations and new revenue initiatives. 

“We’re confident we can deliver it responsibly and our coalition partners are very supportive of that,” Willis said.

Asked about debt, Willis said the government was “elected with a mandate to get government spending down as a proportion of the economy, and we’re working to really drive more value from the investment that we do do.”

“Our debt levels sit at about the same level as Australia relative to GDP but we do want to see that track down because we’re small and exposed,” she said.

--With assistance from Paul Allen, Michael Heath and Adam Haigh.

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