The pre-election forecasts offer a rosier picture of the economy, with wages growing ahead of inflation, but tougher times for the Government’s own books, Marc Daalder reports
New Zealand’s economy will keep growing after our very brief technical recession, the latest Treasury figures suggest.
For the year to June 2023, GDP is expected to have increased 3.1 percent, despite a 0.7 percent contraction in the December 2022 quarter followed by a 0.1 percent decline in March which prompted recession fears.
Overall, the economic projections in the pre-election economic and fiscal update (Prefu) are largely unchanged from the last set released alongside May’s Budget. Where they differ, they offer a rosier picture of the path forward for New Zealand.
Growth will still slow in the next year, falling to just 1.3 percent, but will speed up afterwards and average 2.6 percent over the forecast period. It’s driven in large part by a surge in net migration, forecast to peak at 100,000 in the year to September, which will also spur a recovery in house prices.
Real GDP and Real GDP per capita
Inflation will fall back under 3 percent next year, wages will grow nearly 5 percent a year on average (and continue to keep pace ahead of inflation) and unemployment will peak at 5.4 percent – well below the long-term average.
Where things look grimmer is in the Government’s own accounting. Return to surplus has been pushed back 12 months to the 2026/27 year as tax revenue comes in below expectations and spending spikes in response to the year’s extreme weather events.
Tax revenue for the Crown will be $2.9 billion below estimates made at the Budget for the 2023 year and $6.4 below Budget forecasts through 2027. This was fuelled mostly by lower corporate profit (and therefore lower corporate tax revenue) than expected in 2022, which continues to flow through future forecasts.
Expenditure, meanwhile, will be $6.7 billion higher over the forecast period.
This drives an increase in the size of the deficit, from $7 billion in 2023 at the Budget to $10 billion in the new figures. In 2025/26, the Government will still be running a $1.5 billion deficit rather than the $600 million surplus previously anticipated.
OBEGAL compared to the Budget Update
All of this will be funded through debt, which will rise to 22.8 percent of GDP in the 2024/25 year before falling to 21 percent of GDP by mid-2027.
Finance Minister Grant Robertson focused on the state of the economy in his statement accompanying the new figures.
“The economy is holding its own in an uncertain global environment,” he said. “Our economic plan to support New Zealanders dealing with the cost of living while investing in building a stronger, more resilient and inclusive economy is working.”
On debt, he said New Zealand still compares favourably to Australia (expecting net debt to reach 36 percent of GDP next year), the United States and the UK (both hitting 95 percent of GDP).
“Our continued focus on careful and prudent financial management is even more important as we know the North Island Weather Events will have a sizeable impact on the Government’s finances in coming years as we support the communities and regions affected with the recovery and rebuild.”
The Government’s fiscal rules were still being followed with levels of debt below the 30 percent ceiling and a surplus still expected in the forecast period, he said.
The surplus was largely enabled by the $4 billion savings initiative announced by Robertson and Prime Minister Chris Hipkins in August, which means the Crown will run a $400 million surplus in 2026/27 rather than a $1 billion deficit without it.
