The Government’s books are set to improve by the end of the decade, with a return to surplus now forecast for a year earlier than at the last fiscal update, in December.
At the same time, the Treasury expects economic conditions could be tougher than previously expected as a result of the Iran War and fuel crisis, with the long-awaited recovery likely to be more gradual than hoped.
It’s therefore something of a tale of two forecasts for New Zealand, with Finance Minister Nicola Willis crowing that she is now on track for her 2028/29 surplus target, while households and businesses grow more concerned about their own budgets, spending and revenue.
However, the clear message from the Treasury is the economic disruption from the fuel crisis will be transitory. The economy is still expected to grow this year, albeit at a slower rate than we had previously thought. And though the economic damage from the war is now better understood, the possibility remains that it will hit the Government’s books even harder than currently expected.
In preparation for that, Willis has set aside $450 million as a contingency for future fuel crisis-related spending. Don’t expect any type of lolly scramble in time for the election, though – she was clear the same principles of “timely, targeted and temporary” would be applied to any future cash doled out from that fund.
Beyond the uncertainty prompted by the war, the government’s books are in pretty good shape. A $900m deficit in 2028/29, forecast in December, is now an expected $2.6 billion surplus – a gargantuan $3.5b swing.
That’s driven primarily by the rosy economic projections from next year onwards, with higher GDP driving up tax revenue for the government, with the Treasury expecting to book an extra $3.1b in that critical 2028/29 year.
Willis had to take the drastic measure in December of delaying her return to surplus target, from 2027/28 to 2028/29. And with the war and fuel crisis looming over everything, there were concerns the surplus might be pushed back further.
It’s no surprise, then, that Willis returned repeatedly to the subject of the surplus in her remarks to reporters and analysts in the Budget lock-up.
“Our fiscal plan set out to deliver a surplus in the 2028/29 fiscal year and today I’m happy to present forecasts that show we will achieve that,” she said.
“The Budget shows that despite the uncertainty and disruption caused by the conflict in the Middle East, with careful management the Government is now on track to return to surplus a year earlier than we were forecasting in December last year.”
She went on to warn that this number could change – having already swung $3.5b in one direction in the timespan of six months, economic headwinds or new fiscal pressures could easily take it the other way as well.
As a result of returning to surplus, NZ Debt Management has, for the first time since 2021, reduced its planned bond programme by $6b over the forecast period.
One medium-term threat to the Government’s books is the growing demands of Superannuation. Prior forecasts had shown the Government was to slow contributions to the NZ Super Fund and begin withdrawals in the coming years, as the fund was set to have enough cash to meet future demand.
Instead, new population projections and higher inflation have increased the expected future costs of Super, prompting the Government to hike contributions once again.
By 2030, the total cost of Super payments will be $31.2b, up from $23.2b last year.
Willis made clear in her remarks that she and National still want to see reform of the system, but have been stymied by NZ First in particular.
“I believe – and I’m conscious there are others to my left who might have a different view – that in the absence of doing anything about our settings for the future, we will be committing a huge act against intergenerational equity,” she said, referring to NZ First deputy leader and Associate Finance Minister Shane Jones.
“That is to say, that governments who put this off forever are essentially committing to tax people my age and younger more, and to pay less Super in the future. At some point, a responsible government needs to propose gradual, sensible, moderate changes that are well forecast for New Zealanders.”
Looking ahead, Willis made no changes to the Government’s planned operating allowances of $2.4b in Budgets 2027 and 2028 and extended the same level of spend for Budget 2029.
In capital expenditure, after the Government hiked investment in this year’s Budget, Willis left the $3.5b allowances in the next two unchanged. Budget 2029, however, will see a significant spend of $5b “to reflect expected investments in defence and hospital projects”.
The starkest economic impact of the fuel crisis is in inflation, which is expected to peak at 4 percent this year rather than the 2.4 percent forecast in December. It will then rapidly tail off in 2027, the Treasury estimates, to 1.6 percent (below the December forecast).
The economy will grow about a third slower than estimated in prior forecasts this year. While the half-yearly update in December put GDP growth for the year to June at 1.7 percent, the Treasury now projects just 1.2 percent growth.
By mid-2027, GDP growth will hit 2.3 percent (down from 3.4 percent in the December forecast) and 3.2 percent a year later (up from 2.6 percent).
In other words, the economy recovery will still play out, but delayed by roughly a year as New Zealand grapples with higher inflation and trade and global economic uncertainty.
As a result, the unemployment rate will peak at 5.5 percent this year (up from 5.3 percent in the December forecast) and fall more slowly in the coming years, to 5 percent in June 2027 and 4.5 percent the year after.
