The Government’s books are expected to deteriorate by a lot more than anticipated on the back of the Finance Minister and Treasury tempering expectations around the state of the economy.
There is no surplus in sight. The books are expected to remain in the red until at least the year to June 2029.
At the Budget in May, Treasury expected the books to get back to surplus by 2027/28.
The political situation is such that the Government is (against Treasury’s wishes) introducing a new way of calculating the operating balance before gains and losses (Obegal) that strips out the impact of the Accident Compensation Corporation (ACC).
A recent court ruling, which could see an additional 100,000 people who were abused as children become eligible for compensation, has substantively increased the state injury insurer’s outstanding claims liability. ACC claimants are also taking longer to get rehabilitated.
According to the new measure, “Obegalx”, the books are expected to return to surplus by 2028/29.
The issue is that productivity and economic growth are lower than expected by Treasury.
This means the Government is expected to collect less tax than it was banking on.
Because Finance Minister Nicola Willis isn’t at this stage planning to cut spending by more than planned, or introduce new or higher taxes, Treasury intends to issue a lot more debt.
It plans to issue $20 billion, or 16%, more New Zealand Government Bonds in the four years to 2027/28 than forecast at the Budget in May.
This increase is about four times larger than economists, who were already wary of the deteriorating outlook, expected it to be.
“As you can see, we have a tough job on our hands,” Willis said, as she opened her address to media at an event where Treasury published its Half-Year Economic and Fiscal Update (Hyefu) and Willis released her preview of Budget 2025 – the Budget Policy Statement.
Willis reaffirmed her commitment to increasing operational expenditure by $2.4b – a relatively small quantum – in each of the next three budgets, and also in Budget 2028.
However, she said the Government’s capital expenditure would be slightly higher over the next three Budgets.
Willis said she would consider whether the worse-than-expected economic outlook would “warrant any further action” by her in the future.
As previously signalled, she is looking at requiring charities that are really businesses to pay more tax.
Getting into the details of the Treasury forecasts, it sees Gross Domestic Product (GDP) increasing by a modest 1.6% in the year to June 2025, before rising by 3.4% and 2.7% in the following two years.
It forecasts GDP per capita dipping into the negative for the second year in a row, before recovering.
“Across the four years to June 2028, the forecast for nominal GDP is a cumulative $19.8b lower than in the Budget Update,” Treasury said.
“Slower growth in the nominal economy is a key driver of lower forecasts of tax revenue.
“Total core Crown tax revenue is cumulatively $13b (0.7% of cumulative nominal GDP) lower across the forecast period to 2028 compared to the Budget Update.”
On the other side of the ledger, core Crown expenditure is expected to be higher than forecast in May.
The bulk of the jump comes from New Zealand Superannuation payments. Other benefit expenses and higher interest costs are also factors.
The Government’s core Crown finance costs are expected to keep rising every year until they hit $12b in 2028/29.
The Government can’t start repaying its Covid-era debt until its books get back into surplus.
So it is renewing its debt, all the while issuing new debt for new expenditure.
Net core Crown debt is expected to rise to 45% of GDP in 2024/25, before peaking at nearly 47% in 2026/27.
Willis had promised to get debt to GDP tracking south, below the 40% of GDP mark.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
