New Zealand Finance Minister Nicola Willis. — Bloomberg
Wellington: New Zealand’s government is facing deeper budget deficits and a delayed return to surplus as a prolonged economic downturn and poor productivity hit tax revenue.
The operating balance before gains and losses (Obegal) is projected to remain in deficit until at least the year ending June 2029, according to new Treasury Department forecasts released yesterday in Wellington in the half-year fiscal and economic update.
In the May budget, Obegal was projected to return to surplus in 2028.
Finance Minister Nicola Willis unveiled an alternative measure of the operating balance which excludes revenue and spending by state-owned accident insurer ACC.
So-called Obegalx will return to surplus in 2029, Treasury predicts.
Under either measure, the government’s books are much weaker than portrayed in the middle of the year, with lower tax revenues as the economy takes longer to recover from recession.
Gross domestic product (GDP) is projected to grow an annual average 0.5% in the year through March 2025, less than a third of the pace forecast in May.
If the projections are accurate, the budget will be in deficit for at least nine straight years through 2028. Since taking office in late 2023, Willis has announced billions of US dollars of savings by cutting spending, firing public sector workers and reprioritising government programmes.
“The revisions reinforce the importance of the measures the government has taken to restore discipline to public spending and drive greater economic growth,” Willis said. “The Crown’s financial position has deteriorated over the past six years, but the economy has reached a turning point.”
Treasury projects growth will bounce back strongly in the 2025-2026 fiscal year, with GDP gaining 3.3%, reflecting the Reserve Bank’s aggressive interest-rate cuts.
Still, growth then slows over the forecast period because of poor labour productivity, which limits the capacity to expand, Treasury said.
The lift in productivity seen during the Covid-19 pandemic has failed to be sustained, it said.
Tax revenue in the next four years is projected to be NZ$13bil or about US$7.5bil smaller than previously forecast as weaker assumed private consumption hits sales tax receipts, and softer wage and employment growth curbs income tax, the Treasury said.
Government expenses are expected to be higher across the forecast period as rising debt incurs more finance costs, and there are extra costs in education as school rolls increase.
In the year through June 2025, the Obegal deficit is now projected to widen to NZ$17.3bil compared with the May forecast of a NZ$13.4bil deficit.
The new Obegalx deficit is projected to be NZ$12.9bil from NZ$9.6bil in the budget. — Bloomberg
