New Zealand will avoid a recession as the rebuild from the Auckland floods and Cyclone Gabrielle boost activity, Treasury is now forecasting.
But a softer outlook for tax revenue and the Government’s Budget 2023 decisions (which include spending on the cyclone recovery) means New Zealand won’t return to a surplus for another year.
After a challenging few years for the economy (think the COVID-19 pandemic), the Government’s books have been shaken up again by the devastating North Island weather events, the damage from which is estimated to cost up to $14 billion.
That means projections presented prior to the floods and cyclone haven’t necessarily come to fruition.
As a result, Treasury is now forecasting New Zealand will avoid a recession as the rebuild ramps up activity and tourism is strong.
“Compared to the Half Year Update, the Treasury now expects a more moderate slowdown in activity over the next 12 months,” the Budget Economic and Fiscal Update (BEFU) said.
“Growth slows to 1 percent in the June 2024 year and averages 2.7 percent thereafter. Continued strength in tourism, strong growth in net migration, rebuild activity associated with the North Island weather events and less contractionary fiscal policy wil help to offset slowing demand in other parts of the economy.”
Core Crown tax revenue for 2023 is forecast to be $115.3 billion, compared to $118.1 billion projected in December’s Half Year Update. Expenses this year are thought to be $128.2 billion, rather than the $129.3 billion projected.
“In recognition of the need to be fiscally sustainable over the forecast period, spending is forecast to decline as a percentage of GDP to close to the long run average,” said Finance Minister Grant Robertson.
The Government’s Operating Balance Excluding Gains and Losses (OBEGAL) is expected to record a deficit of $7 billion in 2023, up from $3.6 billion projected in December. It will then reach $7.6 billion in 2024, rather than $500 million.
“The fiscal outlook is expected to then improve across the forecast period as momentum in the economy recovers. However, the impact of the soft economic outlook on core Crown tax revenue and the Government’s Budget 2023 decisions contribute to a slower return to an OBEGAL compared to the Half Year Update.”
This means the surplus has been pushed out to the 2025/26 year.
“The Government’s books will be impacted by the added costs of the extreme weather events, higher inflation costs and lower growth,” said Robertson.
“Despite these challenges, we will return to surplus in 2025/26, the same length of time taken by National to return to surplus following the GFC and only one year later than previously forecast.”
Net debt as a percentage of GDP is expected to peak in 2023/24 at 22 percent, slightly higher than the 21.4 percent previously forecast. It will fall to 18.4 percent by 2026/27.
Robertson said those debt levels continue to be among the lowest in the OECD. The peak is well below the Government’s debt ceiling of 30 percent.
Inflation is expected to run slightly lower in the short-term than forecast last year. Annual change in 2023 is forecast to be 6.2 percent, rather than 6.4 percent, and be 3.3 percent in 2024 rather than 3.5 percent. It’s still projected to return to the 1-3 percent band in 2025.
But unemployment will peak lower. It was forecast to peak at 5.5 percent in the June 2024 quarter, but will now peak at 5.3 percent in the June 2025 quarter.