The Treasury’s pre-election economic and fiscal update warns future governments will have to keep a tight lid on spending for more than a decade.
It said New Zealand’s fiscal position will improve across the next 15 years but only if all the budgets to come were smaller, in real terms, than Budget 2023.
The agency’s pre-election forecasts were not quite as bad as had been predicted by some economists, with government borrowing increasing by $9 billion across the next four years — rather than $10 billion to $15 billion forecast.
Finance Minister Grant Robertson’s recent cost saving initiative has helped keep the deficit under control and will usher the Crown accounts back into surplus in the 2026/27 fiscal year.
Part of these savings was cutting future operating allowances (planned new spending) from $4.5 billion in Budget 2023, down to $3.25 billion in 2024 and only $3 billion thereafter.
In the pre-election update, Treasury said these allowances were enough to deliver current government policy but not much more.
It said past analysis showed $3 billion should be “broadly sufficient” to meet unfunded critical cost pressure, although “significant trade-offs will be required”.
“There could also be additional demand (eg. population changes) that could add extra pressure to future Budget allowances,” Treasury said.
The fiscal outlook would be worse than forecast if future governments continued the recent trend of exceeding budget allowances without increasing revenue.
The forecasts—which show net debt falling to just 9.2% of GDP in 2037 and a surplus averaging 0.2% across the period—would be very different if operating allowances were increased by just $1 billion.
Deficits would then average 2.3% of GDP and net debt would rise to be just over 25% in 2037.
Treasury said this forecast was for flat-to-falling government consumption, with real consumption ending the forecast period similar to its current level.
“This represents a significant departure from recent upward trends. Over the next four years real government consumption is forecast to decline on average 0.2% per year, in contrast to the decade to June 2023 when growth averaged close to 4% per year,” it said.
“In an environment of relatively high population growth, the flat-to-falling government consumption implies declining consumption on a per-capita basis”.
No new recession
Despite the tight Crown accounts, Treasury’s economic forecasts were similar to the ones included in Budget 2023 but with a more moderate economic slowdown.
The New Zealand economy could avoid further recession and grow 1.3% in 2024, however economic growth per person will fall 0.7% and recover just 0.6% in 2025.
This was more positive thanks to an increase in net migration which has supported employment growth and boosted house prices.
Treasury said slow economic growth would continue over the next eighteen months as high inflation necessitates high interest rates.
Unemployment would rise from the current 3.6% rate to 5.4% in 2025, and then retreat to 4.6% by 2027. The Official Cash Rate was forecast to peak at roughly 5.7% and stay until 2025.
“In order to contain the additional non-tradable inflation, interest rates will stay elevated for a longer period than forecast at the Budget Update,” Treasury said.
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