New Zealand Government Faces Later Return To Budget Surplus

The New Zealand government will head into an election year facing deeper budget deficits and a delayed return to surplus as an economic recovery takes longer to gather momentum.

The operating balance is projected to return to surplus in the year ending June 2030, according to new Treasury Department forecasts released Tuesday in Wellington in the half-year fiscal and economic update. In the May budget, the surplus was expected in 2029.

Despite the forecasts, Finance Minister Nicola Willis is targeting a return to surplus a year earlier in 2029, she told a briefing. Previously she aimed to reach surplus in 2028.

"Achieving these fiscal goals will require ongoing restraint and tight control of discretionary spending," she said. "Government agencies have been instructed to keep seeking savings and efficiencies that support this disciplined approach."

If the projections are accurate, the budget will be in deficit for at least 10 straight years through 2029.

Since taking office in late 2023, Willis has targeted savings by cutting spending, firing public sector workers and reprioritizing government programs. Annual savings have reached about NZ$11 billion ($6.4 billion), she said today.

Still, the deficits and the need for fiscal restraint adds to signs the government will have limited scope to boost spending ahead of an election expected in late 2026. Willis reiterated that health, education, defense and law and order will be priorities in her next budget.

The near-term fiscal outlook reflects weaker gross domestic product growth as high interest rates and global uncertainty stalled a recovery earlier this year. Annual average growth is now projected to be 1.7% in the 12 months through June 2026, much less than the 2.9% pace forecast in the budget.

Falling interest rates are expected to lift GDP growth to 3.4% in the 12 months through June 2027 while the pace of expansion will slow thereafter to around 2.5% a year, Treasury said.

"Monetary policy stimulus is expected to underpin a cyclical recovery," the agency said. "Improved consumer spending gives some confidence that the recovery is under way, with increased business and residential investment expected to follow."

The budget balance – the operating balance before gains and losses excluding revenue and spending by state-owned accident insurer ACC, or OBEGALx – will be NZ$13.9 billion in the year through June 2026. That's 3% of GDP and wider than the NZ$12.1 billion projected in the budget.

OBEGALx is expected to narrow to NZ$10.4 billion in 2027 and reach a surplus of NZ$2.3 billion in 2030.

The wider deficits imply more debt, with net core Crown debt rising to NZ$254 billion or 46.1% of GDP by 2030. The peak in debt will come in 2028 at 46.9% of GDP.

Source: Bloomberg Europe