Higher FY24 Deficit Forecast Creates Some Uncertainty Around RBNZ

Treasury has released its pre-election budget economic and fiscal update which gives a starting point for the government that will follow the October 14 elections. Polls currently suggest that there will be a change of government. The updated projections show a better growth outlook over the forecast horizon with lower unemployment, but the current account deficit has been revised higher. While inflation has been revised down for FY23 it is now expected to be higher in FY24. The fiscal outlook has deteriorated with the surplus pushed out one year to FY27.

• The FY24 forecasts may be a concern for the RBNZ as Treasury has revised up CPI inflation to 3.8% from 3.3% and the deficit has been revised 0.5pp higher to 2.7% of GDP. Revised inflation is consistent with the RBNZ’s FY24 forecasts but while FY25 is still within the band Treasury’s projection at 2.5% continues to be higher than the RBNZ’s 2.2%. Growth is stronger and the budget deficit an additional 0.4pp compared to the RBNZ. The RBNZ had revised higher its deficit expectations in August but Treasury’s are higher again and it remains to be seen if this increase in stimulus will be enough to worry the central bank.
• Treasury now expects the FY24 deficit to be 0.5pp higher at 2.7% of GDP adding 0.3pp to the net debt ratio at 22.3%. In the budget it expected a surplus in FY26 of 0.1% of GDP but that is now a deficit of 0.3% and a surplus of 0.4% now waits until FY27. Given how far out this is, the probability of a surplus is likely to be very fluid.
• Production-based GDP in FY24 has been revised 0.3pp higher to 1.3% and the unemployment rate down 0.2pp to 4.8%. The current account deficit as % GDP has been revised 0.5pp higher across the forecast years.