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NEW ZEALAND: Weak Economy & Productivity Drive Wider Budget Deficits

NEW ZEALAND
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NZ Treasury has revised down its growth expectations for the current financial year. Growth is then forecast to slow from FY27 to 2.4% due to limits on the supply side, especially from soft labour productivity (which has been revised down). The budget deficit widens this financial year but then improves from FY26 as the economy recovers but the surplus is delayed a year to FY29. 

  • Treasury projects its adjusted budget deficit to be 3% of GDP this financial year up from 2.2% in May and 2.3% in FY26 up from 1.1%. A 0.1% deficit is expected in FY28 following a forecast 0.9% surplus in May. The revisions are unlikely to alter the RBNZ’s near-term easing path though, given much of the deterioration is cyclical. It will incorporate Treasury’s updated forecasts in its February statement.
  • There has been a pickup in the core expense-to-GDP ratio due to automatic stabilisers, increased education expenditure and higher debt servicing costs, but it should decline from FY26 as government constrains “Budget operating allowances”.
  • The core revenue ratio is forecast to rise 1pp over the forecast horizon but has been revised lower as the weaker expected improvement in productivity detracts almost 1.1% from nominal GDP and results in a smaller tax base.
  • The net debt ratio has been revised higher starting this financial year. FY25 is now expected to be 45.1% of GDP up from 43.5% in the May budget with FY26 in line. It doesn’t begin to decline until FY28.
  • Growth has been revised down to 0.5% in FY25 from 1.7% but the remaining years are little changed with the economy forecast to pickup to 3.3% in FY26. The peak unemployment rate in FY25 has been revised 0.2pp higher to 5.4%. Treasury notes that the risks to its projections are “broadly balanced” but there are significant uncertainties around them, especially productivity and the global economy.
  • FY25 inflation has been revised down 0.4pp to 1.8% y/y with it returning to 2% thereafter, the RBNZ’s target mid-point.
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NZ Treasury has revised down its growth expectations for the current financial year. Growth is then forecast to slow from FY27 to 2.4% due to limits on the supply side, especially from soft labour productivity (which has been revised down). The budget deficit widens this financial year but then improves from FY26 as the economy recovers but the surplus is delayed a year to FY29. 

  • Treasury projects its adjusted budget deficit to be 3% of GDP this financial year up from 2.2% in May and 2.3% in FY26 up from 1.1%. A 0.1% deficit is expected in FY28 following a forecast 0.9% surplus in May. The revisions are unlikely to alter the RBNZ’s near-term easing path though, given much of the deterioration is cyclical. It will incorporate Treasury’s updated forecasts in its February statement.
  • There has been a pickup in the core expense-to-GDP ratio due to automatic stabilisers, increased education expenditure and higher debt servicing costs, but it should decline from FY26 as government constrains “Budget operating allowances”.
  • The core revenue ratio is forecast to rise 1pp over the forecast horizon but has been revised lower as the weaker expected improvement in productivity detracts almost 1.1% from nominal GDP and results in a smaller tax base.
  • The net debt ratio has been revised higher starting this financial year. FY25 is now expected to be 45.1% of GDP up from 43.5% in the May budget with FY26 in line. It doesn’t begin to decline until FY28.
  • Growth has been revised down to 0.5% in FY25 from 1.7% but the remaining years are little changed with the economy forecast to pickup to 3.3% in FY26. The peak unemployment rate in FY25 has been revised 0.2pp higher to 5.4%. Treasury notes that the risks to its projections are “broadly balanced” but there are significant uncertainties around them, especially productivity and the global economy.
  • FY25 inflation has been revised down 0.4pp to 1.8% y/y with it returning to 2% thereafter, the RBNZ’s target mid-point.