New Zealand’s economy to stay sluggish for two more years

Less tax revenue

The deficit in the year ended June 2023 was provisionally $NZ10 billion compared to the $NZ7 billion forecast in May’s budget, the documents show.

Tax collected was $NZ2.9 billion less than projected in May and revenue in the year through June 2024 will be $NZ1.6 billion less than expected four months ago.

Mr Robertson said his plan, which includes trimming baseline spending, reviewing the use of consultants and reducing future budget allowances, will see net government debt peak at 22.8 per cent of gross domestic product in 2025 and fall to 21 per cent two years later.

Net immigration is projected to soar to a peak of almost 100,000 in the third quarter this year – about 33,000 higher than in the budget projections. The population surge is helping to ease labour shortages but also underpinning demand for houses and will stoke near-term growth, the Treasury said.

That will add to inflation pressure and keep interest rates higher for longer, it said.

Inflation is expected to fall below 3 per cent by the end of next year from 6 per cent currently, albeit a slower decline than previously forecast. Unemployment is seen peaking at 5.4 per cent in 2025.

While S&P Global Ratings last week affirmed New Zealand’s AA+ foreign currency credit rating, the weakness in the government books provides a target for opposition parties as they attack Labour’s economic stewardship ahead of the election.

“Treasury’s latest forecasts show the economy isn’t working for Kiwis,” National Party leader Chris Luxon said. “The economic slowdown is expected to last for another 18 months, as interest rates stay high for longer in an attempt to combat persistently high inflation driven by Labour’s addiction to spending.”

Support for Labour dropped to a six-year low of 26.8 per cent in a Newshub-Reid Research poll published this week. By contrast, National had 40.9 per cent support, enough to command a majority in parliament if it teams with the right-wing ACT Party.

Labour is offering benefit increases for low-income families and the removal of sales tax on fruit and vegetables as a way of relieving cost-of-living pressures if it’s re-elected for a third term. National is offering income tax cuts, which Labour says are unaffordable.

Whoever forms the government, they will face sluggish economic growth as rising prices and high mortgage rates curb household spending. Still, the Treasury revised up its economic outlook slightly.

It predicts annual average growth will slow to 1.3 per cent by mid-2024, which is stronger than the 1 per cent expected in the budget.

The agency continues to predict the nation can avoid another recession, unlike the central bank and several bank economists who forecast a contraction starting in the second half of 2023.

Bloomberg