September 13, 2023

Government books show cost of living pressures soon to ease

Treasury’s pre-election forecasts show a country moving freely out of recession

Treasury’s Pre-Election Economic and Fiscal Update (PREFU) forecasts show an optimistic economic outlook, a resilient economy, and a light at the end of the tunnel for the current cost-of-living crisis being felt across the motu.

On Tuesday, the New Zealand Treasury opened its books for the PREFU. Their very optimistic forecasts show a resilient and stable economy amid ongoing global uncertainty. 

PREFU forecasts pave a pathway forward out of the current cost-of-living crisis. 

Treasury's forecasts show a country moving freely out of recession, with a slow upward growth forecast for the economy over the next five years. While New Zealand has recently experienced two consecutive quarters of negative growth (December 2022 and March 2023),   the Treasury's forecast shows GDP is expected to grow slowly and consistently until the end of the forecast period (2027). PREFU forecasts that annual GDP will grow 1.7 percent next year, peaking at 3.7 percent in 2026. Today, the economy is 2.9 percent larger than it was a year ago and seven percent larger than at the start of the COVID-19 pandemic in 2020.

While some of the forecasts seem very optimistic, such as inflation forecast to drop to 3.8 percent by June next year, the trend seems clear: a growing economy, inflation coming down, and wage growth ahead of inflation projected to continue out until the end of the forecast period. 

The real challenge is in the crown accounts. 

The accounts show an infrastructure deficit of $210 billion and net migration estimated to reach 96,000 for the September 2023 quarter. The infrastructure deficit means there are currently $104 billion worth of roads, schools, hospitals, and more that should exist today but do not. Additionally, there is a further $106 billion infrastructure financing needs for the future that are currently missing. With the infrastructure deficit and high net migration in mind, along with both major parties planning for reduced tax revenue post-election, the government will need to decide how it can maintain much needed, and overdue, investment with ever more constrained Crown accounts. 

The Treasury forecasts show that government debt will continue to be low by international standards. Before COVID-19, New Zealand's net debt to GDP was 16.4 percent. As of June 2023, it sits at 18.1 percent and is forecast to reach 22.3 percent next year. For an international comparison, net debt to GDP is much higher in similar OECD countries.


Net Debt to GDP (%)

    Canada New Zealand Australia Germany UK USA Japan
Actual 2019 8.47 1.8 27.88 40.05 74.62 83.6 151.75
2020 15.73 11.3 34.47 45.38 94.5 98.33 162.34
2021 15.38 10.5 33.28 45.58 96.74 98.33 156.9
2022 13.93 17 32.36 45.07 91.86 94.16 162.65
2023 14.06 18.1 35.9 46.69 95.1 95.46 161.01
Forecast 2024 13.91 22.3 38.24 46.79 98.2 99.84 159.3

Source: NZ Treasury PREFU 2023 and IMF

Note: The IMF calculates net debt as gross debt minus financial assets corresponding to debt instruments. Monetary gold and SDRs, currency and deposits, debt securities, loans, insurance, pension, standardized guarantee schemes, and other accounts receivable. 

The unemployment rate for the June 2023 quarter was at 3.6 percent, forecast to increase to 4.8 percent in 2024. Unemployment is expected to peak at 5.4 percent in 2025, which is below the long-run average of 5.8 percent, then drop back to 4.6 percent in 2027. 

According to Treasury forecasts, there were 13,000 more people out of work this June 2023 compared to a year ago. 

Unemployment, at its anticipated peak of 5.4 percent in 2025, will mean an additional 57,000 more people out of work when compared to June 2023. By comparison, Rotorua has an estimated population size of 57,900. 

For June 2023, CPI increased by six percent since June 2022, while wages (average ordinary-time hourly) are forecast to grow by 6.9 percent. Meaning workers, on average, will have 0.9 percent higher purchasing power. By 2024, inflation is forecast to drop to 3.8 percent while wages are set to rise 6.2 percent — a welcome relief for workers during this cost-of-living struggle. 

Source: NZ Treasury PREFU 2023

Following 2021's incredible jump in house prices of 29.7 percent, projections for 2023 have house prices crashing by 9.6 percent this June 2023. However, following the economic outlook trend of slow, gradual growth, house prices are then forecast to increase by 1.6 percent next year and continue a gradual price growth each year until the end of the forecast period (1.6 percent in 2025, 2.7 percent in 2026, and 3.9 percent in 2027).  

Source: NZ Treasury PREFU 2023