May 18, 2023

Government hopes for brighter future than RBNZ intends

Observations from the Budget Economic and Fiscal Update 2023

Despite the efforts of the Reserve Bank of New Zealand (RBNZ) to engineer a recession, the Treasury’s Budget Economic and Fiscal Update, released alongside Budget 2023, forecasts a more positive outlook for New Zealand’s economy.

Despite the on-going efforts of the RBNZ to engineer a recession, the Treasury’s Budget Economic and Fiscal Update, released alongside Budget 2023, forecasts a more positive outlook for New Zealand’s economy.

RBNZ sets out to create a recession; the Government counters it in Budget 2023

As RBNZ has increased interest rates, it has been clear in its intention to push New Zealand into what it expects could be a year-long recession. However, the Treasury is forecasting that the North Island rebuild, tourists returning faster than expected, and less-contractionary government spending will see New Zealand avoid recession. The Treasury expects GDP to grow by 3.2 percent this financial year before easing to one percent in 2025 and increasing back to three percent in 2026 and 2027.

The greatest challenge of Budget 2023 was managing spending to provide relief for households struggling with the cost of living, and funding the recovery from recent natural disasters, while minimising the impact on inflation. Inflation is now forecast to remain higher for longer, outside the one to three percent target range in 2023 (6.2 percent) and 2024 (3.3 percent), before returning from 2025 to 2027.

As GDP growth slows, unemployment is forecast to increase from 3.7 percent in June 2023 to 5.3 percent in late 2024. GDP growth is forecast to pick up in 2026 and 2027, with the unemployment rate expected to fall to 4.8 percent. Higher unemployment will see current labour market pressures ease, and wage inflation is expected to fall from 7.3 percent in 2023 to 4.2 percent by mid-2027.

We now await RBNZ’s response when it announces its Official Cash Rate (OCR) review on May 25th.

The need for government investment pushes back the return to surplus

Following a $9.7 billion deficit in 2022, the Government’s operating balance – before balance and losses (OBEGAL) – is expected to record a deficit of $7 billion in 2022–23, increasing to a $7.6 billion deficit in 2023–24.

The Treasury has forecast OBEGAL returning to a surplus by the end of the forecast period. This return, however, has been pushed back by a year due to lower tax revenue and higher expenses. Budget 2022 forecasted a $0.6 billion surplus in 2024–25. This is now expected to be a deficit of $3.6 billion. The $0.6 billion surplus is now expected in 2025–26. In 2026–27, the surplus will be $3.2 billion.

The low debt-to-GDP ratio might represent a missed opportunity

Net government debt is expected to peak at 22 percent of GDP in 2024, two percent higher than expected in Budget 2022. It then decreases to 18.4 percent by 2026–27. In his speech, the Minister of Finance, Grant Robertson, stated that “[even] with the investments we have made, New Zealand continues to have some of the lowest public debt in the world”, and that “[this] compares well, using IMF measures, with the likes of Australia at 36 percent, the United Kingdom at 95 percent, and the United States at 96 percent”.

It is difficult to look back on the last 15 years and wonder why New Zealand did not borrow more at low rates, increase our debt to GDP, and make significant investments in New Zealand's future to prepare us for the challenges we face today as the cost of borrowing increases, GDP slows, and unemployment increases.