The economy is headed for a mild recession, but government finances should hold up reasonably well as strong tax revenues continue to support expected higher spending, according to the Treasury Department.
The Half-Year Economic and Fiscal Update (HYEFU) shows a smaller budget deficit for the current fiscal year as income taxes boost on strong employment and spending is dovish.
Key economic figures (for the year ending June 2023 compared to budget 2022 projections)
- GDP (annual) 3.5 percent vs. 3.3 percent
- Inflation 6.4 percent versus 5.2 percent
- Unemployment 3.8 pct versus 3.3 pct
- House inflation -13.0 pct versus -2.5 pct
Key financial figures (for the year ending June 2023 compared to budget 2022 projections)
- Core tax revenue $118.1 billion versus $116.1 billion
- Core spend $129.3 billion versus $127.1 billion
- OBEGAL – $3.6 billion vs – $6.6 billion
- Net debt (percent GDP) 19.9 vs 18.7
Treasury Secretary Grant Robertson said the government’s fiscal policies are moving from addressing global health risks to global economic headwinds.
“We have a challenging year ahead of us.”
He said now was the time to bring government finances back to more cautious levels after Covid-related spending and more recently cost-of-living support.
“We have to be flexible, careful and balanced.”
Robertson said government spending would become more targeted and policies would be reprioritized and funds reallocated or saved as necessary, and over the forecast period government spending as a share of the economy would fall, reducing inflationary pressures.
“It’s time for fiscal policy to support Reserve Bank monetary policy.”
He said it was now necessary to tighten the belt.
As part of this, the government has decided to phase out the half-price public transport subsidy, road tolls and fuel tax cut from March next year.
The Treasury Department’s comment highlighted the uncertainty surrounding the forecasts, including its assumptions on global growth, inflationary pressures, rising interest rates and the war in Ukraine.
Economic growth was forecast to deteriorate in 2023/24, leading to a mild recession, with the economy contracting 0.3 percent in June 2024, while inflation would remain high longer, exceeding 7 percent early next year would peak and then gradually fall back in later years.
Unemployment was expected to rise from the current 3.3 percent to 5.5 percent in 2024.
However, the currently strong labor market and inflation-matched wage growth supported households and government tax revenues, while the Treasury forecast that government spending would increase in part due to high social spending.
“We will continue to support the New Zealanders through good times and bad,” Robertson said.