New Zealand will avoid a double-dip recession but faces larger budget deficits and a longer road back to surplus, according to the nation’s Treasury Department.
(Bloomberg) — New Zealand will avoid a double-dip recession but faces larger budget deficits and a longer road back to surplus, according to the nation’s Treasury Department.
Releasing the Pre-election Economic and Fiscal Update Tuesday in Wellington, Treasury said the deficit will widen to NZ$11.4 billion ($6.7 billion) in the year ending June 2024 compared with a NZ$7.6 billion gap forecast in May’s budget. The books don’t show a surplus until 2027, a year later than previously projected.
The weaker budget outlook comes less than five weeks out from the Oct. 14 general election and leaves political parties little room for lavish spending promises to entice voters. The ruling Labour Party is currently trailing the main opposition National Party in opinion polls.
Finance Minister Grant Robertson said the government’s accounts are still reflecting the costs of the Covid-19 pandemic and a destructive cyclone earlier this year, while the deterioration in the global economy, particularly China, has impacted tax revenues and will continue to do so.
“The economy is turning a corner, but the challenges remain very real,” he said. “This cannot be an election campaign where people are making big promises.”
Less Tax Revenue
The deficit in the year ended June 2023 was provisionally NZ$10 billion compared to the NZ$7 billion forecast in May’s budget, today’s documents show.
Tax collected was NZ$2.9 billion less than projected in May and revenue in the year through June 2024 will be NZ$1.6 billion less than expected four months ago.
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% of gross domestic product in 2025 and fall to 21% 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 labor 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% by the end of next year from 6% currently, albeit a slower decline than previously forecast. Unemployment is seen peaking at 5.4% 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 Christopher 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% in a Newshub-Reid Research poll published yesterday. By contrast, National had 40.9% 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 reelected 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% by mid-2024, which is stronger than the 1% 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.
(Updates with immigration surge in ninth paragraph)
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