(Bloomberg) -- New Zealand’s government is facing deeper budget deficits and a delayed return to surplus as a prolonged economic downturn and poor productivity hit tax revenue.
The operating balance before gains and losses (OBEGAL) is projected to remain in deficit until at least the year ending June 2029, according to new Treasury Department forecasts released Tuesday in Wellington in the half-year fiscal and economic update. In the May budget, OBEGAL was projected to return to surplus in 2028.
Finance Minister Nicola Willis unveiled an alternative measure of the operating balance which excludes revenue and spending by state-owned accident insurer ACC. So-called OBEGALx will return to surplus in 2029, Treasury predicts.
Under either measure, the government’s books are much weaker than portrayed in the middle of the year, with lower tax revenues than previously projected as the economy takes longer to recover from recession. Gross domestic product is forecast to grow an annual average 0.5% in the year through June 2025, less than a third of the pace projected in May.
“The downgrade to the fiscal outlook has been a lot sharper than expected,” said Miles Workman, senior economist at ANZ Bank in Wellington. The big surprise was “the extent of the Treasury’s downgrade to the economic outlook, which has weighed heavily on the fiscals,” he said.
The yield on government 10-year bonds rose as much as 4 basis point to 4.49%, steepening the yield curve in response to the government increasing its bond issuance program by NZ$20 billion ($11.6 billion) over four years. The local currency was little changed.
If the projections are accurate, the budget will be in deficit for at least nine straight years through 2028. Since taking office in late 2023, Willis has announced billions of dollars of savings by cutting spending, firing public sector workers and reprioritizing government programs.
“The revisions reinforce the importance of the measures the government has taken to restore discipline to public spending and drive greater economic growth,” Willis said. “The Crown’s financial position has deteriorated over the past six years, but the economy has reached a turning point.”
Growth Returns
Treasury projects growth will bounce back strongly in the 2025-26 fiscal year, with GDP gaining 3.3%, reflecting the Reserve Bank’s aggressive interest-rate cuts.
Still, growth then slows over the forecast period because of poor labor productivity, which limits the capacity to expand, Treasury said. The lift in productivity seen during the Covid-19 pandemic has failed to be sustained, it said.
Tax revenue in the next four years is projected to be NZ$13 billion smaller than previously forecast as weaker assumed private consumption hits sales tax receipts and softer wage and employment growth curb income tax, the Treasury said.
Government expenses are expected to be higher across the forecast period as rising debt incurs more finance costs, and there are extra costs in education as school rolls increase.
In the year through June 2025, the OBEGAL deficit is now projected to widen to NZ$17.3 billion compared with the May forecast of a NZ$13.4 billion deficit.
The new OBEGALx deficit is projected to be NZ$12.9 billion from NZ$9.6 billion in the budget.
The OBEGALx gauge narrows to a NZ$10.5 billion deficit in 2025-26 and is projected to be a NZ$1.9 billion surplus by 2029.
The wider deficits imply more debt, with net core Crown debt rising to NZ$234 billion or 45.2% of GDP by 2029. That means debt will be little changed from 45.1% in the current year.
(Updates with economist comment in fifth paragraph. An earlier version of this story corrected the year for the GDP forecast in the fourth paragraph.)
©2024 Bloomberg L.P.