Mike Bain, Colin Ambler/cvnznews.com
New Zealand’s financial outlook has received a welcome boost ahead of the election, with Treasury forecasting the Government will return to surplus a year earlier than expected and carry less debt than previously feared. The improved figures suggest the country’s economic recovery is gaining momentum, providing whichever party forms the next Government with a stronger starting position than many had anticipated.
The figures come from Treasury’s Pre-election Economic and Fiscal Update (PREFU), an independent assessment of the nation’s finances and economic outlook released ahead of every general election. The report is closely watched by politicians, businesses and voters because it provides the baseline from which parties must fund their election promises and offers the clearest picture of what the country can realistically afford over the coming years.
According to Treasury, the Government’s books are now expected to return to surplus in 2028/29 under the traditional Operating Balance Before Gains and Losses (OBEGAL) measure, a year earlier than was forecast in May’s Budget.
Treasury forecasts a $2.1 billion OBEGAL surplus in 2028/29 and a $4 billion surplus under its newer OBEGAL-X measure, which excludes the impact of ACC.
The stronger outlook is largely being driven by higher-than-expected tax revenue and slightly lower government spending. Inflation has generated additional tax revenue as more workers have been pushed into higher income tax brackets, while expenditure has come in marginally below previous forecasts.
The country’s debt burden is also expected to peak at a lower level than previously forecast.
Net core Crown debt is now expected to rise from 41 percent of GDP this year to a peak of 43.9 percent in 2027/28 before beginning to fall. Treasury’s Budget forecasts had debt peaking at 46.1 percent of GDP.
While government debt remains significantly higher than before the Covid-19 pandemic, the revised track represents a modest but notable improvement in the Crown’s financial position.
Finance Minister Nicola Willis, who earlier this week hinted New Zealanders would be pleased by the PREFU results, is likely to point to the figures as evidence that tighter spending controls are beginning to improve the Government’s finances.
Labour, which had delayed finalising its fiscal plan until the PREFU was released, is expected to closely examine whether the improved outlook reflects genuine economic strengthening or simply higher tax receipts generated by inflation and bracket creep. The party has consistently argued that economic performance should be measured not only by balance-sheet improvements but also by outcomes for households and public services.
However, despite the positive headline numbers, Treasury delivered a sobering warning about New Zealand’s long-term future.
Treasury Secretary Iain Rennie said the conflict in the Middle East had delayed New Zealand’s recovery rather than derailed it, describing the rebound as looking more “U-shaped” than the sharper “V-shaped” recovery once expected.
More importantly, he warned that New Zealand’s long-term fiscal position remains unsustainable unless future governments confront the growing costs associated with an ageing population.
Treasury once again singled out the increasing cost of New Zealand Superannuation as one of the major pressures likely to weigh on future government finances.
The report also highlights several risks that could undermine the forecasts.
Treasury warned that global oil prices could remain elevated for longer, potentially forcing the Reserve Bank to maintain higher interest rates than currently anticipated. Higher international bond yields could also continue pushing up New Zealand’s borrowing costs.
The cost of servicing government debt is expected to remain substantial, with core Crown finance costs forecast to exceed $10 billion this financial year and climb above $13 billion by 2029/30.
The PREFU also lands as parties prepare to unveil major campaign policies. Willis has already signalled she would like to continue adjusting personal income tax thresholds to address bracket creep, provided future improvements in the Government’s books allow room for such changes.
Meanwhile, Treasury’s forecasts may create questions around Labour’s proposal for a targeted capital gains tax to help fund three subsidised GP visits per person each year, with relatively subdued house price growth potentially limiting the amount of revenue such a tax could generate.
For voters, the message from Treasury is mixed but broadly encouraging. The Government’s books are improving faster than expected, debt is expected to peak lower than feared, and surpluses are back on the horizon.
Yet Treasury’s overarching warning is clear: while the immediate financial picture has brightened, New Zealand still faces significant long-term challenges. An ageing population, rising healthcare costs, mounting superannuation commitments and growing debt-servicing expenses mean the next Government, whatever its political colours, will still face difficult decisions about how to pay the nation’s bills in the decades ahead.
