New Zealand’s government is grappling with deeper budget deficits and a delayed return to surplus as a prolonged economic downturn and poor productivity growth severely impact tax revenues. According to the latest forecasts from the Treasury Department, the operating balance before gains and losses (OBEGAL) is going to remain in deficit until at least June 2029, a significant shift from earlier predictions that OBEGAL would return to surplus by 2028.
Finance Minister Nicola Willis introduced a new metric, OBEGALx, which excludes revenue and spending by state-owned accident insurer ACC. Under this measure, the government is forecast to return to surplus in 2029. Regardless of the method used, New Zealand’s fiscal outlook has worsened significantly since the May budget, with lower-than-expected tax revenues as the economy recovers more slowly than anticipated. Gross domestic product (GDP) is going to grow by just 0.5% annually through June 2025, a sharp decline from earlier projections.
New Zealand’s Budget Deficits as Economic Downturn Hits Tax Revenue
Miles Workman, senior economist at ANZ Bank, commented that the extent of the fiscal downgrade was not what they want, especially the drastic reduction in the economic outlook, which has severely impacted the government’s finances. In response, the yield on 10-year government bonds rose by four basis points to 4.49%, and the local currency remained relatively stable.
Since assuming office in late 2023, Minister Willis has made efforts to rein in spending, including public sector cuts and reprioritizing government programs. She emphasized the importance of these measures in restoring fiscal discipline and fostering long-term economic growth.
The Treasury expects a rebound in growth during the 2025-26 fiscal year, with GDP projected to rise by 3.3%, aided by aggressive interest rate cuts. However, growth is going to slow thereafter due to stagnating labor productivity. The overall tax revenue shortfall is going to total NZ$13 billion over the next four years, with government expenses rising due to increased debt and higher costs in education.
Despite the ongoing fiscal challenges, the government remains focused on stabilizing the economy and reducing long-term debt.
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