Finance Minister Nicola Willis will fail to balance the Crown accounts in the next five years due to a weaker economy and annual deficits from the Accident Compensation Corporation (ACC).
Treasury’s Half Year Economic and Fiscal Update showed the annual deficit would be extended for another two years relative to Budget 2024, and there would not be a surplus in the forecast period.
New Zealand’s recession had been longer than expected and, while growth will resume next year, the economic potential of the country has been revised lower.
Treasury expects relatively rapid growth of 3.3% in 2025 as interest rates fall, but long-term growth rates of just 2.4% due to poor productivity. This is similar to the Reserve Bank’s assessment.
Weakness in the economy generally means deeper deficit as the Government spends more on social support and collects less tax revenue as unemployment rises. Treasury now expects the annual deficit to be $17.3 billion next year, and only reduce to $2.4 billion by 2029.
Those deficit numbers are equal to 3% and 0.4% of gross domestic product (GDP). Net core Crown debt will peak at 46.5% of the economy in 2027 and only reduce marginally in the forecast period.
With no surplus in sight, Willis has opted to create a new fiscal indicator called OBEGALx. This measure will exclude ACC which is supposed to be a self-funding entity in the long-run.
OBEGAL has been the standard measure of the Government’s annual spending since 2008. It already excludes valuation changes which can impact the overall operating balance. Treasury advised against excluding ACC and will continue to report the old measure in all of its documents.
Willis’ new measure will show a surplus of $1.8 billion in 2029, having essentially balanced the budget in 2028 with just a $300 million deficit. These numbers are 0.4% and -0.1% of GDP, respectively.
Despite not recommending the new measure, Treasury Secretary Ian Rennie said it may prevent governments from cutting spending more than needed to achieve long-term fiscal sustainability.
Willis said there would be no changes to the fiscal plan and operating allowances she outlined in her first budget in response to the worsening outlook.
ACC Minister Matt Doocey last week announced an independent review of ACC, citing concerns about declining rehabilitation rates and increasing costs.
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