Nicola Willis 'won't overreact' to forecast fiscal changes as ANZ economists say ‘substantial policy change’ is needed to tackle the likes of ageing population costs

The Government won’t “overreact” to forecast changes, Finance Minister Nicola Willis says, despite Treasury’s Half Year Economic and Fiscal Update showing a widening fiscal deficit expected in 2025/2026. It's driven in part by the weak economy, with the forecast return to surplus pushed out.

Treasury’s Half Year Economic and Fiscal Update (HYEFU), released on Tuesday, shows the Operating Balance Before Gains and Losses excluding the Accident Compensation Corporation (OBEGALx) is forecast to return to surplus in 2029/2030. In last year’s Budget Policy Statement, the Government’s fiscal strategy was to return this to 2027/2028.

Speaking following the release of Treasury’s Half Year Economic and Fiscal Update (HYEFU) on Tuesday, Willis said; “I wouldn’t get too wound up about small changes in OBEGALx”.

The Government is still targeting an OBEGALx surplus in 2028/2029, Willis said.

HYEFU highlights

Prior to the HYEFU and Budget Policy Statement, which looks ahead to Budget 2026 release, secretary and chief executive to the Treasury, Iain Rennie, said the economy had been going through a prolonged downturn necessitated as the Reserve Bank went through its tight monetary policy cycle to get inflation back within its 1% to 3% target band.

This year, Rennie said they had seen elevated levels of global uncertainty flowing from things like changes in the USA’s tariff policy which “certainly weighed on both business and household sentiment in New Zealand”.

“So over the first half of this year, activity was flat. We saw a weakening in business investment, an increase in unemployment and more of a geographic story - very much a two-speed economy,” Rennie said.

“The broad story remains the same,” Rennie said.

“In that we expect a cyclical upturn over the next few years and that’s driven by both the monetary policy stimulus that the RBNZ (Reserve Bank) has put into the system since August last year …. Together with terms of trade, which remains and we project to remain at rapid high levels in a historical context.”

Rennie said those two features would drive cyclical upturn over time, but he did note there was a significant slowdown in growth in the middle of the year.

“In terms of our forecast, it essentially delays, in a short-term sense, the extent of the recovery. So in this forecast, we expect a weaker real GDP (Gross Domestic Product) forecast in 2025/2026 before we hit a stronger rebound in 2026/2027.”

Rennie said when it came to forecast changes over the last two to three years, the forecast movements in HYEFU are “pretty small in the context of forecast variation generally.”

When it came to fiscal risks, Rennie said these were balanced on either side in HYEFU.

“On the upside, we do see the potential for a more rapid cyclical upturn that we have built into this forecast, and this reflects the amount of monetary easing that has gone on together with strong terms of trade that we're projecting."

“On the downside, however, clearly both households and firms have been very cautious, and that caution, if it persisted, could mean that the forecast is somewhat weaker than we are projecting, certainly in the near term.”

Superannuation was also brought up with Rennie saying New Zealand had more older people than previously expected.

“That flows through, for example, to spending items like New Zealand Superannuation.”

Continue to run a tight ship

Willis said the Government would be focusing on health, education, defence, law and order for next year's Budget.

The Government would continue to run a tight ship, she said.

In the Budget Policy Statement (BPS), the operating allowances for Budgets 2026, 2027 and 2028 remain at $2.4 billion. Budget 2029 has been set at $2.4 billion.

The BPS said: “Any future adjustments would have to be consistent with the overarching objective to get the government’s books back in order and restore discipline to public spending.”

“Existing pre-commitments mean there is only $1 billion per year, on average, left to be allocated from the operating allowance for Budget 2026.

“Most agencies and Ministers will need to plan to manage service pressures and other commitments with little or no additional funding.”

When it came to capital allowance for Budgets 2026, 2027 and 2028 – this would remain at $3.5 billion. Budget 2029 has been set at $3.5 billion.

Headwinds

Willis said: “We have taken a deliberate, medium-term approach to fiscal consolidation that minimises the impact on individuals and on public service delivery, but also crucially shows a credible path to surplus and debt-reducing as a proportion of the economy.”

“The economic revisions are certainly headwinds, but the Government has repeatedly said it won’t overreact to forecast changes,” Willis said.

And when it came to OBEGALx and surplus, Willis said it is the path to surplus that counts.

“The pick up is slightly slower and slightly weaker at least initially than was forecast earlier this year at the Budget Update. That means that tax revenue is a little lower in total across the forecast period."

“At the same time, expenses are a little higher, for example benefit expenses, which relates to slower pick up in the economy,” Willis said.

“And together, that means that the OBEGALx track is slightly lower than at the budget update, reaching surplus in 2029/30 - a year later than previously expected.”

Willis said this is a very small difference and the Government was keeping its surplus target of 2028/2029.

When asked by a reporter how much responsibility Willis, as the Finance Minister, and the Government, took when it came to surplus being pushed out, Willis said: “I take responsibility for keeping on target to return to surplus in 2028/2029.”

“I take responsibility for setting out books which show that path is credible and achievable. I take responsibility for all of the hard work our government has done so far to achieve it and all the hard work that lies ahead of us.”

Following through

ANZ economists said the Government had pushed out its OBEGALx surplus date by year in response to a weaker fiscal outlook. There were no other changes to the Government’s fiscal strategy.

“Another shifting out of the fiscal strategy goalposts could raise questions around whether the Government intends to follow through on its fiscal strategy,” the ANZ economists said.

“With little change to discretionary fiscal settings from May’s Budget, we don’t think there is much here to lead the RBNZ to materially change their assessment of how fiscal settings are contributing to CPI (consumers’ price index)  inflation pressures.”

ANZ economists said in absolute terms, the Government was still injecting more money into the economy than it is withdrawing through taxes.

“However, operating deficits as a share of GDP are forecast to begin narrowing within the next year or so and the fiscal impulse is expected to turn negative from 2027, which should help contain inflationary pressure over the medium term, provided the Government adheres to its strategy."

“If the Government were to consolidate faster than currently planned (for example, by increasing taxes or reducing spending), the RBNZ would be well placed to respond to the smaller demand impulse with a lower OCR (Official Cash Rate) than otherwise, and vice versa.”

‘Pixie dust economics’

Labour’s finance spokesperson Barbara Edmonds said; “the books clearly show the Government has lost control of the economy”.

“It’s pixie dust economics,” Edmonds said.

“Nicola Willis needs to look in the mirror and take some responsibility. She’s blamed Labour, she’s blamed Fonterra, she’s blamed Ruth Richardson, she’s blamed the unions.

“She needs to have a good hard look at these books and reflect on the choices that she’s made.”

Green Party co-leader and Finance spokesperson Chlöe Swarbrick said Willis' “growth at all costs” mentality is coming at New Zealanders’ expense.

“The numbers are clear. Willis’ economic strategy has failed, and the cost is being paid by New Zealanders,” Swarbrick said.

Asked about the HYEFU results and the OBEGALx surplus forecast being pushed out, ACT leader David Seymour told reporters on Tuesday it was “deeply concerning.”

“The ACT Party has long said that we need to save money. We’ve played an honourable role as part of this Government in driving the savings and it seems the need to do that has intensified today.”

Elephant in the Cabinet room

ANZ economists said: “While we acknowledge that pursuing fiscal consolidation amid resistance to higher taxes and the need to deliver key public services is challenging, there remains an elephant in the Cabinet room - and it is getting bigger.”

“As the Treasury noted in its Long-Term Fiscal Statement earlier this year, current fiscal settings are not sustainable in the long run,” they said.

“Significant fiscal challenges on the horizon - chiefly the fiscal cost of an ageing population - suggest substantial policy change will eventually be required.”

“That’s particularly concerning in the context of the Treasury’s estimate of the structural balance, which shows current fiscal deficits are not being driven by the state of the economy, but by a fundamental mismatch between revenues and expenses.”

“The slower the pace of fiscal consolidation today, the sooner policymakers will be forced to tame the elephant,” ANZ economists said.

Superannuation

When it comes to the retirement age, National and Act have previously announced they want to raise the age of eligibility to 67.

Willis said it was an issue that she thought all sensible parties needed to take a position on in next year’s election.

Putting her National Party finance spokesperson hat on, Willis said they had fired their opening shot with its KiwiSaver policy proposal.

ACT Party leader David Seymour said: “We clearly need to look at all the things the Government is saving money on and work out how we’re going to cut our cloth.”

“Because ultimately, there’s either going to be more taxes including on your house or we’re going to have to have a smaller and more efficient government,” Seymour said.

“As people live longer and have fewer children, there are more superannuitants, fewer taxpayers paying tax to support Super, there is an obvious change that just about every country we compare ourselves with is making and that is now inevitable in New Zealand."

“The question is are we going to make that change slowly and gradually in our own time or have it foisted on us by some financial crisis in the future?”

When asked by a reporter if Labour was prepared to change the settings for NZ Super, Labour’s finance spokesperson Barbara Edmonds said “no, not at this point. We’re not going to roll out our election policies right now.”

'Not a lot of wiggle room'

ASB senior economist Mark Smith said the HYEFU gave little away, with; "the Coalition Government keeping their powder dry until the election campaigning gets into full swing in the second half of next year."

"The scene is set and the Coalition Government must be hoping that burgeoning economic expansion continues into 2026," Smith said. 

Smith said more "growth enhancing policies" could be announced next year; "but the amount of fiscal leeway is comparatively small."

"We note that corporate tax cuts could be one avenue that would assist firms with funding additional KiwiSaver contributions. There is not a lot of wiggle room to fund an election year spend-up."

Smith said fiscal settings are expected to remain contractionary with a "tough line" on government spending.

"We have to wait and see if this is a credible commitment given next year's general election but note that tight fiscal policy will mean more of the growth onus relies on the OCR."

This could help calm wary markets, Smith said.

'Build up fiscal buffers'

"Our focus is also on whether the Government are providing a platform for a more durable upswing. There are significant demands on the public sector resources and Treasury have been explicit in noting the long-term fiscal and economic challenges that need to be addressed," said Smith.

He said balancing this would be tricky; "but with the New Zealand economy off life support, now is the time to build up fiscal buffers, not run them down."

"The long run of structural fiscal deficits needs to end. But we acknowledge the tightrope walk that is maintaining fiscal consolidation while sustainably growing the New Zealand economy."