A shortfall in tax revenue has contributed to the Government's books not showing a surplus until a year later than previously forecast.
Despite Tuesday's Pre-Election Economic and Fiscal Update (PREFU) showing a longer deficit, the Labour Government is pointing to no projection of a recession, wages being ahead of inflation and unemployment peaking below the long-term average as signs the economy is "turning the corner".
"The PREFU shows New Zealand remains resilient in the face of challenging conditions thanks to the Government's economic plan," Finance Minister Grant Robertson said.
"We are striking a balance between supporting New Zealanders with cost of living pressures and investing in strong public services and resilient infrastructure network while carefully managing our responses to ensure the long-term sustainability of the economy."
There is no forecast of a recession. Quarterly economic growth is expected to average 0.4 percent over the coming year, a "more moderate slowdown than anticipated" in the May Budget.
The PREFU captures stronger-than-expected net migration. In the September 2023 quarter, annual net migration is forecast to peak close to 100,000, which is about 33,000 higher than predicted in the Budget, with 45,000 more people over the entire forecast period than what was previously assumed.
"Net migration will boost the supply of labour and help ease acute labour shortages that have developed in some industries," the PREFU said.
"On balance, it is expected the demand generated from migration will outweigh the supply boost to the labour market when assessed across the whole economy. Consequently, this adds to inflation pressure and leads to higher interest rates for a longer period."
On the inflation front, it is expected to return to the normal band by the end of next year. But interest rates are forecast to remain elevated for longer as domestic pressures do persist.
The unemployment rate will lift to 5.4 percent in 2025 from 3.6 percent, before then falling to 4.6 percent by 2027.
Robertson said that 5.4 percent peak is below the long-term average of 5.8 percent.
"Wage growth will outpace declining inflation, meaning household budgets will stretch further," he said.
The PREFU also said an expectation that mortgage rates have peaked as well as the surge in net migration has contributed to a stablisation in house prices.
"House prices are expected to show small quarterly increases from the June quarter this year - following declines in the previous five quarters - returning to an annual growth rate of about 3.9 percent by June 2027," PREFU said.
One of the key figures to look at is the OBEGAL - the operating balance before gains and losses - which highlights whether we have a deficit or surplus. New Zealand previously had a surplus, but the COVID-19 pandemic forced the books into the red.
The PREFU on Tuesday shows the OBEGAL deficit went from $9.7 billion in the 2022 year to $10 billion this year. While this is only $300 million worse than last year, it's $3 billion worse than what was forecast in the Budget, pushing out a surplus by a year until 2026/27.
But before it gets better, it will get worse. The deficit will grow to $11.4 billion in the 2024 year, before then falling to $6.2 billion in 2025, $1.5 billion in 2026, and then a $2.1 billion surplus in 2027.
The potential for another year of a deficit was raised earlier this year when the accounts for the 11 months until the end of May showed Core Crown tax revenue as about $2.2 billion less than what was predicted.
The figures released on Tuesday for the full financial year showed the tax take sitting at $112.4 billion, which is $3.9 billion higher than last year, but $2.9 billion lower than expected.
The growth in tax revenue compared to 2022 was driven by more money from the likes of income tax and GST (which was up because of rising prices on goods), as well as higher interest rates leading to more resident withholding tax.
But this was offset partially by corporate tax and other tax declining. There was also a reduction due to the Government collecting less fuel excise duty and road user charges.
Meanwhile, Core Crown expenses rose from $125.6 billion in 2022 to $128 billion in 2023. This was actually $200 million less than expected. One of the major reasons for this was spending on cost of living payments, the North Island weather events, increased spending on benefits, and a higher cost of servicing debt.
Net debt, which was just $5.4 billion in 2019, has risen to $71.4 billion. That's $400 million more than what was expected in the Budget. As a percentage of GDP, net debt is 18.1 percent.
Looking forward, tax revenue is expected to increase in line with nominal GDP, hitting nearly $150 billion by the 2027 year. Expenses will surpass $150 billion in that year, but will fall as a percentage of GDP due to smaller Budget operating allowances, reprioritisations and immediate savings.
The forecast shows net debt to reach 22.8 percent of GDP in 2025, before then falling to 21 percent by 2027.
Robertson said these debt levels compare favourably to countries New Zealand compares itself with. For example, net debt in Australia will reach 36 percent, while in the United Kingdom, it will reach 95 percent.
Speaking about the lower-than-predicted tax revenue, Robertson noted that since May, there has been a "further deterioration in the global economy, particularly in China, which will continue to have a direct impact on the New Zealand economy".
"In this uncertain environment, the Government has continued to respond to ensure we meet our balanced and responsible fiscal goals of a surplus in the forecast period and net debt below the limit of 30 percent of GDP."
He said the $4 billion in savings revealed last month - on top of $4 billion of savings in May - showed the Government acting "swiftly".
"The deficit is forecast to fall from a peak of $11.4 billion in the current year to a surplus of $2.1 billion in 2026/27, a year later than projected in the Budget in May. Over the next four years, Treasury is forecasting real government consumption to decline on average by 0.2 percent a year, which will ease inflation pressures."
The Government last month announced a series of measures to create about $4 billion in savings. That includes trimming some current programmes, pulling back future Budget operating allowances, and making baseline savings.
