Budget Economic and Fiscal Update 2022

Executive Summary#

Note:

1. Operating balance before gains and losses.
2. A series of net core Crown debt (the previous headline net debt indicator) can be found on pages 38-39 and page 157.

Sources: Stats NZ, the Treasury

• The New Zealand economy has overall been resilient to the transmission of the Delta and Omicron variants across the motu, although some businesses and households have been more impacted than others. High vaccination rates are limiting the health impacts of the virus while the more permissible COVID-19 Protection Framework enables greater economic activity. In addition, fiscal support measures have helped support the economy to date. Consequently, the Omicron outbreak will weaken GDP growth and hours worked in the first half of 2022 as people fulfil their isolation requirements, but the impacts are expected to be relatively small and temporary.
• The labour market remains characterised by a state of tightness whilst tax revenues remain strong. The unemployment rate in the March 2022 quarter remained at a record-low 3.2% and hours worked, which were expected to decline due to Omicron, fell only 0.2%. These conditions, in turn, have supported core Crown tax revenue, which was $2.7 billion above the 2021 Half Year Update forecast for the nine months to March 2022.
• Inflation has surfaced as the principal economic challenge in New Zealand and abroad. Consumers Price Index (CPI) inflation – which reached a thirty-year high of 6.9% in the March 2022 quarter – is being driven by strong domestic demand pushing up against constrained supply, which in turn has been compounded by the Russian invasion of Ukraine. In response, the Reserve Bank of New Zealand has signalled its intention to tighten monetary policy at pace, which will act as a constraint on economic activity. This has had an immediate impact on house prices that are forecast to fall throughout 2022 and 2023.
• Economic activity across 2022 is expected to be supported by the reopening of the international border, elevated terms of trade, and robust investment. Economic growth, however, slows over time due to rising interest rates, a reduction in government consumption as COVID-19 related expenditure unwinds – evident through the operating balance before gains and losses (OBEGAL) deficit decreasing $12.4 billion between the 2021/22 and 2022/23 years – and a declining terms of trade.
• The labour market is forecast to remain tight in the near term, with the unemployment rate decreasing to 3.0% in 2022. In combination with increased salary expectations, this tightness is expected to catalyse nominal wage growth in 2023. This helps to offset the impact of declining real wages that began in the September 2021 quarter, with positive annual real wage growth re-emerging at the start of 2023 and peaking at the end of 2024. Slowing domestic demand is then expected to ease labour market tightness, resulting in the unemployment rate rising to 4.8% at the end of 2025.
• In addition to the clear humanitarian consequences, the Russian invasion of Ukraine is expected to have ongoing economic implications throughout 2022. These include impacts on oil prices, international commodity prices, global supply chains and the global growth outlook.
• New Zealand’s border restrictions have eased earlier than previously expected, resulting in a faster forecast recovery in international visitor spending that helps to narrow the current account deficit. Rising world commodity prices are expected to boost the terms of trade, thereby supporting firm profitability and GDP growth.
• Although the 2021/22 year has been disrupted by COVID-19 restrictions, the economy has been resilient and, as a result, core Crown tax revenue is expected to grow by $5.8 billion. Inflationary conditions are expected to drive growth in nominal GDP over the forecast period, which augments growth in core Crown tax revenue. Overall, core Crown tax revenue is expected to increase by $40.5 billion over the forecast period.
• As most of the COVID-19 fiscal support measures from the 2021/22 year are temporary, they start unwinding in the coming year. This, coupled with the stronger growth in core Crown tax revenue, sees most key fiscal indicators starting to improve over the forecast period.
• The OBEGAL improves considerably in 2022/23 and is forecast to return to surplus in 2024/25, reaching $7.0 billion by the end of the forecast period. While net debt peaks in 2023/24 at $83.6 billion in nominal terms – equal to 19.9% of GDP – it falls to 15.0% of GDP by the end of the forecast period.
• In Budget 2022, the Government has announced $5.9 billion per annum in new operating spending. There have also been investments in relation to multi-year funding decisions for some sectors that have been managed against future Budget operating allowances. As a result, overall investments from the core Budget 2022 operating package have a fiscal impact of $6.5 billion in 2022/23, growing to $7.5 billion by 2025/26. The Government, moreover, has also announced funding to address climate change and cost of living on top of the core Budget 2022 operating package.
• Net worth attributable to the Crown is expected to decline in the current year, largely reflecting the expected operating balance deficit in 2021/22, but then starts to steadily increase from 2023/24 once the operating balance returns to surplus. As a share of GDP, net worth attributable to the Crown falls from 44.1% of GDP in 2020/21 to 32.1% of GDP by 2025/26.
• The Economic Outlook chapter presents alternative upside and downside scenarios for the New Zealand economy. Relative to the central forecast, the upside scenario considers less persistent price pressures and a faster recovery in international visitor numbers. In the downside scenario, we explore more persistent impacts from COVID‑19 and the Russian invasion of Ukraine in tandem with a reversal of globalisation.
• The Risks to the Fiscal Forecasts chapter discusses the key risks to the fiscal forecasts, including COVID-19 and climate change.