Economic and fiscal update

Budget Economic and Fiscal Update 2023

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Only the Executive Summary has been prepared in HTML. If you require a full HTML version, please contact [email protected] and cite Budget Economic and Fiscal Update 2023 as a reference.

As the government's lead economic and financial adviser, the Treasury forecasts the economic outlook for New Zealand and the Government's fiscal outlook. This Budget Economic and Fiscal Update (Budget Update) is part of a suite of documents we release as required by the Public Finance Act 1989.

This Budget Update primarily outlines what the Treasury observes in our current economic and fiscal climate, what we might see in the future, and what risks we may face over the forecast period. This gives an indication of what the economy is most likely to do to inform decision-making.

Table of contents

  • Statement of Responsibility
  • Executive Summary
  • Economic Outlook
  • Fiscal Outlook
  • Risks to the Economic and Fiscal Forecasts
  • Forecast Financial Statements
  • Core Crown Expense Tables
  • Glossary of Terms
  • Time Series of Fiscal and Economic Indicators

Executive Summary#

After a period of strong growth, the economy is now slowing, as anticipated in the Half Year Economic and Fiscal Update 2022 (Half Year Update). Annual consumer price inflation peaked at 7.3% in June 2022, and the Reserve Bank lifted interest rates to reduce strong domestic demand. Activity is now weakening and will be soft throughout 2023. However, compared to the Half Year Update, the Treasury now expects a more moderate slowdown in activity over the next 12 months. Growth slows to 1.0% in the June 2024 year, and averages 2.7% thereafter. Continued strength in tourism, stronger growth in net migration, rebuild activity associated with the North Island weather events (see pages 6 to 7), and less contractionary fiscal policy will help to offset slowing demand in other parts of the economy.

The net result is that, relative to the Half Year Update, the unemployment rate is forecast to peak lower, while interest rates are likely to stay higher for longer to manage inflationary pressure. Inflation has already begun moderating, and the Treasury expects further moderation ahead, with inflation falling to 4.5% by the end of 2023 and dropping inside the Reserve Bank's target band of 1-3% inflation by late-2024.

As economic activity slows, labour market conditions will deteriorate, resulting in the unemployment rate rising to 5.3% by late-2024, before falling back to 4.8% by the end of the forecast period. Wage growth will also decline, from a peak of 7.4% in September last year to a more moderate 4.2% by mid-2027. The forecast of growth in nominal gross domestic product (GDP), an important driver of tax revenue, is lower than the Half Year Update forecast.

The Operating Balance Excluding Gains and Losses (OBEGAL) is expected to record a deficit of $7.0 billion in the 2022/23 fiscal year, and a deficit of $7.6 billion in 2023/24. The fiscal outlook is expected to then improve across the forecast period as momentum in the economy recovers. However, the impact of the soft economic outlook on core Crown tax revenue and the Government's Budget 2023 decisions contribute to a slower forecast recovery in OBEGAL compared to the Half Year Update. As a result, the forecast return to an OBEGAL surplus has been pushed out by a year to 2025/26. Net debt is expected to peak as a percentage of GDP in 2023/24 at 22.0% and to fall to 18.4% of GDP by 2026/27.

June years 2022
Real production GDP (annual average % change) 1.1 3.2 1.0 2.1 3.1 2.9
Unemployment rate (June quarter) 3.3 3.7 5.0 5.3 4.9 4.8
CPI inflation (annual % change) 7.3 6.2 3.3 2.6 2.3 2.1
Current account (annual, % of GDP) (8.0) (7.8) (5.9) (4.6) (4.1) (3.8)
Total Crown OBEGAL1 ($ billion) (9.7) (7.0) (7.6) (3.6) 0.6 3.2
       % of GDP (2.7) (1.8) (1.8) (0.8) 0.1 0.7
Net debt2 ($ billion) 61.9 71.0 91.2 94.7 95.3 89.2
       % of GDP 17.0 18.0 22.0 21.7 20.7 18.4


  1. Operating balance before gains and losses.
  2. A series of net core Crown debt (the previous headline net debt indicator) is on page 156.

Sources: Stats NZ, the Treasury

Core Crown tax revenue is forecast to continue growing from the 2023/24 year onwards, broadly in line with the economy. However, this growth is slower than expected at the Half Year Update.

Core Crown expenses are forecast to increase in each year of the forecast period. This increase in part reflects the impact from the Government's Budget 2023 operating package of $4.8 billion per annum and funding announced for future Budgets, which have been increased to $3.5 billion over the subsequent three Budgets. The establishment of the National Resilience Plan contingency, which will assist with the rebuild back from the severe weather events, is expected to lift core Crown expenses by $0.6 billion. In addition, the indexation of the main benefit types and increased recipient numbers from demographic changes increase benefit payments over the forecast period.

Figure 1 - OBEGAL and net debt


Figure 1 - OBEGAL and net debt

Sources: The Treasury

This combination of lower tax revenue and higher expenses leads to larger OBEGAL deficits than forecast in the Half Year Update, and a return to surplus that is one year later. A stronger starting position for net debt, reflecting favourable market conditions initially, means an improved position is expected in the current year compared to the Half Year Update. This trend reverses from the 2023/24 year.

Net worth is expected to grow over the forecast period by $22.8 billion, reflecting the forecast total Crown operating balance results. However, as a share of GDP, net worth falls from 48.0% of GDP in 2021/22 to 40.7% of GDP by 2026/27 as the nominal increases in net worth, which is largely driven by the level of the operating balance, do not keep up with nominal GDP growth over the forecast period.

Figure 2 - Real GDP growth


Figure 2 - Real GDP growth

Sources: Stats NZ, the Treasury

The total fiscal impulse implies that, over the forecast period as a whole, fiscal policy settings are expected to be contractionary. This means fiscal policy settings will supress aggregate demand and inflation pressure over the forecast period as a whole. However, fiscal policy settings are expected to be less contractionary than was forecast in the Half Year Update. Fiscal policy settings are expected to be expansionary in the 2023/24 fiscal year, meaning fiscal policy will be supporting aggregate demand and inflation pressure in that year.

Real government consumption, a measure of goods and services provided by the Government, is expected to decline over the forecast period, partly reflecting the winding down of COVID-19-related spending, and the impact of wage and price inflation eroding the government's spending power. This is a sizable reduction in real government consumption within a short time span.

The current account deficit has reached 8.9% of GDP. The Treasury expects the strong lift in tourism will help narrow the current account deficit over the forecast period. Despite a deterioration in global trading conditions suppressing goods export earnings, other services exports such as education and business services are expected to increase strongly. At the same time, rising global interest rates, and the unwind of international supply constraints, will reduce imported inflation, and further contribute to the current account deficit improving to 3.8% of GDP by the end of the forecast period.

There are several risks to the economic and fiscal outlooks, the most significant of which includes how the economy evolves and how these flow through to revenue and spending pressures.

Finalisation dates for the Budget Economic and Fiscal Update (Budget Update)#

Economic forecasts - 29 March 2023

Tax revenue forecasts - 5 April 2023

Fiscal forecasts - 27 April 2023

Risks to fiscal forecasts - 4 May 2023

Text finalised - 10 May 2023

Impact of the North Island weather events#

This box outlines how the impacts from the North Island weather events influence the economic and fiscal forecasts that follow.

The North Island weather events comprise the severe weather that hit Auckland in late January, followed by Cyclone Gabrielle in February and involved large-scale flooding and loss of life. Widespread damage was caused to buildings, businesses and infrastructure across multiple regions with large impacts on the affected communities.

Both the Government's initial response and shift to a recovery and rebuild footing have fiscal implications. Initially, the focus has been on: support to get businesses and communities back up-and-running; immediate repairs to transport infrastructure; temporary accommodation assistance; and wider support to affected communities. As the focus shifts to more permanent repair and rebuild, investment will increase, including funding from the Government’s National Resilience Plan.

Impacts on the Economic Forecasts

In April 2023 the Treasury released preliminary estimates of output losses, price impacts, and overall damage to physical assets.[1] Damage to physical assets is estimated at between $9 billion and $14.5 billion, while $400 million to $600 million of output is estimated to have been lost in the first half of 2023, with smaller persistent losses from the loss of capital stock such as orchards.[2] Temporary price spikes associated with reduced availability of some goods is assumed to add 0.4 percentage points to inflation over the March and June 2023 quarters.

In the economic forecasts, this lost production is reflected as lower-than-otherwise levels of exports of around $1 billion over the forecast period.

Repairing and replacing damaged homes is assumed to involve just under $2 billion of residential investment, while replacing damaged household items is assumed to represent nearly $900 million of consumption.

The forecasts assume just under $7 billion of rebuild-related business investment occurs over the forecast period. Around $5 billion relates to local and central government infrastructure and the remainder is private sector investment. A further $1.3 billion of investment is assumed to occur after the forecast period. However, the actual timing of rebuild-related investment is uncertain.

Rebuild activity will support demand and contributes to a stronger growth profile, particularly in the second half of 2023. The Treasury now anticipates small increases in GDP over the second half of 2023 rather than the small declines contained in the Half Year Update.

As rebuild demand persists over the remainder of the forecast period, employment levels are supported and unemployment peaks lower than previously forecast. However, it also means that interest rates are not expected to decline to the extent they may have otherwise. This constrains growth in activity and employment later in the forecast period.

Impacts on the Fiscal Forecasts

The North Island weather events have impacted the fiscal forecasts in a number of ways. Early indications of the fiscal costs to the Government are provided below. These estimates will be refined as more information comes to light.

The Government announced a number of interim support measures including emergency business and primary sector support, funding to help assess and fix roads, silt and solid waste removal, as well as other support measures, totalling around $0.8 billion in 2022/23. In addition, $1.1 billion has been recognised in 2022/23 to reflect the Government's obligations to contribute to local authorities' response and recovery costs as a result of a local or national emergency ($0.4 billion) and costs from the Earthquake Commission insurance claims ($0.7 billion).

A number of subsequent decisions have been made in Budget 2023 resulting in a further $0.9 billion of operating expenditure. Of this, $0.8 billion is forecast for 2023/24, with the most significant decisions relating to the reinstatement of road and rail infrastructure. While capital expenditure decisions totalling $0.2 billion were announced in Budget 2023.

The Government has also established the National Resilience Plan, totalling $6 billion over a 10-year period (for more information refer to the Fiscal Outlook chapter page 24). In the first instance, it is assumed further funding for asset repair and replacements from the North Island weather events will be funded from this.

Some asset values have been impacted by the North Island weather events, with the largest impacts expected for the rail and roading networks. This is reflected in a reduction in the value of these assets on the Government's forecast balance sheet.


  1. [1] See Impacts from the North Island weather events
  2. [2] Figures in the Economic section of this box are at 2023 prices.