Budget Economic and Fiscal Update 2025

Executive Summary#

The economic outlook is positive despite global trade uncertainty  #

Following a sharp contraction in 2024, the economy is now growing, led by the export sector. Although New Zealand will be buffeted by the shock from shifting global trade policies, economic growth is forecast to gather pace this year. The recovery is supported by substantial declines in interest rates over recent months and the contribution from net exports. Real GDP growth of around 3% is expected over the next three years before easing at the end of the forecast period as weakness in labour productivity constrains the pace of growth (see Table 1).

Fiscal deficits turn to surplus in 2028/29#

The operating balance before gains and losses excluding ACC (OBEGALx) remains on track to return to surplus in 2028/29. The deficit is forecast to widen initially as economic conditions weigh on revenue, and spending on benefits and debt servicing costs drive increases in core Crown expenses. From 2023/24, revenue growth is also restrained by tax policy changes. Excluding the impact of the economic cycle, the structural fiscal balance begins to improve this year. The structural deficit averages 1.3% of GDP over 2024/25 and 2025/26, down from 1.9% over the previous two years. From 2026/27, the Government's restrained spending plans and a broad-based pick-up in tax revenue support a return to both OBEGALx and structural surpluses.

Net capital spending combined with operating deficits, leads to cash shortfalls that are largely funded through additional borrowings. As a result, net core Crown debt rises to 45.5% of GDP at the end of June 2029.

Sources: Stats NZ, the Treasury

Trade tensions are weighing on the global outlook…#

The global economy is facing challenges from sharply higher tariffs and heightened uncertainty around access to markets. Actions by the United States to impose near-universal tariffs and countermeasures by some countries have led international agencies to lower their global growth forecasts.

The Budget forecasts assume growth in New Zealand's major trading partners will average 2% over the next two years and 2.3% thereafter, well below the 3.3% average of the past two decades. Weaker export demand and the investment-chilling effect of elevated uncertainty are assumed to reduce economic growth in New Zealand by 0.2% over the next two years. Trade policy is continuing to evolve, and the range of potential outcomes is wide. The impacts of a deeper global downturn are outlined in a scenario on page 25.

…and will dampen the recovery under way in New Zealand#

The global trade shock is hitting a New Zealand economy that is recovering from last year's sharp contraction. The export sector led a revival in GDP growth in the final quarter of 2024, and conditions in the sector have remained solid this year despite the spike in trade uncertainty. However, domestic demand remains subdued, and the unemployment rate has reached 5.1%, indicating there is now a significant degree of slack in the labour market. Wider measures of excess capacity have also increased, consistent with easing inflation pressures. Interest rates have fallen rapidly in recent months, although their full impact has yet to filter through the economy.

The lagged effect of lower interest rates alongside net exports, stronger migration and rising house prices underpin the forecast of near 3% percent growth from 2025/26 to 2027/28. Budget 2025 helps to sustain growth as Investment Boost adds impetus to business outlays on capital, while restrained government spending provides scope to lower interest rates slightly. As spare capacity is absorbed and the unemployment rate falls, weak productivity growth becomes the main constraint on the pace of the expansion and growth slows to 2.6% in 2028/29.

The fiscal outlook recovers from 2026/27#

The OBEGALx deficit is expected to rise to $10.2 billion in 2024/25 and $12.1 billion in 2025/26 as revenue growth slows and core Crown expenses continue to increase. Lower income tax thresholds introduced in July 2024 and partial expensing of capital investment in Investment Boost are the main revenue policy changes. Increases in benefit expenses, particularly for New Zealand Superannuation, drive most of the growth in core Crown expenses. Budget decisions account for most of the remaining increase in expenses.

The OBEGALx deficit is forecast to improve by around $4.1 billion per annum from 2026/27 and to return to surplus in 2028/29. The forecast reflects steady growth in tax revenue as the economic recovery spurs household spending and lifts business profits, and slower growth in core Crown expenses.

Growth in core Crown expenses slows from 2025/26, reflecting the Government's commitment to set aside lower operating allowances for future Budgets than in recent times. Reflecting this expenditure restraint, core Crown expenses decline from 32.9% of GDP in 2025/26 to 30.9% at the end of the forecast period, which helps to close the structural gap in the fiscal accounts.

The total fiscal impulse is positive in the short-term when spare capacity is rising. In the medium-term, when spare capacity is declining, the fiscal impulse is negative, which indicates that fiscal policy is tighter than in the preceding year.

Net core Crown debt is expected to peak at 46.0% of GDP in 2027/28, before declining to 45.5% of GDP by 2028/29. Cash deficits accumulated across the forecast period total $62.3 billion, with $51.2 billion relating to net spending on capital. The cash shortfall is largely funded through additional borrowings and utilising financial assets.

Tax revenue is lower compared to the Half Year Update…#

Compared to the Half Year Economic and Fiscal Update (Half Year Update) 2024, the weaker global backdrop has lowered short-term prospects for real GDP growth and there is more spare capacity in the economy. However, as the global impacts fade, the larger reduction in spare capacity alongside additions to the capital stock from Investment Boost, contributes to faster growth. Budget 2025 also reduces inflationary pressures and interest rates are slightly lower over the final three years of the forecast. These developments have led to slower nominal GDP growth than in the Half Year Update 2024.

Slower nominal GDP growth has a knock-on effect to core Crown tax revenue, which is $13.3 billion lower across the forecast period. Slower growth in business profits is the main driver of the revision, while Budget policy changes lower tax revenue by a further $4.8 billion.

Core Crown expenses are lower in the current year than previously forecast, chiefly owing to reduced estimates of the cost for pay equity settlements and the rephasing of expenses. Benefit payments and finance costs are the main drivers of higher expenses over the forecast period but savings made in Budget 2025 more than offset these increases.

…making the return to surplus more challenging#

Overall, downward revisions in tax revenue outweigh the reductions in expenses, and OBEGALx deficits are larger across the forecast period than in the Half Year Update 2024. The larger operating deficits flow through to the cash balance and net core Crown debt. Residual cash deficits are $5.3 billion higher over the forecast period, and net core Crown debt is $4.4 billion higher at the end of the period. As a share of GDP, net core Crown debt is initially 2.4 percentage points lower than expected, owing to lower borrowing and upward revisions in historical GDP, but is close to the Half Year Update 2024 by the end of the forecast period at 45.5% of GDP.

Risks are skewed to weaker outcomes#

There is a lot of uncertainty around the global outlook, partly because of global trade policies but also owing to geopolitical conflicts, and outcomes could prove to be more negative for the New Zealand economy than assumed. There are also domestic sources of uncertainty, including net migration and productivity, that could prove to be stronger than assumed and lead to faster growth. Scenarios in the Economic Outlook chapter show weaker global growth is likely to have a much larger impact on the fiscal outlook than stronger net migration inflows and higher productivity.

The fiscal outlook could also be impacted by a range of other factors, including whether future Budget operating allowances are sufficient, natural disasters and the matters outlined in the Specific Fiscal Risks chapter.