Economic and fiscal update

Half Year Economic and Fiscal Update 2023

As the government’s lead economic and financial adviser, the Public Finance Act 1989 requires the Treasury to produce a range of stewardship documents:

  • Some as part of an annual cycle: twice-yearly Economic and Fiscal Updates, and monthly and annual Financial Statements of the Government.
  • Some are every three or four years: Pre-election Economic and Fiscal Update, Long term Fiscal Statement, Investment Statement, Wellbeing Report, as well as the Long term Insights Briefing required by the Public Service Act 2020.

The Half Year Economic and Fiscal Update is part of the annual cycle of stewardship documents. This update primarily outlines what the Treasury observes in our current economic climate and what we might see in the future. Our observations of the economy, alongside the Government’s fiscal policy decisions are used to inform our view on the Government’s financial performance and financial position over the current year and next four years (our forecast period). We also consider the risks we may face that could alter the economic and fiscal outlook over the forecast period.

This gives an indication of what the outlook is for the economy and the Government’s fiscal position for accountability purposes and inform decision-making.

Accessible version

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

Table of contents

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

Executive Summary#

Economic activity remains slow, as forecast in the Pre-election Economic and Fiscal Update 2023 (Pre-election Update). High interest rates are expected to persist and drive a sustained period of soft economic growth, reducing inflationary pressure. Compared to the Pre-election Update, slightly stronger activity and persistence in domestic inflation means interest rates are expected to stay around current high levels for longer. This means that although economic growth is expected to be stronger in the near term than in the Pre-election Update, high-for-longer interest rates mean we are now forecasting a more delayed recovery in activity.

The economic forecasts in this document were finalised on 6 November, and the fiscal forecasts were finalised on 24 November. This means that the forecasts do not incorporate the potential impacts of the new Government’s decisions. These will be fully captured in the 2024 Budget Economic and Fiscal Update. For more information refer to box on page 6.

Economic growth is forecast to average just 1.5% over the next two years, as elevated interest rates increase the cost of borrowing and of servicing existing debt, driving weak consumption and investment. Strong net migration and the ongoing recovery in international tourism are expected to provide some offsetting stimulus to parts of the economy, but the overall picture is one of slow growth. This is expected to reduce labour demand and lead to the unemployment rate reaching 5.2% in early 2025. Once inflation is again within the Reserve Bank of New Zealand (Reserve Bank) 1.0% to 3.0% target band, forecast to occur in late 2024, interest rates are expected to fall and growth is expected to pick up, averaging 2.8% per year from 2026 onwards.

The fiscal outlook is expected to improve over the forecast period as the economy grows and expenditure growth declines, albeit at a slower pace compared to the Pre-election Update, largely reflecting the weaker forecast for tax revenue and higher finance costs. The operating balance before gains and losses (OBEGAL) is expected to return to a small surplus of $0.1 billion in 2026/27, while net debt starts to fall, as a percentage of GDP, from a peak of 23.3% in 2024/25. The forecast improvement over time is underpinned by declining growth in core Crown expenses, as lower levels of funding are set aside for future decision-making, the baseline savings announced in August 2023 start to take effect, and some temporary spending ends (such as the response to the 2023 North Island weather events). In contrast, core Crown tax revenue recovers from sluggish growth in the 2022/23 year and is expected to gradually increase, from 28.4% of GDP in 2022/23 to 30.0% of GDP by 2027/28.

Table 1 – Key economic and fiscal indicators
June years2023
Sources: Stats NZ, the Treasury
Real production GDP (annual average % change)
Unemployment rate (June quarter)
CPI inflation (annual % change)
Current account (annual, % of GDP)
OBEGAL ($ billion)(9.4)(9.3)(6.1)(3.5)0.13.4
as a percentage of GDP(2.4)(2.2)(1.4)(0.7)0.00.7
Net debt ($ billion)71.497.4102.7107.7107.499.1
as a percentage of GDP18.023.223.323.222.019.3

Record high net migration has been supporting economic activity since borders reopened in 2022 following the COVID-19 pandemic. Since the Pre-election Update, net migration has been even higher than expected, reaching 128,900 in the year to October 2023. These high inflows have alleviated labour shortages and wage pressures in certain industries but are driving increased population growth. Partly due to stronger migration, annual house price growth is expected to be higher than in the Pre-election Update, reaching 5.3% in the year to June 2024, compared to 1.6% in the Pre-election Update. This, coupled with a recovery in tourism, is leading to more resilient demand in the economy and stronger inflationary pressures than forecast at the Pre-election Update. Consequently, interest rates are expected to remain at their current levels for slightly longer than previously forecast. Higher net migration is leading to a larger population than previously forecast, which while raising additional tax revenue will also increase pressure on future government expenditure.

Household budgets are expected to remain under pressure as labour market conditions deteriorate and living costs rise. Unemployment is forecast to peak at 5.2% in early 2025, while annual wage growth is expected to ease from 6.7% in September 2023 to 5.1% in June 2025. Business conditions are also expected to remain challenging, despite stronger demand from the ongoing recovery following the North Island weather events earlier in the year. Increasing business costs, subdued consumer demand, and soft export prices will weigh on profitability and businesses investment, while residential construction is anticipated to decline markedly over the next year. Overall, weak GDP growth, coupled with high migration-led population growth, means that real GDP per capita is forecast to be lower across the forecast period than in the Pre-election Update and is forecast to decline until the end of 2024.

The global economy remains subdued. This has been weighing on prices for key New Zealand export products and is expected to continue doing so throughout 2024 and 2025. Additionally, increased geopolitical volatility and trade fragmentation are expected to put upward pressure on the price of imports and downward pressure on the terms of trade. As global growth recovers during the latter part of the forecast, demand for New Zealand export products is expected to recover, as do the terms of trade. The current account deficit is forecast to improve from 7.5% of GDP in the 2022/23 fiscal year to 3.2% by mid-2028.

Nominal GDP expands over the forecast period, which lifts forecast core Crown tax revenue by $41.6 billion, to $154.0 billion by 2027/28 – an average increase of $8.3 billion per annum. Around half ($20.0 billion) of this forecast growth comes from source deductions, which are mainly PAYE on wages and salaries, owing to high nominal wage growth. GST is expected to increase by $8.0 billion over the forecast period, driven mainly by a combination of price increases and population growth while spending per capita stays relatively flat. Core Crown tax revenue is forecast to increase as a proportion of GDP, from 28.4% to 30.0% by 2027/28.

However, core Crown tax revenue is expected to be $1.6 billion lower in total across the forecast period, compared to the Pre-election Update, in part reflecting a downgrade in business profits, which persists across the forecast period, lowering the forecasts of both corporate and other persons tax revenue.

Core Crown expenses growth remains elevated in the current fiscal year, increasing by $12.7 billion compared to 2022/23. Increases are more than halved thereafter and well below the annual growth in core Crown tax revenue. The current year growth in expenses reflects decisions taken at Budget 2023, rephasing of unused spending from 2022/23 and economic factors driving higher finance costs and benefit expenses. Core Crown expenses are expected to decline as a share of GDP, from 33.4% in 2023/24 to 31.4% by 2027/28, as the impact of the baseline savings and lower Budget operating allowances reduce expense growth. Compared to the Pre-election Update, core Crown expenses are higher in all years. This largely reflects that higher finance costs are now expected from high-for-longer interest rates and additional borrowings needed to cover the downward revision in tax revenue forecasts.

The factors above mean that OBEGAL deficits remain elevated in the near term, before returning to surplus in 2026/27. This forecast return to surplus is expected to occur in the same year as in the Pre-election Update, but it is significantly smaller at $0.1 billion. By the end of the forecast period, an OBEGAL surplus of $3.4 billion is expected.

Residual cash follows a similar trend to OBEGAL, with significant deficits in the near term, before returning to surplus by the last year of the forecast period. A total residual cash deficit of $32.2 billion is expected, slightly higher than the Pre-election Update, which will be largely funded through additional borrowings.

The deficits expected in the near term are the key driver for the initial lift in net debt, which rises to $107.7 billion by 2025/26, before starting to fall. Overall, the net debt track is expected to be slightly higher across the forecast period compared to the Pre-election Update. Net debt is now forecast to peak at 23.3% of GDP in 2024/25, before declining to 19.3% of GDP by 2027/28 – around 1 percentage point of GDP higher than forecast in the Pre-election Update. The higher net debt track is largely reflective of the weaker residual cash forecasts, along with recent market conditions that have had unfavourable impacts on the net financial instrument portfolio of the New Zealand Superannuation Fund, which are included in the net debt measure.

Net worth is forecast to grow by $14.3 billion over the forecast period, largely reflecting the operating balance results, but it declines as a percentage of GDP, to be 40.1% in 2027/28, as operating balance results are less than the growth in nominal GDP.

Finalisation dates for the 2023 Half Year Economic and Fiscal Update

Economic forecasts – 6 November 2023
Tax revenue forecasts – 14 November 2023
Fiscal forecasts – 24 November 2023
Risks to fiscal forecasts – 24 November 2023
Text finalised – 14 December 2023

The Government’s Mini Budget, 100 Day Action Plan and coalition agreements

The Treasury’s economic and fiscal forecasts presented in the 2023 Half Year Economic and Fiscal Update (Half Year Update) were completed prior to the release of the Coalition agreements, the Government’s 100 Day Action Plan commitments and the decisions made on the Mini Budget. Therefore, the forecasts are based on decisions and circumstances known as at 23 November 2023 and do not capture any information after that date.

The table below outlines the anticipated fiscal impacts on key fiscal indicators from final decisions announced in the Government’s Mini Budget. Only the direct impacts from Mini Budget decisions are captured in Table 2, and there will be subsequent impacts that have yet to be considered. For example, the decision to exit the Crown’s contribution to Let’s Get Wellington Moving will likely include the withdrawal of some National Land Transport Fund (NLTF) co funding from the programme (in addition to the Strategic Investment Programme funding withdrawn through the Mini Budget), thereby leaving more funding available in the NLTF for other projects.

Table 2 – Indicative impact of Mini Budget decisions on key fiscal indicators1
Year ending 30 June
Core Crown revenue1.
Core Crown expenses(0.2)(1.2)(1.4)(1.6)(1.0)(5.4)
Capital spending(0.1)(0.1)(0.2) 
Net debt (cumulative impact)(0.2)(1.5)(4.1)(6.4)(7.9) 

While overall the Mini Budget decisions will improve the fiscal outlook presented in the Half Year Update, it is anticipated that once combined with the other signalled commitments in the Mini Budget (eg, tax plans) expected to be agreed in the future, the overall impact would be broadly neutral over the forecast period.

Once the Mini Budget decisions and other commitments are reflected into the forecasts, there will be changes in the composition of some key indicators presented in the Half Year Update (eg, GDP, core Crown revenue and core Crown expenses). In addition, there is a risk that once decisions are fully reflected into the economic and fiscal forecasts, the overall fiscal impacts may not be neutral due to the indirect, or second order, impacts of the decisions. In particular, decisions may have flow on impacts to the economic outlook, which in turn have implications for forecasts of certain revenue and expense items, such as tax revenue and finance costs.

The full economic and fiscal implications from future commitments that are outlined in the Mini Budget, 100 Day Action Plan and Coalition agreements, will be assessed as part of our next forecast round, which will be released in the 2024 Budget Economic and Fiscal Update. There is a risk that these future decisions could impact on the economic and fiscal forecast presented in the Half Year Update. In addition, there will be a number of specific fiscal risks presented in the Half Year Update that may now expire from decisions and announcements to stop some of the previous Government’s programmes.


  1. [1] The numbers in the table reflect Mini Budget decisions at the time the Half Year Update went to print. There is a risk that there could have been subsequent decisions in the Mini Budget that will not be captured in the table.