Half Year Economic and Fiscal Update 2024

Executive Summary#

Economic recovery is expected from early 2025…#

The economic weakness of the past two years has persisted longer than anticipated. Economic growth starts to pick up in the first half of 2025, and real GDP is expected to grow 0.5% in 2024/25. Economic growth accelerates to 3.3% in 2025/26, supported by lower interest rates. The pace of the recovery is limited by the economy's supply capacity, with weakness in labour productivity expected to continue. As a result, growth slows to 2.4% in 2028/29.

…and fiscal deficits are expected to decline over the forecast period#

Weakness in economic activity coupled with expenditure growth contributed to past fiscal deficits and increases in government debt. The deficit increases in 2024/25 as expenses continue to grow but tax revenue is flat. The Government's new headline fiscal indicator, the operating balance before gains and losses excluding Accident Compensation Corporation (ACC) revenue and expenses (OBEGALx) widens to a deficit of $12.9 billion, and net core Crown debt rises to $192.8 billion by the end of 2024/25. The box on page 36 of the Fiscal Outlook chapter discusses the new OBEGALx indicator.

The headline fiscal indicator moves into surplus in 2028/29 underpinned by the Government's plans to restrain future Budget operating allowances. Further impetus is provided as stronger economic activity flows through to higher tax revenue. The fiscal deficits and capital investment translate into an accumulated cash shortfall of around $57 billion over the forecast period. By the end of the forecasts, a growing economy and declining deficits results in net core Crown debt-to-GDP that is close to its 2024/25 ratio.

Sources: Stats NZ, the Treasury

Inflation has eased and lower interest rates will support a pick up in activity…#

High inflation and high interest rates have stretched household budgets, reduced activity in the housing market and lowered business investment. Weakness in activity over the past two years has opened up some spare capacity in the economy, which is evident in higher unemployment and lower inflation.

With inflation returning to the target range, the Reserve Bank has eased its restrictive policy settings and expects to ease further next year. From early 2025, the reduction in interest rates supports an increase in household consumption and a recovery in house prices and residential investment. Exports are also a key contributor to growth in 2025/26.

…but productivity growth is likely to remain low#

The recovery in economic activity is constrained by sluggish growth in labour productivity. The Treasury has revised down its productivity forecasts over the past year. Further evidence that the weak pre-pandemic trend has continued has led to another downward adjustment (the box on page 14 provides more detail). As a result, real GDP recovers more slowly and the economy is smaller than previously forecast.

The fiscal position begins to recover in 2025/26…#

Fiscal deficits narrow from 2025/26, with a return to surplus forecast in 2028/29. By the end of the forecast period net core Crown debt falls to 45.2% of GDP. Growth in core Crown expenses slows in 2025/26 led by Government decisions to constrain Budget operating allowances. As a share of GDP, core Crown expenses decline from 33.9% in 2025/26 to 31.5% at the end of the forecast period. Meanwhile, rising activity lifts household incomes and business profits driving growth in tax revenue.

…but at a slower pace than previously expected#

A slower recovery in labour productivity compared with the Budget Economic and Fiscal Update 2024 (Budget Update) contributes to nominal GDP that is nearly $20 billion (or 1.1%) lower over the period to 2027/28, which flows through to a smaller tax base. Weaker outturns for some tax types, especially GST, source deductions and business income tax add to the change in the tax outlook. Overall, core Crown tax revenue is cumulatively $13 billion lower than previously forecast.

Compared with the Budget Update, core Crown expenses are $1.4 billion higher per year on average. The weaker economic outlook initially increases benefit expenses, particularly jobseeker support. Upward revisions to school roll projections drive higher education spending while higher core Crown debt adds to finance costs. In addition, Crown entity (excluding ACC) deficits are higher in 2024/25, largely owing to higher expenses in Health New Zealand.

These changes delay the return to OBEGALx surplus by two years compared to the Budget Update. Adding in the revenue and expenses of ACC, OBEGAL is now forecast to remain in deficit throughout the forecast period. The larger deficits flow through to net core Crown debt of 46.1% of GDP in 2027/28, up from 41.8% previously.

There are risks on both sides of the outlook#

Risks to the economic and fiscal forecasts are broadly balanced, but the range of uncertainty around the main forecast is wide. Developments in labour productivity are a major source of uncertainty. To illustrate the uncertainty two scenarios for productivity growth are presented. In the upside scenario, productivity growth is stronger and there is more economic activity. Core Crown revenue is $8.5 billion higher over the forecast period, which leads to OBEGALx surpluses from 2027/28. In contrast, productivity growth is weaker in the downside scenario, the economy is smaller, deficits are larger and debt is higher.

The global outlook remains highly uncertain. Increasing trade protection and geopolitical conflicts could intensify and disrupt supply chains, raise inflation, and negatively impact growth. Potential impacts of higher trade barriers on the New Zealand economy are discussed in the box on page 17.