New Zealand’s government is grappling with larger budget deficits and a delayed return to surplus due to a prolonged economic downturn and weak productivity, which have affected tax revenue.
The operating balance before gains and losses (OBEGAL) is now expected to remain in deficit until at least the year ending June 2029, according to new Treasury Department projections released Tuesday in Wellington as part of the half-year fiscal and economic update.
In the May budget, OBEGAL had been forecast to return to surplus by 2028, Bloomberg reports.
Finance Minister Nicola Willis introduced an alternative measure of the operating balance that excludes revenue and spending by the state-owned accident insurer ACC. This new metric, OBEGALx, is expected to return to surplus in 2029, according to Treasury forecasts.
Regardless of the measure used, the government's finances are much weaker than previously expected, with tax revenues falling below earlier projections as the economy takes longer to recover from the recession.
Gross domestic product is now forecast to grow at an average annual rate of just 0.5% through June 2025, less than a third of the growth rate projected in May.
“The downgrade to the fiscal outlook has been a lot sharper than expected. The big surprise was the extent of the Treasury’s downgrade to the economic outlook, which has weighed heavily on the fiscals,” said Miles Workman, senior economist at ANZ Bank in Wellington.
The yield on government 10-year bonds rose by as much as 4 basis points to 4.49%, causing the yield curve to steepen in response to the government’s decision to increase its bond issuance program by NZ$20 billion ($11.6 billion) over four years. The local currency remained largely unchanged.
If the projections hold, the budget will remain in deficit for at least nine consecutive years through until 2028. Since taking office in late 2023, Willis has announced billions of Dollars in savings through spending cuts, public sector layoffs, and reprioritising government programs.
“The revisions reinforce the importance of the measures the government has taken to restore discipline to public spending and drive greater economic growth. The Crown’s financial position has deteriorated over the past six years, but the economy has reached a turning point,” Willis said.
Furthermore, Treasury projects a strong rebound in growth during the 2025-26 fiscal year, with GDP expected to increase by 3.3%, driven by the Reserve Bank’s aggressive interest rate cuts.
However, growth is forecast to slow down in the following years due to weak labour productivity, which limits expansion potential. Treasury noted that the productivity gains seen during the Covid-19 pandemic have not been maintained.
Moreover, the OBEGAL deficit for the year through June 2025 is now expected to widen to NZ$17.3 billion, compared to the NZ$13.4 billion deficit projected in May.
Meanwhile, the new OBEGALx deficit is forecast to reach NZ$12.9 billion, which is up from NZ$9.6 billion in the budget.
The OBEGALx measure is expected to narrow to a NZ$10.5 billion deficit in 2025-26, with projections indicating a NZ$1.9 billion surplus by 2029.