Economic and fiscal update

PREFU shows short-term borrowing at long-term cost

12 Sept 2023

Sabrina Swerdloff

Our take on the latest Economic and fiscal update (Tue 12 Sept 2023)

Economic performance broadly unfolding as expected

Additional $7b in expenditure over forecast period

Net debt to be $13b higher by 2027

The key numbers...

Latest Treasury forecasts indicate that the economy is broadly performing as expected in the Budget Economic and Fiscal Update (BEFU) in May. Expectations for key indicators such as unemployment and wage growth over the next four years were quite consistent with BEFU forecasts. High net migration and stabilising house prices are continuing to support the economy, but interest rates will remain elevated to dampen demand and bring it closer in line with supply.
However, the fiscal outlook is considerably more challenging than expected at the Budget.
Tax revenue expectations are lower during every year of the forecast period, driven by a limited corporate tax take. However, the outlook for overall core Crown revenue is less downbeat. Projected core Crown revenue was revised lower for the 2024 and 2025 fiscal years, and higher over 2026-27, leaving the total take over the forecast period $632m higher than expected in May.
The real risk to the government’s fiscal position is consistently higher spending. Despite the Finance Minister signalling a $4b reduction in expenditure over the forecast period prior to today’s pre-election update, forecasts of core Crown expenditure in fact rose by $7b.
Significantly higher expenditure with more subdued revenue growth has pushed expectations for the OBEGAL’s return to surplus out another year, to 2027. The OBEGAL deficit is expected to be $2-4 larger each year in the near-term, and the expected surplus in 2027 was pared back from $3b to $2b.
Larger deficits and a slower return to surplus will require more borrowing, meaning net debt in the 2027 fiscal year is now expected to be $13b higher than previous forecast.

Fiscal surplus expected to come later

OBEGAL, $m, Treasury forecasts

...and our reaction

The PREFU showed that costs have risen significantly for the government, while tax revenue is being squeezed by rising business costs and slowing demand.
The $7b in increased expenditure is driven primarily by higher debt-servicing costs, higher transport investment, and higher levels of benefit payments. An extra $0.3b is expected to be spent over the forecast period on the North Island extreme weather events (compared to Budget 2023), which is a small proportion of overall cost pressures, despite being cited by politicians as a key driver.
Although net debt will be maintained below 30% of GDP, a higher peak of 23% in the 2025 fiscal year means future governments will take on a tougher challenge than was indicated at the Budget.
Essentially, today’s update showed that future Kiwis face a higher debt burden in order to keep the lights on today. The operating allowance is sufficient for funding the rising cost of current public services, but there is little head room for any new spending going forward.

Latest updates

Premium

Economic and fiscal update

PREFU shows short-term borrowing at long-term cost

The key numbers...

Fiscal surplus expected to come later

...and our reaction

Latest updates

Budget 2026: Fiscal position set to improve

OBEGALx return to surplus delayed yet again

Budget 2025: The switch-it budget

Return to surplus pushed out another two years