Economic and fiscal update

Return to surplus pushed out another two years

17 Dec 2024

Our take on the latest Economic and fiscal update (Tue 17 Dec 2024)

Slower productivity growth lowers GDP growth track

Government spending remains above 31% of GDP

Return to surplus in 2028/29 (OBEGALx)

Economic conditions have deteriorated further than The Treasury had previously anticipated, contributing to a $12.9b reduction in forecast Core Crown revenue between 2025 and 2028, compared to expectations in May’s Budget Economic and Fiscal Update (BEFU).
Expectations for Core Crown expenses have risen, up $5.7b over the 2025 to 2028 period. Largely due to the weaker economic track, spending will remain above 31% of GDP throughout the forecast period to 2029, compared to the pre-pandemic figure of 29%.
Weaker expected revenue, combined with increased spending, means the return to surplus has been pushed out again, this time beyond the forecast period. A new metric, OBEGALx, was introduced in the Half Year Economic and Fiscal Update, which measures the operating balance before gains and losses excluding ACC revenue and expenses. This measure has been introduced because ACC will be temporarily underfunded with the motor vehicle and worker accounts oversubscribed. OBEGALx returns to surplus in 2028/29, a year later than the BEFU’s forecast return to OBEGAL surplus of 2027/28.
The combination of expected reduced revenue and increased expenses means more borrowing to bridge the gap, with an additional $17b of net debt in 2027/28 compared to the BEFU forecast.

$b, June-years, OBEGAL

The economy is expected to recover substantially from mid-2025 onwards, with year-end growth reaching 3.4%pa in the second half of 2026. But weaker activity to date this year, which is forecast to continue into the first half of 2025, means that GDP levels are expected to be lower throughout the forecast period. This shift has had negative repercussions for the fiscal outlook.
The key driver of weaker expected GDP growth and a lower tax take over the forecast period is slower labour productivity growth, with just over half of the $13b reduction in tax take a direct result of this change. Nominal GDP forecasts were revised down by $18.8b over the 2025 to 2028 period.
Net core crown debt as a percentage of GDP is expected to rise relatively from 38% in 2024 to 46% in 2027 before edging down to 45% in 2029. This track is slightly higher than in the BEFU largely due to the reduction in forecast GDP growth.
Treasury sees downside risks to its outlook, with low economic growth expected from our major trading partners over the forecast period, combined with uncertainty over future trade policy that might be implemented following US President-elect Trump’s inauguration in 2025.

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