Govt books set to return to surplus a year early

The Government’s finances are looking marginally better than Treasury expected when it released its forecasts at the Budget in May. 

The books are expected to get out of the red by 2028/29, according to the traditional “operating balance before gains and losses” (Obegal) measure – a year earlier than Treasury forecast in May. 

The Government is expected to post a $2.1 billion Obegal surplus in that year, and a $4 billion surplus, according to this government’s new ObegalX measure, which includes the impact of the Accident Compensation Corporation (ACC). 

The improvement is expected to come from inflation sending the Government’s tax take higher than expected, as well as spending coming in an inch lower than expected. 

Indeed, Treasury’s forecasts are based on the assumption the next government keeps spending exceptionally tight. 

Treasury’s tax and spend forecasts haven’t changed much since May as a percentage of the economy. 

However, in nominal terms, the increase in expected tax revenue looks a little starker. This is largely due to inflation bumping people up into higher personal income tax brackets. 

While the country’s mountain of debt is still getting larger, it is expected to peak at a lower level as a percentage of gross domestic product (GDP) than expected. 

Net core Crown debt is expected to rise from 41% of GDP in June, to a peak of 43.9% in 2027/28, before tracking down. 

In May, Treasury saw debt peaking at 46.1% of GDP. 

Debt-to-GDP has been rising since the Covid-19 pandemic, before which it was below 20%. 

When Nicola Willis became Finance Minister in 2023, she said she wanted debt-to-GDP to fall below 40% of GDP. National is continuing to make this pledge. 

Addressing media at the release of Treasury’s forecasts, known as its Pre-Election Economic and Fiscal Update (Prefu), secretary to the Treasury Iain Rennie said conflict in the Middle East had delayed, not derailed, New Zealand’s economic recovery. 

He said that what was originally expected to be a V-shaped recovery was now looking more like a U-shaped recovery. 

Even though the Government’s books had improved in the short to medium term, Rennie stressed that unless checked, New Zealand’s ageing population meant the country’s financial position was “unsustainable” longer term. 

Rennie didn’t mince his words, yet again pointing to the cost of New Zealand Superannuation. 

Treasury acknowledged the risks of its forecasts were skewed to the downside. 

It noted oil prices could be higher for longer. This could force the Reserve Bank to raise the Official Cash Rate (OCR) by more than would otherwise be the case. 

It also noted that higher bond yields globally could continue hampering New Zealand, pushing the country’s interest costs even higher. 

Treasury forecast core Crown finance costs hitting $10.3 billion in the year to June, and rising to above $13b by 2029/30. 

Willis has, over the past month, voiced her desire to continue adjusting personal income tax brackets to address bracket creep – or people being pushed into higher tax brackets due to inflation – provided the state of the books improves. 

She said she would have more to say on National’s tax policy later. 

As for one of Labour’s key election policies – to introduce a narrow capital gains tax and use that revenue to cover the cost of three GP visits per person per year – Treasury’s house price forecasts suggest property investors may not have many capital gains to pay tax on. 

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.