Interest rates are not likely to begin to ease until late next year, and the unemployment rate is expected to rise to 5.4% while wage growth slows.
A return to surplus is also now expected a year later than previously forecast.
It comes as the government’s books are opened for the last time before the election, setting the economic scene ahead of October 14.
Treasury’s Pre-Election Economic and Fiscal Update (PREFU), was released to the public at 1pm today, and said inflation would likely not return to within the Reserve Bank’s target of 1% to 3% until December next year.
1News business correspondent Katie Bradford explains why today’s opening of the books is so important.
Households and businesses are expected to remain under pressure, the update said, but it showed a “more moderate economic slowdown” compared to the May Budget update.
The main reason was a recent “surge” in net migration, which contributed to an earlier stabilisation in house prices and stronger employment growth, it said.
Unemployment – at 3.6% in June – was expected to rise to 5.4% in 2025, and wage growth was likely to ease from 6.9% in June this year to 3.7% in June 2027.
Interest rates were expected to “gradually ease” from late 2024, and from then on economic growth was to slowly lift and the unemployment rate fall from mid-2025.
The unaudited Crown operating balance before gains and losses (OBEGAL) was $10 billion in the 2022–23 fiscal year, $3b larger than expected at the Budget update.
Interest rates are not likely to start easing until late next year, and unemployment is forecast to rise.
This was due to lower than expected tax revenue, particularly a lower corporate tax take.
Net debt was close to forecast at $71.4 billion as the weaker tax results were largely offset by favourable investment market conditions, the update said.
Core Crown tax revenue was forecast to continue growing from this fiscal year on, but forecast tax revenue was lower than previously expected by $3.5b from this fiscal year until 2027.
“This partly reflects the expectation that recent weakness in tax revenue will persist and factors in the implications from the Government’s SmokeFree Aotearoa 2025 Action Plan decision taken in 2022, which have now been quantified.”
That was a drop in the tobacco excise tax, which is forecast to decline in line with lower tobacco use.
Crown expenses – government spending – remained “elevated” this fiscal year, it said, and was $6.9b higher across the forecast period (2024 to 2027).
That elevated spending was due to “decisions at Budget 2023, the rephasing of unused spending from the 2022/23 fiscal year, the response to the North Island weather events, and the increasing costs of debt servicing”, it said.
“Beyond the 2023/24 fiscal year, core Crown expenses gradually decline to 31.4% of Gross Domestic Product by the end of the forecast period, partly as a result of the Government’s recently announced fiscal sustainability measures.
“As a result, the OBEGAL deficits are expected to narrow in the near-term and return to surplus in the 2026/27 fiscal year, one year later than shown in the Budget Update.”
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