New Zealand is at risk of falling into a deeper recession, according to the International Monetary Fund.
In its annual report card, the IMF said the Government needs to rein in spending or else the country faces prolonged high inflation lasting until 2025.
The IMF said the economy had slowed, but significant labour market restraints had put upward pressure on wages, and the large positive output gap had kept inflation high.
"Growth is expected to slow to around 1% year-on-year in 2023 and 2024, with the possibility of a technical recession, despite some short-term boost from higher spending to address the North Island weather events and funding to meet central government cost pressures," the IMF said.
"Inflation is likely to decline gradually to the 1–3% target range only in 2025 given the pick-up in non-tradable inflation."
Finance Minister Grant Robertson announced yesterday the Government forecasts $4 billion in savings, although the Opposition say it is too little, too late.
On top of this, the New Zealand dollar has dropped significantly, sliding below US$0.60, and the NZX is on track to finish the month down almost 5%.
The strong US dollar is a bright spot for exporters who have been hit hard by the faltering Chinese economy, but the IMF's warning signals the future could be glum if spending doesn't cool.
"These are challenging economic times, all New Zealand companies, exporters can see that when they look out to the likes of China, but the underlying fundamentals of the economy are good and the IMF do point that out as well," Robertson said today.
National are set to release its long-awaited tax plan tomorrow, with finance spokesperson Nicola Willis claiming it will put no pressure on inflation.
"It requires no additional borrowing and we can fully deliver it regardless of the state Labour leaves the books in."
Four new ways of collecting money will be unveiled.
"They will be specific, they will be targeted," Willis said. "I don't think people are going to be angry."
Prime Minister Chris Hipkins believed the only people that would be happy would be the wealthy.
"They'll introduce four new taxes in order to introduce tax breaks for millionaires and property owners," he said.
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