In the Land of the Long Dark Cloud
High interest rates, slow growth, rising unemployment and more indebtedness debt.
With high interest rates, slow growth, rising unemployment and increasing government debt.
The Pre-election Economic and Fiscal Update is an important transparency and accuracy in government financial reporting. We have this report because of what happened in 1990, when the the incoming National government was taken aback by the state of the books, contradicting public claims by the outgoing Labour government. The PREFU serves to prevent this by providing all political parties, as well as the public, with an impartial and authoritative view of the country's economic and fiscal position before an election.
Despite occasional inaccuracies in long-term forecasts, the PREFU is generally considered to provide reliable short-term predictions.
This year’s report paints a bleak picture of New Zealand's economic prospects.
At a glance:
Persistent domestic inflation is expected to keep interest rates high, leading to a prolonged period of slow economic growth. This economic slowdown is projected to further stagnate the labour market, with the unemployment rate forecast to peak at an alarming 5.4% in early 2025.
The situation is further exacerbated by tax outturns that have consistently fallen short of expectations, a trend that is likely to persist.
Accordingly, the Operating Balance before Gains and Losses (OBEGAL) deficit is projected to be $11.4 billion in the current year. This is like the government’s equivalent of a household budget. In simple terms, this is a measure of whether the government is taking in more money than it is spending (or vice versa).
Accumulated residual cash deficits are projected to total $34.4 billion. If the OBEGAL is like the household budget, this figure is the total, accumulated amount you've overspent in your household budget.
This means the government will need to find additional funding sources to cover this shortfall. This could be through additional borrowing or drawing down on existing cash reserves.
Social security and welfare expenses for the year ending June 2022, which encompass payments such as unemployment benefits, pensions, and disability allowances, amounted to $48.3 billion. Looking ahead, the Treasury forecasts that these expenses will continue to rise, reaching $53.8 billion by June 2023.
Health expenses, which cover costs related to public healthcare services, hospitals, medication subsidies, and public health initiatives, totalled $27.7 billion for the year ending June 2022. As healthcare needs and costs continue to grow, the Treasury anticipates that health expenses will increase to $29.2 billion by June 2023.
Accordingly, debt is set to continue rising steadily. Net debt as a percentage of GDP is expected to peak in 2024/25 at 22.8%, before reducing to 21% of GDP by 2026/27, assuming the economy improves, and the government commits to spending restraint.
Notably, the Treasury seems to express some doubt about the ability of the government to maintain such restraint.
It all paints a rather sombre picture of the coming years for New Zealanders. While the numbers seem abstract they add up to a period of economic uncertainty. That means a tougher job market, reduced job security and heightened financial stress for many households.
The economic slowdown, coupled with the high interest rates, could also impact the housing market. Home ownership is likely to become even more difficult for average New Zealanders. Businesses will also find it more expensive to borrow money for expansion of operations.
Things could have been worse. And tough times don’t last. That’s the best spin that could probably be managed as far as the 2023 PREFU goes.
It’s going to be a Hell of a mess to clean up after October.