Analysis: Finance Minister Nicola Willis began her presentation to media and economists on the half-year economic and fiscal update with a rosy “big picture story”.
“With fresh air in its lungs, the economy is picking up,” she said.
The first slide of her presentation proudly declared in blue font: “The economy has turned the corner. Growth will strengthen and unemployment fall.” The Government would take more tax and spend less money, return to surplus and start paying off its total debt, she said.
And yet, all the positive talk in the world couldn’t paper over the yawning, growing gap between the Government’s revenue and expenses in the coming years. This time last year, the Treasury forecast a narrow deficit in 2027/28 of $300 million under Willis’ new ObegalX metric (operating balance before gains and losses, excluding ACC). That has since widened by nearly $5 billion.
At the time, Willis promised the Government would turn this to a surplus, pushing back the return to surplus by two years under the new metric (or one year if comparing across the new and old metric for calculating a surplus, which are not directly comparable). At the Budget in May, she said she was still committed to this target, even as the projected deficit grew to $3.1 billion.
Finally, on Tuesday, Willis conceded the goal would not be met. The Treasury now forecasts a $5.1 billion deficit in 2027/28 and even a $900 million deficit the next year. Willis has changed the target date for the return to surplus to 2028/29, although she didn’t mention it was a changed target in her press release on the fiscal update.
“This change is consistent with a deliberate, medium-term approach to consolidation,” Willis wrote in her Budget Policy Statement.
Willis pointed to the state of the economy and inaccurate earlier Treasury projections as the cause of the widening deficit, rather than the Government’s spending decisions.
“At the time of the pre-election update in September 2023, the Treasury was feeling very – in fact, overly – optimistic about the economic outlook. It turns out with the benefit of hindsight that the forecasts were far too optimistic and some of the assumptions made at that time have been unwound,” she said.
“The revisions have reduced tax revenue and increased expenses relative to previous forecasts. The ObegalX forecast track is lower now than it was in 2023, but that is almost entirely due to the impact of these economic forecast revisions. It is not the result of discretionary Government policy changes.”
However, the changes in the forecasts between the Budget and Tuesday’s update were driven primarily by growing superannuation and benefit expenses in the medium term. For the next two years, lower-than-expected tax revenue on the back of a weaker-than-forecast economy were a significant driver, but that impact fades from 2027/28 onwards.
In the statement and in her remarks on Tuesday, Willis pushed back on calls from the right to adopt tighter fiscal settings and positioned a profligate Labour Party as the realistic alternative to her approach.
“Some would go much harder. The Taxpayers’ Union, for example, wants to abolish all Working For Families tax credits. This would take money away from 330,000 Kiwi families who overnight would lose, on average, around $180 a week. Beneficiary and low-income working families would bear the biggest brunt,” she said.
“A sharp correction of this sort would also depress demand in the economy just as it is recovering. It would create a level of human misery that I for one am not prepared to tolerate.”
Willis also cited figures from her office suggesting the deficit this year would be $25 billion without the Government’s spending cuts, as opposed to the projected $13.9 billion. It is not clear whether this figure also includes the fiscal impact of the Government’s tax cuts from last year, which cost the Government about $14 billion and were also opposed by the Opposition.
Although she at one stage said a Labour-Green government was the greatest threat to a return to surplus, Willis directed most of her ire at the Taxpayers’ Union. The libertarian group last week launched a campaign against Willis’ fiscal management, fronted by its chair and former National Party finance minister Ruth Richardson.
For more than a week, Willis and Richardson have exchanged barbs through press releases and comments to the media, in particular about a proposed debate on the state of the Government’s books. Willis said Tuesday she had no updates on the debate but was available Thursday or Friday, with any moderator desired by the Taxpayers’ Union.
“If they want to turn up, I’m ready,” she said.
Willis came to the press conference equipped with a Taxpayers’ Union policy document listing public services that should be cut to achieve a sooner surplus.
“What I would put to them and others is that it is one thing to say, ‘Cut spending’. It is another thing to set out who would be impacted by the changes you propose and how. As I’ve said, the biggest saving they propose in that document is not the $12 million saving from the Ministry of Women’s Affairs, it is the billions they want to cut out of the pockets of 330,000 working families,” she said.
“I stand by our Government’s position that that would be the wrong thing to do and I would welcome a debate about that.”
The half-yearly update documents also listed and quantified fiscal risks with greater specificity and transparency than before. Many new and old risks now had potential price tags associated with them, although some commercially sensitive figures were withheld and a few items had not been quantified by the Treasury.
Recently announced resource management reforms could lead to an unexpected $200 to $500 million in implementation costs, for example, while increasing social and transitional housing costs could run to $100 to $200 million.
Some of the largest risks in absolute terms were associated with health capital pressures ($2 to $5 billion), unfunded transport commitments ($5b to $10b) and long-term infrastructure and digital investment commitments across defence, health, corrections and education ($5b to $10b).
On the economic front, the new figures built in the impacts of the unexpected sharp decline in the economy in the June quarter, although they also projected a stronger recovery in the September quarter. Official figures for September are due on Thursday.
Overall economic growth is projected to be more gradual than was forecast at the Budget, but will peak at a higher level. Inflation will take slightly longer to fall to 2 percent, but will remain within the Reserve Bank’s target band of 1 to 3 percent.
Unemployment will peak later and higher (at 5.5 percent in the December 2025 and March 2026 quarters) and fall slower, towards 4.3 percent by June 2030.
Net migration is also expected to be lower and take longer to return to the Treasury’s expected average of 40,000 per year.
Still, the forecasts are unambiguous that the economy will recover over the coming months – not a surprise, but nonetheless much-needed good news for the Government.
“Merry Christmas, everyone,” Willis said as she left. “2026 is going to be better than 2025.”
