New Zealand Treasury sees deeper economic downturn pressuring tax take

NEW Zealand’s economic downturn has been deeper than expected, putting pressure on tax revenues as the government struggles to reduce its budget deficit, according to the Treasury Department.

The latest evidence points to a likely further downgrade to the Treasury’s economic and fiscal forecasts, Chief Economic Adviser Dominick Stephens said in a speech on Thursday (Nov 21) in Wellington. The projections will be published in the half-year economic and fiscal update on Dec 17.

“Recent data has suggested that the economic downturn has been deeper, and the recovery may begin later, than the Treasury forecast at Budget 2024,” Stephens said.

In the May budget, the projected return to surplus was pushed out one-year to 2028, while the forecast 2025 deficit was larger than previously expected. That’s despite Finance Minister Nicola Willis eliminating jobs in the public sector and cutting spending.

“New Zealand is currently running a structural fiscal deficit, with expenditure exceeding revenue,” said Stephens. “Economic growth falling short of expectations has been making it harder for the government to bring the books back into balance.”

A second-quarter economic contraction was unexpected and the manufacturing and services industries have been subdued, he said. In addition, consumer spending remains weaker than a year ago and companies are still pessimistic about their own trading outlook, Stephens said.

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The Reserve Bank of New Zealand cut interest rates in August and and October and is expected to deliver a second straight 50 basis-point reduction at its final policy decision of the year on Nov 27, taking the cash rate to 4.25 per cent. Investors see a 20 per cent chance of a 75-point cut, swaps data show.

Stephens said labour productivity growth remains weak, which adds to downside risks for both economic growth and tax revenue.

“New Zealand is not alone,” he said. “Productivity growth began slowing in New Zealand and around the world before the global financial crisis and has fallen even further in the last decade.” BLOOMBERG