ANALYSIS: NZ Headed for a Prolonged Recession, New Government Says

Finance Minister Nicola Willis speaks to media on her way to the house following the State Opening of Parliament in Wellington, New Zealand on Dec. 6, 2023. Hagen Hopkins/Getty Images

Analysis

The finance minister promised a “mini mini” budget, and MP Nicola Willis certainly delivered that with a document just six pages long.

Nonetheless, it contained some deep cuts to public services and, when combined with the accompanying Half-Year Economic and Fiscal Update (HYEFU) from the Treasury, painted a bleak picture of New Zealand’s medium-term economic future.

Since the last update in September, core Crown revenue has fallen by NZ$1.6 billion over the forecast period while expenses have grown, mainly due to more borrowing and higher interest costs.

Treasury warns of a prolonged contraction in real GDP per capita growth, sparking a recession which could last two years and a consequent decline in living standards. The cumulative effect of this is to reduce the $2.1 billion surplus in 2027, which Treasury forecast in September, to just $140 million.

GDP growth is expected to be just 1.5 percent in 2024 and 2025, rising to just 2.8 percent in 2026, and 3 percent in 2027. But in per capita terms, in 2024, real GDP per capita growth will be -0.7 percent, with a further decline of -0.1 percent forecast for 2025.

Unemployment is set to rise to 4.5 percent next year, and 5.2 per cent in 2025, well above the current level of 3.6 percent.

Economic growth is forecast to be slow due to high-interest rates being maintained by the Reserve Bank, despite reports of a sharp fall-off in pre-Christmas retail spending and flat spending on credit cards over 2023.

And despite the fact inflation is expected to fall to 4.1 percent next year and 2.5 percent in 2025.

Post-pandemic credit card spending in NZ has been flat Courtesy of Reserve Bank of NZ

Net debt is forecast to be 23.2 percent of GDP in the current year, compared to 18 percent in the year to June 2023. It is forecast to peak at 23.3 percent in the year to June 2025. Borrowing will be $7 billion higher over the next four years than was previously forecast.

Which Projects Will Be Cut

Ms. Willis also unveiled a list of “Fiscal Cliffs”—her term for items which have time-limited funding that expires in the forecast period, and which the new government would need to fund if it wanted them to continue. The cumulative total of these programmes is $7.2 billion.

The National Party made pre-election commitments to funding an increase to Pharmac’s budget, school lunches, and the apprenticeship boost scheme.

Ms. Willis also revealed that funding for Te Matatini (a nationwide Māori performing arts festival and competition for kapa haka performers), which runs out in two years, would also continue.

Amongst the programmes that will not survive are industry transformation plans, which will save $127 million over the next four years.

Stopping the Lake Onslow project (a proposal for “pumped hydro,” which already had $20 million spent on it during the investigation phase) will save $64 million.

Ending the Resource Management Act reforms will save $302 million, while shutting down the ill-fated “Let’s Get Wellington Moving” transport plan will save $525 million.

However, the biggest single saving comes from ending depreciation on commercial buildings, which is set to save $2.311 billion.

Treasury’s list of risks to the fiscal forecasts underlines just how precarious a state the economy is in.

It warned the increased prison population, growing demand for legal aid (both likely as a result of all three coalition parties’ “tough on crime” policies), plus the cost of meeting New Zealand’s international climate commitments, could all add additional drains on revenue.

Ms. Willis drew attention to the former Labour government’s Transport Investment Programme, to which it had committed $85 billion, well under the $288 billion needed to deliver it. However, she did not give any indication of the new government’s funding plans for the sector.

The mini-budget reverses the previous government’s extension of 20 hours of free early childhood education to two-year-olds, and repeals free and half-price public transport for those under 25.

Future measures include taxing online casino gambling operators, increasing audit activities of the IRD and replacing the current tertiary first-year fees-free policy with a final year fees-free policy.

Ms. Willis has also written to ministers asking that their agencies find savings ahead of next year’s Budget, with each agency’s target informed by their headcount growth since 2017.

Other savings announced today include $1.5 billion from initial baseline exercises: $500 million started by the previous govt, plus $400 million in fewer consultants, and $600 million in decreased departmental costs.

But, as opposition finance spokesperson Grant Robertson was quick to point out, the mini-budget contained no detail on the cuts to public service expenditure.

“We were told we would know the details of the cuts to public services that were going to be used to fund tax cuts. That is not here either today,” Mr. Robertson said.

Little Clarity

That was echoed by Council of Trade Unions economist Craig Renney, who said that despite calling for clarity on existing spending, the mini-budget lacked an outline of the government’s plan.

“It doesn’t provide any analysis of the spending cuts being required of government departments, nor how they are to be achieved. It doesn’t provide a fiscal strategy. In short, New Zealanders will have to wait to understand what is being changed,” Mr. Rennie said. “The government has claimed that it is delivering fiscal responsibility but has taken money from climate change to deliver tax cuts for landlords and it’s taking $676 million from welfare payments.”

Private landlords, promised a restoration of interest deductibility if the National Party was elected, will also have to wait until next year for details.

Ms. Willis said the HYEFU “lays bare the extent of Labour’s economic and fiscal vandalism,” and said an “economic clean up” had begun today with the mini-budget.

There has been no reaction from the debt and foreign exchange markets to the announcement.

New Zealanders, struggling with an increasingly high cost of living, will now need to wait until the Budget in May next year to find out what relief measures are in place.