Pre-election forecast bleak but not all bad

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

Opinion

As bad as probably expected, but better than some thought — that would sum up Treasury’s Pre-election Economic and Fiscal Update released yesterday afternoon.

Pundits have been warning that Prefu, as it has become known, would show a gloomy outlook for the country and the government, and they have been proved right.

However, Treasury is not forecasting a recession — it predicts annual GDP growth of 1.3 percent, up from its 1.0 percent forecast in May — and it sees a return to surplus by 2027.

Treasury secretary Dr Caralee McLeish said a provisional deficit of $10 billion for the year to June 2023 was expected to grow to $11.4bn next year, as core Crown expenses outpace growth in revenue.

Treasury does expect the fiscal outlook to improve next year. Net debt is due to peak at 22.8 percent of GDP in 2024 and the return to surplus has been pushed back by a year to the 2026/27 financial year.

Significantly, inflation will stay high until the end of 2024 and interest rates might need to be hiked further.

People paying current mortgage interest rates are already spending double what they were to service their loans compared to September 2021.

Treasury is predicting 90-day interest rates to remain at 5.7 percent until mid-2024 before easing to 3.0 percent by mid-2027.

This is bad news for young families trying to enter the housing market, but good news for savers.

McLeish is also predicting a slowing economy, but this will be eased by high migration which will peak close to 100,000 for the 12 months to September, about 33,000 more than Treasury predicted in May.

It all adds up to bad news for the Labour government.

Finance Minister Grant Robertson sees some positives in the forecast, including the economy having turned the corner out of a technical recession, while claiming to have managed the situation in a balanced way.

He may be whistling into the wind however in the eyes of the general public.

Naturally National and Act see added ammunition in Prefu for their claims that the Government is financially incompetent and the mantra that they will handle the economy better.

The downside for National is that the straitened circumstances increase the focus on its “trust us” line as to where the money is coming from for its promised $14.6 billion in tax cuts. Expect a desperate Labour to hammer this point all the way to Election Day, October 14.

For the country in general the bleak outlook for the next two years will cast a shadow over the coming summer and lift worry levels for many.