It also expects unemployment to fall
back below 5%, inflation to stay subdued at about 2%, and wage growth to run ahead of the cost of living at 2.7%.
Growth will average 2.9% across the next four years, the Befu says.
I hope it is right.
That global trade uncertainty stuff has been relatively benign for the past few weeks, with China and the United States coming to a temporary truce. But one suspects the fallout is far from over.
There are, as Treasury notes, some good reasons to be positive about the outlook.
“Goods exports have been buoyed by high export commodity prices,” the Befu says.
“High dairy and meat commodity prices, reflecting global supply and demand dynamics, have boosted on-farm profits and confidence in rural regions. Returns have been further bolstered by a lower New Zealand dollar.”
New Zealand is experiencing an export-led recovery. If tourism keeps recovering, we might actually be on our way to some decent topline economic numbers ...
But beneath the hood, the economy still has some big structural problems that will take time to fix.
Treasury says structural deficits will persist right across the forecast horizon.
That’s unchanged from the Half-Year Update and implies it’s not the state of the economy or adverse shocks driving persistent deficits, says ANZ senior economist Miles Workman.
“It’s a fundamental mismatch between revenue and expenditure settings.”
In other words, we’ll need more Budgets at least this tight to get back to surplus.
Net core Crown debt as a share of GDP is forecast to peak at 46% in 2027/28, and dip to 45.5% in 2028/29.
“The forecast peak in the Half-Year Update was 46.5%, but one year earlier,” Workman says.
“The level of net core Crown debt is higher by the end of the forecast horizon.”
New Zealand Debt Management has lifted its bond issuance guidance by a cumulative $4 billion, but it’s all in the tail. Near-term issuance guidance has been downgraded.
There are risks that the cost of borrowing rises higher than Treasury assumptions.
Treasury has assumed an average interest rate of 4.3% across the next four years. But as it acknowledges, the rate (at the time the Befu was written) was 4.6%.
A lot depends on what happens to the international cost of borrowing, and that comes back to how the global trade turmoil plays out.
To be fair to Treasury, US trade policy isn’t something anyone can pick right now, so it would be dangerous to put too much weight on assumptions.
Most economists feel the Reserve Bank will have plenty of scope to cut rates further if grim international outcomes demand it.
Meanwhile, the fiscal impulse for the economy in the coming year is much stronger (or at least much less weak) than had been forecast, says BNZ head of research Stephen Toplis.
The fiscal impulse refers to the extent to which the Government’s spending levels will be stimulatory or contractionary.
“But much of this is because the 24/25 stimulus was lower than anticipated, and over the forecast horizon, the total shift in stimulus is small,” Toplis says.
“On this basis, we doubt this Budget will have any meaningful impact on the Reserve Bank’s upcoming decision.”
The RBNZ will release its latest Monetary Policy Statement next Wednesday. It is widely expected to cut the Official Cash Rate by 25 basis points to 3.25%.
Do you have questions about the Budget? Ask our experts – business editor at large Liam Dann, senior political correspondent Audrey Young and Wellington business editor Jenee Tibshraeny – in a Herald Premium online Q&A here at nzherald.co.nz at 9.30am, Friday, May 23.
Liam Dann is business editor-at-large for the NZ Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.
Do you have questions about the Budget? Ask our experts - business editor at large Liam Dann, senior political correspondent Audrey Young and Wellington business editor Jenee Tibshraeny - in a Herald Premium online Q&A here at nzherald.co.nz at 9.30am, Friday, May 23.
