Real GDP growth will be just 0.5% in the year to June 2025, rising to 3.3% in 2027 before slowly falling. Unemployment will rise to 5.4% by next June, slightly higher than forecast in the Budget, before falling.
Over the four years to June 2028 nominal GDP is a cumulative $19.8 billion lower. These differences widen so that in the year to June 2028, nominal GDP is $7.1b lower than forecast at the May Budget – that’s a fairly large revision in just a few months.
After a -2.7% fall in GDP per capita in 2024, there is a fall of -0.6% pencilled in before the metric rises by 2.2% in 2026and 1.7% in 2027. New Zealanders will feel poorer – because they are.
The slump in GDP doesn’t just leave New Zealanders poorer. The Government is worse off too.
Total core Crown tax revenue is cumulatively $13b lower over the forecast period with most of that revision thanks to lower GDP. That is a big enough headache on its own, but remember it comes on top of Treasury revising down tax revenue by $28.3b over the forecast period at the Budget (some of that is related to the tax cuts).
Cumulatively, since the last half-year update, the Government has lost a Christchurch rebuild worth of tax – and it could get even worse. Treasury’s confidence chart showed it reckons there is a 70% chance of revenue falling within +/-$12b of its central forecast – so there is a good chance things could get even worse (but an equally good chance they could get better).
Things that might look like silver linings are, in the full light of day, simply different expressions of pain.
Over the forecast period, the unemployment rate will be lower than at the Budget, but Treasury Secretary Iain Rennie said that some of what is being seen in labour market forecasts is people leaving the workforce, including “people ... moving to Australia”.
So while the unemployment rate may be lower, part of it is a function of the labour force upping sticks.
The housing market will pick itself up off the canvas, shrinking by -0.1% in the year to June 2025, before roaring back into life in 2026 with growth of 5.3% and 5.8% in 2027 and staying high across the forecast period.
While that recovery will be welcome for some, it could trade the economic problem of atrophying household wealth, with a social problem of declining home ownership.
Defending these forecasts, Finance Minister Nicola Willis noted that these figures were still lower than the 30-year average and did not yet include the impact of the Government’s recent housing announcements.
Residential construction activity, which is flat, is expected to reach an annual growth rate of 7.1% in the June 2026 year, indicating a recovery.
The virus that is giving the economy this disease is productivity. New Zealand is not experiencing the productivity growth it did in the past.
This means that it is struggling to grow in a sustainable way. The cliche, coined by Nobel Prize-winning economist Paul Krugman, is that in the long run, productivity isn’t everything, but it’s almost everything.
Labour productivity measured by GDP per hour worked grew by 1.4% a year from 1993 to 2013, but slowed to around zero from 2014 to 2019.
This reversed out during the pandemic years, which saw strong productivity growth.
However, this was not sustained. That lower productivity growth leads to lower GDP and a lower tax take because people are earning less.
What does this mean for Willis and the Government?
Well, the surplus that both Labour and National campaigned on achieving by 2026/27 has now slipped so far it has dropped out of the forecast period and won’t be hit until some time in the 2030s (it’s so far into the future the printed Hyefu booklet doesn’t actually include it).
In the meantime, the Government has a created a new metric, Obegalx, by which it will measure the surplus. This metric, which was not supported by the Treasury, excludes the likes of ACC and will mean the Government will hit a surplus before the end of the decade.
In the more immediate term, Willis will struggle to keep to her spending parameters. The Government has recommitted itself to $2.4b in new operating spending in the next two budgets. There’s only about $700 million left in the 2025 Budget, with most of that allowance already allocated.
The Government can find additional money – but only by introducing new revenue measures like the long-awaited charities tax, or by cutting spending elsewhere.
Willis said departments have been given “performance plans” to help them stay within their new tight baselines.
It all points not just to a tight Budget in 2025, but tight budgets all decade, meaning a very tough path to re-election.
