New Zealand's economic woes cast a shadow on its budget

By Lucy Craymer

WELLINGTON, Dec 16 (Reuters) - New ⁠Zealand published on Tuesday ⁠new financial ‍forecasts that show no return to a budget surplus in the next five years, as the effects of a stuttering economy offset the government’s efforts to keep a tight hold ‍on its fiscal purse.

The South Pacific nation's economy has contracted in three of the ​last five quarters, and its recovery has been hobbled by tepid consumption and heightened uncertainty about U.S. trade policy and the global ​economic outlook.

However, the government is hoping that the economy is on the mend, with its third-quarter data due Thursday expected to show growth, and Treasury is forecasting improved economic growth over the next 18 months.

“With fresh air in its lungs, the ​economy is picking up,” New Zealand Finance Minister Nicola Willis said at the release of the half-year economic and fiscal update in Wellington. “At the same time, the government continues to take a very disciplined ​approach to its spending.”

Since coming to power in late 2023, the centre-right government has tightened its purse strings in an effort to cut what ‌it sees as wasteful spending, but critics say the fiscal discipline is undermining an economy at a time of rising external risks.

“Tight control of spending has to continue ​and it will,” Willis said. She added that health, education, ⁠defence and law and order will be the priorities for any new spending at the budget in May.

The government forecast a budget deficit of NZ$16.93 billion ($9.79 billion) for ‌the current financial year, wider than the deficit of NZ$15.60 billion at its May budget.

It does not expect to return to a surplus over the forecast five-year period if costs for its nationwide accident insurance scheme are included. It forecasts a ‌deficit of NZ$60 million in the 12 months ending June 30, 2030.

“The books forecast a very, very small deficit in the ‌out year but as I say with forecast revisions I think you would see it returning to surplus,” Willis said.

Gross domestic product (GDP) growth is expected to be 1.7% in the 12 months ending June 30, 2026, down from the forecast growth ‍in May of 2.9% for the same period, but will pick up to 3.4% in the following financial year. For the 2025/2026 period, it expects inflation to ⁠track at 2.4%, higher than the prior forecast of 2.1%.

Net debt, excluding advances, was forecast to peak at 46.9% of GDP in 2027/28. In May, the government had expected it to peak at 46.0% of GDP in 2027/28.

Willis said that following recent improved data, Treasury is now expecting third-quarter GDP of 0.9%.

($1 = 1.7286 New Zealand dollars)

(Reporting by Lucy Craymer in Wellington; Editing by Muralikumar Anantharaman)

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