Treasury upgrades outlook: lower unemployment, more tax, less debt

Wednesday, 15 December 2021

Finance Minister Grant Robertson the economy is operating close to potential.

The Treasury has slashed its prediction of how much debt the Government will need to run up over the next few years, after forecasting unemployment will be lower and tax revenues much higher than it had previously expected.

Treasury secretary Caralee McLiesh said it now expected core Crown debt to peak $18.7 billion lower than it forecast in its Budget update, at 40.1 per cent of GDP in the year to the end June 2023, rather than 48 per cent of GDP.

The debt would drop back to 30.2 per cent of GDP by June 2026, The Treasury has predicted.

The Government's operating balance before gains and losses should return to surplus during the year to June 2024, three years sooner than The Treasury had previously forecast, McLiesh said.

Stuff Business Editor Susan Edmunds is joined by Infometrics chief forecaster Gareth Kiernan and principal economist Brad Olsen to talk about what’s really happening in the economy.

* Your questions about the economy answered

* Covid puts further $1b dent in Government coffers in October

The Treasury believes the Government will now need to raise $76b through new bond issues in the four years to June 2025, $31b less than it had previously slated.

Finance Minister Grant Robertson said it was clear the economy was operating “close to its potential and no longer requires the broad economic stimulus that has helped us through the initial impact of Covid”.

The Treasury's Half Year Economic and Fiscal Update (HYEFU) released on Wednesday sees unemployment dropping from its current level of 3.4 per cent, to 3.1 per cent in March next year and staying below 4 per cent for most of the period through to June 2026, with wage growth also averaging over 4 per cent.

Robertson noted the wage forecasts would see pay rising 1.1 per cent ahead of annual inflation, that is instead of below inflation as at present.

The Treasury is forecasting four years ahead in which house prices will barely move, neither rising nor falling by more than 1 per cent.

House prices are forecast to rise 10.8 per cent in the year to June due to rises that have already taken place so far this year.

But The Treasury expects tiny price falls of 0.2 per cent and 0.4 per cent in the following years, with very small prices rises of 0.5 per cent and 0.6 per cent in the years after that.

McLiesh said The Treasury expected Stats NZ to report a 6 per cent drop in GDP when it reports its figures for the three months to the end of September on Thursday.

But The Treasury is predicting a strong rebound from the Delta lockdowns with 4.9 per cent GDP growth in the year to June 2023, and annual GDP growth sitting a little above 2 per cent in the following three years.

The economy had proved to be more adaptable and resilient to the Covid pandemic than expected, McLiesh said.

However, the economic forecasts were finalised on November 10, before the emergence of the Omicron variant, which she said highlighted the extent to which Covid “continues to represent a key source of uncertainty”.

Robertson said “Omicron does represent another set of challenges for all of us”.

The Treasury is expecting inflation to peak at 5.6 per cent in the three months to the end of March.

“As a result interest rates are expected to rise faster and to a higher level than in the Budget update,” McLiesh said.

But The Treasury expected that would succeed in bring inflation back to within the Reserve Bank's target band below 3 per cent by late 2023.

Nominal GDP would be a cumulative $78.5b higher over the forecast period to June 2025 than The Treasury had expected in its last Budget forecast, McLiesh said.

“This is the main driver of an additional $48.6b in core Crown tax revenue across the four years,” she said.

The Treasury also expects Government expenses to be higher than it had previously thought, particularly in the current year due to Covid support.

But after that, the expected increase in tax revenues would more than compensate, according to The Treasury's latest forecast.

Robertson said the debt track for the Government was “significantly improved”.