Treasury confirms it’s likely to downgrade economic and fiscal forecasts

Thursday, 21 November 2024

The Treasury has effectively removed any doubt that it will lower its growth forecasts and chart a more difficult course for the Government returning its books to surplus.

Chief economic adviser Dominick Stephens told the annual conference of Chartered Accountants Australia and New Zealand that its latest evidence pointed to a likely further downgrade to its economic and fiscal forecasts.

Treasury’s May Budget forecast a return to economic growth in the second half of 2024, but the latest data suggested that the recovery would begin later, he said.

The Treasury is due to release its Half Year Economic and Fiscal Update (Hyefu) on December 17 and Finance Minister Nicola Willis had already dropped strong hints that would see a return to surplus pushed back once again, by at least a year, to the year ending June 2029.

BNZ research head Stephen Toplis noted the Public Finance Act effectively required the Government to aim to return to surplus by the end of the forecast period that year.

The economic assumptions for the Hyefu were finalised earlier this month and may be overly optimistic despite the impending downgrade, as the Treasury has said they were finalised too soon to take into account any impact from US President-elect’s Donald Trump’s proposed trade tariffs.

The International Monetary Fund has warned widespread tariffs could knock 0.8% off global economic activity next year, and reduce it by 1.3% in 2026.

Stephens said in his speech to the chartered accountants body that the Treasury had been revising down its assessment of future economic activity at successive updates.

“The key reason is accumulating evidence of a sustained productivity slowdown.

“Productivity is the key to economic growth, so as evidence of the productivity slowdown has emerged Treasury has steadily revised down its forecast for future economic activity.”

New Zealand was currently running “a structural fiscal deficit”, with expenditure exceeding revenue, he said.

Economic growth falling short of expectations was making it harder for the Government to bring its books back into balance, he said.

The fiscal challenges were compounded by longer-term pressures from population ageing and climate change, he noted.

New Zealand wasn’t alone in facing implications from declining productivity growth, he said.

“Productivity growth began slowing in New Zealand and around the world before the global financial crisis and has fallen even further in the last decade,” he said.

“Last week the Reserve Bank of Australia cited flagging productivity as a cause of forecast revisions across the ditch.”

The Treasury warned in May that there did not appear to be a quick fix on the horizon and warned it would reconsider its assumptions about the long-term track of productivity in a report it will issue next year.

New Zealand’s per capita GDP has fallen 4.6% since late 2022.

'One should always read real-time economic data with caution, but this presents further downside risks to the Treasury’s productivity, economic growth, and tax revenue forecasts,“ Stephens said.