Government still aiming to outperform Treasury's fiscal forecast

Tuesday, 8 April 2025

Tariff turmoil shouldn’t stop the Government beating the Treasury’s forecasts by returning to a form of surplus a year earlier than officials expect, says Finance Minister Nicola Willis.

Willis attempted to provide some reassurances to the public over the knock-on impact of United States President Donald Trump’s trade policies today, despite acknowledging they would complicate the country’s economic recovery.

The Treasury is currently forecasting the Government won’t return its books to surplus until the year ending June 2029, even after excluding ACC’s large deficit from its numbers.

Willis said the knock-on effects of tariffs, which she expected to include lower economic growth for New Zealand’s trading partners, would impact the Government’s books, “with potential impacts for revenue, debt, inflation and interest rates”.

There is a still a high degree of uncertainty over how global events will unfold, with Trump announcing further additional “retaliatory” tariffs of 50% on China from Tuesday, US time, in addition to a previously announced 34% “reciprocal” tariff announced last week.

Treasury’s “initial assessment” was that economic growth among New Zealand’s trading partners in the year to June would be “closer to 2%” than the 2.5% average growth it had forecast in December, Willis said.

It also now expected global inflation would rise to 3% that year, half a percentage point above its previous forecast.

But Willis said the Government intended to stick to its fiscal strategy by still seeking to return its books to an “ObegalX” surplus a year earlier than the Treasury’s December forecast.

Willis appeared conscious that the fear of ongoing turmoil could spook consumers, for example by making them concerned about their retirement savings.

“Markets hate uncertainty, and what you are seeing is volatility as investors figure out what this all means.”

Many New Zealanders would already have seen that impact their KiwiSaver balances, “which may have been knocked around, and others might be choosing not to look at it”, she said.

“These times of uncertainty are unsettling, but it is important to remember that KiwiSaver is a long-term investment.”

Willis’ reassurance on the Government’s fiscal goal could also be intended to send a signal to the Reserve Bank, which will release the results of its review of the official cash rate tomorrow.

It was up to the Reserve Bank to determine whether recent developments would warrant more monetary policy relief, she said.

“They always observe our fiscal decisions in the Budget, and those flow into their decisions around interest rates.

“One of the reasons you need a government to be disciplined about its own spending is so that inflation stays lower, and so the Reserve Bank has the optionality to reduce interest rates further.”

Willis didn’t attempt to sugarcoat the overall impact of tariffs on the economic outlook.

“The tariffs applied by the US are the catalyst for what is occurring on global markets as the global economy faces a significant period of uncertainty,” she said.

“It is clear we are witnessing a historically significant global economic event. Put simply, the past week's global developments make our recovery harder.”

But in an apparent attempt to limit the impact on consumer confidence, she also pointed to silver-linings, noting New Zealand looked as though it would experience fewer direct impacts from tariffs than other countries.

“This can be a country that looks like a better place to do business than some other countries in the world right now.

“Oil prices, a key input for the New Zealand economy, have fallen,” she also noted.

“It is too soon to say what this means for your mortgage.”