Half-year economic update: The fiscal plan that depends on nothing going wrong

Tuesday, 16 December 2025

What do you think about the forecast? Have your say in the comments below.

ANALYSIS: The Government’s fiscal strategy is pretty simple: to constrain new spending to below the growth in nominal gross domestic product.

In other words, the growth in new spending in dollar terms should be less than the growth in GDP in dollar terms, to close the Government’s fiscal deficit over time.

Small operating allowances and a continued focus on sticking to budget plans are key. Slippage is not an option.

In an unusually political HYEFU briefing, Willis took the chance to lash the Taxpayers’ Union — her current bête noire— brandishing one of its documents as a recipe for human misery. At the same time, she thundered against the Opposition, saying the biggest risk to the nation’s finances was a re-elected Labour Party.

She presented her approach as both prudent and moderate, while also being disciplined and careful. Voters will judge that for themselves.

But while the Government has a new and healthier spending strategy — recalibrating its spending and sticking to what it promises — the ability of the overall fiscal strategy to wrestle the books into shape, in the real world, is far less compelling.

Sitting in the HYEFU lock-up and looking through all of the forecasts and papers, it is difficult not to have a sense of déjà vu: the finances appear to broadly balance out over the medium term, and right at the end of the four-year forecast period.

Post-Covid, this seemed to be the case at every Grant Robertson Budget and Budget update. Now it is the case with every Nicola Willis Budget as well — although, unlike Robertson, she has actually come in slightly under the spending levels committed to the year before.

The concern here is that the economic and fiscal recovery always seems to be back-loaded into the future. And so it was today, with Willis leaning into the fact that growth is forecast to improve significantly. Forecasts are not reality — let’s see what materialises.

There are a bunch of other figures and assumptions that make one suspicious of the Government’s ability to stay on this narrow fiscal path.

Next year, the deficit is expected to rise to about 3% of GDP. Treasury estimates that about 1% of that will be taken care of by an economic upturn, but 1.9% of it remains structural. In the words of Treasury, “this is the part of the deficit that will not resolve as the economy recovers”. This, Treasury says, will have to be resolved by spending cuts and better-performing Crown entities.

The current forecasts do show an elimination of that structural deficit, but it will require ongoing spending discipline — and nothing going wrong.

Then there are some of the other assumptions. Treasury reckons house prices will start growing at 6.6% per year in 2027 and grow at least that fast thereafter. While apparently lower than the historical long-run average, that still seems pretty high given the lack of growth in the economy.

Net core Crown debt will also grow by almost $72 billion through to 2030. That will take debt up to $250 billion — over 46% of GDP.

There was also no cash surplus anywhere in the forecasts. In fact, about 80% of the cash deficit is money being spent on infrastructure. Clearly, infrastructure projects are fiscal risks.

In the table of specific fiscal risks, Transport is noted at $1 billion to $5 billion; Social Development at $1 billion to $2 billion (mostly benefits); another $5 billion to $10 billion on long-term infrastructure and digitising government. Even the benighted school lunches programme is in there at $500 million to $1 billion. Other risks are simply withheld, such as pay equity.

All of these are overs and unders. Some may turn out better than others.

But the overall concern about this fiscal strategy is not its intent, but that it all seems to rely on everything going right. Assuming no big shocks, this is the path of least pain and social disruption. As a strategy, the Government also aims to keep debt below 40% of GDP, rather than trying to pay it off, in order to keep investing in infrastructure.

But everything must go right: that spending restraint is maintained, that economic growth ticks up, and that there are no major earthquakes, floods, disasters or external shocks.

Treasury has previously said that New Zealand should plan for a shock of about 10% of GDP every decade. The risk of the Willis approach is that, as since the global financial crisis, New Zealand has not got on top of debt because shocks have been too frequent and debt has mostly just ratcheted upwards in response to those events.

So what does the HYEFU tell us? It tells us Willis is convinced of her steady-as-she-goes approach and wants to position herself as a sensible broker between extremes. It tells us Willis is determined to stick to budget forecasts. It tells us the Government will continue to pump most new spending into health.

But given the climate, earthquake and potential geostrategic shocks that might come down the pike over the next decade, a question mark hangs over its long-term sustainability.

The strategy is tidy, coherent and disciplined. It is also unforgiving — a fiscal plan that works only if the future behaves itself.