Budget 2026: Nicola Willis’ economic recovery at risk from oil price spike, Strait of Hormuz crisis

Wednesday, 4 March 2026

ANALYSIS: Who would want to be a finance minister in this day and age?

Up until a week ago, the stars appeared to be finally coming into some sort of alignment for Nicola Willis, but Westpac chief economist Kelly Eckhold has sketched out how much that could be changed by events in Iran.

It may have flown under the radar, but the Government’s books have been tracking meaningfully better than the Treasury had forecast in its November Half Year Economic and Fiscal Update (Hyefu).

The improvement should be kept in perspective, but the numbers were moving in the right direction.

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The operating balance before gains and losses (Obegal) deficit was tracking $1.5 billion better than expected, at $5.5b for the six months to the end of December. Net core Crown debt was also $2b lower than forecast, at just over $191b.

The improvement was largely driven by expenses coming in below expectations.

Since then confidence had grown that a long-awaited economic recovery is taking place.

Forecasts that firms will soon return to stronger profitability — and therefore pay more tax — suggested the gains Treasury reported could potentially be consolidated in the months ahead.

Only potentially, though. Back in November, Treasury was already forecasting fairly punchy growth of 3.3% in the year to June, and 3% the following year, so arguably the hopes for the recovery were already well built in.

That November update had projected net core Crown debt would peak at 46.9% of GDP in the year to June 2028, with no return to an Obegal surplus within the forecast period, which runs through to June 2030.

Treasury is unlikely to finalise its economic forecasts for the Budget Economic and Fiscal Update (Befu) until around mid-April.

But if it were to predict net core Crown debt peaking at less than 46.9% of GDP, that would be only the second time the picture had at all got rosier in recent years.

The 2025 Budget was a smidgen more optimistic than the 2024 Hyefu forecast. But putting that aside, the future track of Crown debt and the expected date of a return to surplus have been getting worse in each Befu and Hyefu since the fog cleared on the Covid crisis in 2021.

What has changed of course is the conflict in Iran.

If regime change in Iran hasn’t been achieved by mid-April then uncertainty about the flow-on effects of the turmoil in the Middle East appears likely to cast a dark shadow of uncertainty over the Budget forecasts.

The quadruple threats are higher inflation and lower growth caused by a higher price of oil, lower exports due to disruption to shipping through and to the Middle East, the same impacts from lower economic growth among more directly affected trading partners, and a general malaise caused by greater uncertainty and weaker business sentiment.

It is far too early to predict what circumstances the Treasury will be faced with or what conclusions it might draw from different scenarios.

But Stats NZ estimates a 10-cent-per-litre price increase in the petrol and diesel (which is about what could be expected to flow from a sustained US$10/barrel increase in the price of oil) would directly increase inflation by between 0.1 and 0.2 percentage points.

That would be only the very direct effect of pricier oil.

Eckhold has done some modelling with his Westpac colleagues in Australia and sketched out the potential for more serious impacts.

They have estimated that if the Strait of Hormuz was closed off to oil exports for a month, that could cause the price of oil to rise to US$113 (US$40 above its pre-conflict level).

The impact of that would be a 0.5 percentage hit to annual GDP and 1.6 percentage point increase in inflation — which he says would be likely to see inflation rise to 4%.

A three-month closure of the strait could result in oil spiking massively to US$185 a barrel and even greater economic fallout, according to the modelling.

Even a scenario where the Iranian regime was unable to close the strait — and it was only Iranian oil production that was disrupted — could be expected to result in the oil price reaching US$100 a barrel, and a 0.3 percentage point hit to GDP and 1 percentage point rise in inflation, he says.

The silver-lining to that dark cloud is that people shouldn’t jump to the conclusion that the Reserve Bank would necessarily respond by raising interest rates in response to inflation rising further above its target band, Eckhold says.

“This might happen, but as long as the economy is operating well below capacity and inflation expectations don’t get unmoored then the OCR would likely stay where it is at stimulatory levels,” he says.

Eckhold also cautions that all his modelling is “indicative” and describes the prospect of a one to three-month closure of the Strait of Hormuz as an “Armageddon scenario”.

“We can’t pretend that these are the answers.”

But he says the “global macro model” Westpac used has been “calibrated over multiple shocks”.

What does seem clear is that the narrative for this year’s Budget will partly be dictated by events in the Middle-East.

When and at what level net Crown debt had been expected to peak

Hyefu 2025: in 2028 at 46.9% of GDP

Befu 2025: in 2028 at 46%

Hyefu 2024: in 2027 at 46.5%

Befu 2024: in 2025 at 43.5%

Hyefu 2023: in 2024 at 43.5%

Befu 2023: in 2024 at 43.1%

Hyefu 2022: in 2024 at 41.8%

Befu 2022: in 2024 at 41.2%

Hyefu 2021: in 2023 at 40.1%

Befu 2021: in 2023 at 48%

Hyefu 2020: in 2023 at 52.6%

Befu 2020: in 2023 at 53.6%

Hyefu 2020: in 2022 21.5%