The surplus is already at severe risk
Sunday, 31 May 2026
Vernon Small is a journalist and former Labour Government advisor.
OPINION: “Don’t put it all at risk.”
That was Finance Minister Nicola Willis’ parting shot at the Beehive Banquet Hall pre-Budget lock up for media and analysts.
“Kiwis just need to vote for it.”
Just what “it” is, was not totally clear.
Perhaps it was avoiding a return to the previous Labour administration’s approach, which this Government uses as gloomy mood music whenever it talks about its efforts to get the books in shape.
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Whatever ‘it” is, its manifestation made flesh seems to be a potential surplus of $2.6 billion in 2028-2029 – a year earlier than previously forecast.
Yet, even as that surplus was revealed it was already at severe risk.
Not because any individual forecast is wildly optimistic. In general, they are rosy but not vermillion. And Willis herself noted that forecast numbers can change.
They might even change as early as the Prefu – the pre-election economic and fiscal update that will be released a month or so before the November 7 polling date.
But in the meantime, the Budget documents themselves suggest it would require an extraordinarily serendipitous convergence of events, a series of lucky strikes, a perfect storm of good outcomes to achieve the forecast growth, inflation and surplus track.
In a word, kismet. (Thanks are due at this point to the online thesaurus.)
Treasury warned that the risks in its forecasts are skewed to the downside. Its more pessimistic scenario would show only a wafer-thin surplus in 2028-29 as inflation rose to 5.4%, unemployment hit 5.8%, oil soured to $US135 a barrel and petrol prices hit $3.73 a litre with diesel at $4.10.
Moreover, it included a cautionary warning that since the forecasts were finalised, oil prices have been higher, inflation more persistent and business and consumer confidence has waned.
So, its main forecast may understate inflation pressures and overstate near term growth.
But there are other reasons for doubt about the achievability of that main, central, forecast. Not least the assumptions about a relative early end to the Iran conflict and high fuel prices being temporary before returning to around $US77 a barrel. (At the moment the futures market is pricing oil at $US92 a barrel.)
Despite the fallout from the Iran conflict Treasury is still tipping growth at 1.2% this year, 2.3% in 2027 and then 3.2% and 2.7%. (Per capita doesn’t get above 2% in any statistically significant way.)
The Reserve Bank’s outlook, released on Wednesday, was weaker and its inflation track was higher.
To add to the doubts, there could be a potential loss of more than $250 million of fuel excise tax increases. They are currently included in the forecasts, but Willis has said they are highly unlikely to go ahead next year, especially if petrol prices are still high. The Prefu will make that clear and should see at least some of the potential increase in revenue from the excise increase written out of the forecasts.
And then there is the tight allowance for net new operating spending of $2.4 billion a year.
Willis has so far shown she can keep to, and even undershoot, the allowance and has been gleeful in comparing her success on that with former finance minister Grant Robertson’s record. This year it came in $300 million under, at $2.1 billion.
But the Government has used some big “savings” – such as the $12 billion from changes to pay equity law and the intended $2.4 billion in cuts from the state sector – to offset other spending increases. It will take some creative fiscal mining to uncover further significant cuts, making ongoing restraint harder even without the indefinite pressures from the Iran conflict. It’s worth noting, too, that most of the savings from the state sector cuts – 2% this year and 5% in each of the next two years – comes after the election so may never come to pass. Foreign Minister Winston Peters has cast doubt on her planned cuts ever happening in his portfolio.
Even in the short term, the 2026-2027 contingency allowance of $450 million set aside in Thursday’s Budget “in case further fuel-related support is required” looks light, especially as the impact on businesses becomes more obvious. By comparison, the boost to Working for Families this year cost around $375 million and went to only a small proportion of households.
It is easy to say there was no lolly scramble in this week’s Budget – which finance minister ever said there would be? – and that this is a tough-love Budget. That spending for a “sugar hit” would only make things worse in the long run.
But that makes spending to help those struggling sound frivolous.
One politician’s “sugar hit” may be many families’ desperately needed assistance to cover the basics.
So, the pressure is certain to remain intense for cost-of-living relief for households, and for businesses too if the Iran war drags on.
And that will take the political gloss off any forecast surplus, believable or not.
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