Venu Menon
Wellington, July 7,2023
A snapshot of the New Zealand economy shows slower growth and weak profits, but employment is looking strong.
Crown accounts for the 11-month period that ended in May show New Zealand has a deficit of $6.5 billion.
That is $2.1 billion higher than forecast at Budget 2023, Minister of Finance Grant Robertson has acknowledged in a statement released on Wednesday.
Tax revenue has fallen on the back of lower profits and return on investments in the corporate sector, which is beset by higher interest rates.
The Reserve Bank of New Zealand (RBNZ), moving in tandem with central banks around the world, has been adjusting the Official Cash Rate (OCR) to constrain inflation. This has resulted in the economy slowing and consumer spending softening.
The core Crown tax revenue is $103.3 billion, which is $2.2 billion below forecast.
Treasury notes the shortfall in tax revenue is slightly offset by “source deduction revenue,” which is $0.3 billion above forecast, thanks to a strong labour market.
But truant tax revenue has added $2.1 billion to the Operating Balance before Gains and Losses (OBEGAL) deficit of $ 6.5 billion.
However, Finance Minister Robertson is drawing comfort from the deficit being “smaller than it was last year.”
“The cooling economy has resulted in lower-than-forecast tax revenue. In these accounts, the lower corporate tax revenue particularly relates to terminal tax and is reflective of corporate profits for the 2022 year being less than forecasts,” Robertson explains.
But Treasury expects the economic slowdown will be moderate over the next 12 months, with inflation falling to 4.5% by the end of 2023 and within the RBNZ target band of 1% to 3% inflation by late 2024.
The slowdown in economic activity will impact the labour market and push the unemployment rate to 5.3% by late 2024, before falling back to 4.8% by the end of the forecast period, Treasury forecasts.
As the unemployment rate rises, wage growth will decline, from a peak of 7.4% in September last year to a more moderate 4.2% by mid-2027, it says.
As a result, gross domestic product (GDP), which drives tax revenue, will drop.
Treasury predicts the OBEGAL deficit will touch $7.0 billion in the 2022-23 fiscal year, and reach $7.6 billion in 2023-24.
The economy is set to recover from then on, though the dip in core Crown tax revenue and the government’s Budget 2023 fiscal allocations will slow that recovery.
Consequently, Finance Minister Robertson’s much-vaunted forecast of a return to surplus will be delayed by a year, to 2025-26.
Net debt is expected to peak in 2023-24 at 22.0% of GDP, falling to 18.4% of GDP by 2026-27.
While Treasury forecasts a growth in core Crown tax revenue from 2023-24 onwards, this growth will be overshadowed by an increase in core Crown expenses each year of the forecast period. This is partly due to the government’s Budget 2023 operating package of $4.8 billion per annum and funding announced for future budgets.
Robertson’s massive recovery and rebuild effort on the back of the severe weather events in the North Island is expected to lift core Crown expenses by $0.6 billion.
While this erodes the government’s spending power, Robertson is falling back on spill-overs from his Covid-19- related contingency fund to finance the recovery and rebuild programme.
While the finance minister has repeated his refrain that New Zealand is not immune from the challenges faced by other countries in a deteriorating global trading environment, he is relying on a boost in tourism and net immigration numbers to prop up the economy.
But the North Island weather events and the huge capital expenditure that has followed in its wake, centred on asset and infrastructure (such as road and rail) repair, as well as support for affected businesses and communities, have introduced an uncertainty in the fiscal outlook for the years ahead.
Yet, Finance Minister Robertson remains upbeat. “The government had already taken steps to respond to the uncertain economic environment by carefully and responsibly managing its spending,” Robertson says.
However, the opposition parties don’t share the minister’s optimism about the economy.
National Party finance spokesperson Nicola Willis says the government has misjudged the course of the economy. “Government debt has soared by an additional $5 billion, and the books have been plunged even further into the red, with a deficit that is $2 billion larger than forecast,” Willis says.
ACT Party leader David Seymour adds: “The main reason for the growing deficit is slowing company tax receipts. The economy is bad, and Robertson’s irresponsible policies are finally affecting his own books.”
But Robertson has countered by linking the human cost exacted by the adverse weather events to the economic cost of reparation and rebuilding in the aftermath.
“We are striking a balance between supporting New Zealanders in the here and now and investing in strong public services and a resilient infrastructure network, while carefully managing our resources to ensure the long-term sustainability of the economy.”
Venu Menon is an Indian Newslink reporter based in Wellington
