A faster and stronger economic rebound from the Covid-19 pandemic will see the government’s finances headed back to surplus sooner than expected, according to the Treasury.
The half year economic and fiscal update (HYEFU) shows lower budget deficits over the next four years as a strong tax take and lower expenses bolster the government’s finances.
“While New Zealand’s economy contracted in 2020 it is forecast to rebound strongly in 2021, outperforming regions we compare ourselves to like the Euro Zone, the United Kingdom and Japan,” Finance Minister Grant Robertson said.
Economic growth is forecast to be 1.5 percent in the year to June next year compared with a slight contraction forecast in the September pre-election update.
Unemployment is expected to peak at 6.8 percent in 2022 and then decline over the next three years to about 4 percent, compared to a 7.7 percent peak forecast in September.
The lower jobless rate was expected to reduce social welfare benefit costs as well as boost the tax take, which would also benefit from higher GST and corporate tax revenue.
“The fiscal position is still challenging,” Robertson said.
However, higher income and lower costs are expected to see smaller budget deficits.
Treasury warns that closed borders are still a drag on growth, and there are downside risks from slower global growth.
Net debt is now forecast to peak at 52.6 percent of GDP in 2023, a year earlier and lower than forecast before the election, while the budget deficit is seen to have peaked already at $23 bn this year and will gradually to $4.2 bn in 2024.
“New Zealanders will have to get used to higher levels of debt,” Robertson said.
The government has $10.3bn uncommitted to be spent on future measures if there should be a significant return of Covid-19 to the country.
The stronger condition of the government’s finances has seen the Treasury reduce planned borrowing by more than $25bn over the next three years.
However, Robertson would not comment on whether the government would “bank” the financial gains from lower deficits, borrowing and higher revenue, saying it was all part of the budget process.
While house prices are predicted to keep rising, a pipeline of new houses and the borders staying closed could slow that growth somewhat.
House prices rose by 6 percent in 2020 and are expected to increase by a further 8.5 percent in 2021, and 4.5 percent the year after – nearly 30 percent over the next five years.
In comparison, wages are predicted to grow by only 2.3 percent in 2021, and 2.2 percent the year after – totalling just under 13 percent by 2025.
In the latest economic update, Treasury said housing affordability was not a new problem, with building failing to keep up with population growth for the past decade.
It said the closed borders could help stem demand and at the end of this year building activity was going strong.
However, with interest rates expected to stay low and net migration rising again in coming years, it said house prices were forecast to keep rising.
Treasury has based its forecasts on the border re-opening in January 2022.