The government's finances have taken a bigger than expected hit from the current Covid-19 outbreak, but are forecast to bounce back faster and stronger leading to surpluses and less debt, according to the Treasury.
The half year economic and fiscal update (HYEFU) shows a bigger budget deficit for the current financial year because spending on wage and business support payments is outpacing the growth in the tax take.
Key economic numbers (for year ended June 2022 vs Budget 2021 forecasts)
- GDP (annual) 0.8 pct vs 3.2 pct
- Inflation 5.1 pct vs 1.7 pct
- Unemployment 3.2 pct vs 4.0 pct
- House inflation 10.4 pct vs 0.9 pct
Key fiscal numbers (for year ended June 2022 vs Budget 2021 forecasts)
- Core tax revenue $102.6b vs $93.2b
- Core expenses $128.0b vs $114.7b
- OBEGAL -$ 20.8b vs -$ 18.4b
- Net debt (pct GDP) 37.6 vs 43.8
Finance Minister Grant Robertson said the Delta outbreak had tested the strength of the economy, which has been performing well.
"We can look forward to 2022 with cautious optimism as the economic and fiscal outlook is good."
He said supply chain disruptions, higher inflation and Covid-19 might affect the forecasts.
The Treasury commentary highlighted uncertainty around the forecasts including its assumptions on when the border would open more fully, levels of immigration, and house prices.
Economic growth was forecast to rebound strongly in 2022/23 before moderating in later years, while inflation was forecast to peak next year above 5 percent before falling back in subsequent years into the Reserve Bank's 1-3 percent target band.
Unemployment was expected to keep falling over the next couple of years and to stay below 4 percent for the next five years.
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 revenues.
"Our cautious approach continues to pay dividends," Robertson said.
Average annual growth of 2.9 percent over the next five years was expected.
Net debt is now forecast to peak at 40.1 percent of GDP in 2023 before declining to nearly 30 percent, while the budget was forecast to be back in surplus three years earlier than previously forecast in 2023/24.
Treasury expected housing inflation to fall to about 10 percent in the coming year, with further slight falls in the following two years.
Robertson declined to nominate a figure for growth in house prices but said the government approach was to ensure "that we don't have unsustainable price rises".
The government still had $4.3 billion uncommitted in its Covid-19 relief fund.
The stronger condition of the government's finances has seen the Treasury reduce planned borrowing by $31bn over the next four years.
In the accompanying Budget Policy Statement, pointing to key issues in next year's budget, climate change and health were singled out as key spending priorities.
Robertson said there would be a move to multi-year funding for the health system as reforms were implemented to replace the current district health boards.
He said a Climate Emergency Response Fund would be established which would be funded by proceeds from the Emissions Trading Scheme.
Operational allowances for day-to-day government spending were expected to rise $6bn in the 2022/23 budget, easing to $3bn in subsequent years, while capital spending would increase by $9.8bn.
"This one-off increase ... is designed to ensure we can forge ahead with major reform programmes that will have long term benefits," Robertson said, adding it would mean careful prioritising of policies.