New Zealand expects a recession next year, but the budget deficit will decline

Spending restrictions and an expected recession will add to the challenges facing Prime Minister Jacinda Ardern’s Labor Party ahead of next year’s general election.

The economy will contract in the second, third and fourth quarters of 2023, according to an economic and financial update released by the Treasury Department on Wednesday.

The Reserve Bank of New Zealand is more pessimistic than the Treasury, having predicted a one-year recession from the second quarter of next year as a result of sharp interest rate increases it has imposed to control inflation.

“2023 is a difficult year for many New Zealand families,” Finance Minister Grant Robertson said at a news conference after issuing the regular mid-year financial update.

He said in a statement that returning to a surplus will require difficult budgetary choices.

Robertson said ministers would be asked to find funds from existing budgets for new initiatives next year.

In May, the government announced major infrastructure spending, including new schools, and the health system, which got more funding for medicines and utilities.

Opposition parties have criticized government labor spending, saying it contributes to inflation, which is just below its highest level in three decades.

Robertson said a cautious approach to the budget is needed if the country is to bring down inflation.

However, the financial outlook has actually improved. The government has projected a budget deficit of NZ$3.63 billion ($2.34 billion), or 0.9% of gross domestic product, for the fiscal year ending June 2023. This is less than the NZ$6.6 billion stipulated in the budget. Posted in May.

Public finances will produce another deficit in 2023/24 but top a surplus of NZ$1.6 billion in 2024/25, according to the Treasury update document.

It expects net debt, according to an outdated calculation method, to peak at 41.8% of GDP in 2023/24, while the May forecast predicted a peak in 2023/24 at 41.2% of GDP.

Westpac economists said in a note that the relatively benign fiscal outlook suggests room for government spending. “For now, the government is keeping their powder dry,” the note adds.

The government said it would extend transportation subsidies, with the end of the reduction in production fees on gasoline postponed until February, and half of public transport fares will remain until March.

Despite the economy’s weakness, inflation will not return to the government’s target range of 1% to 3% until December 2024, according to a Treasury update. In the third quarter of 2022, consumer prices increased by 7.2% over the previous year.

($1 = 1.5485 New Zealand dollars)