New Zealand 2024 Budget: Key Highlights and Detailed Analysis

Economic Conditions and GDP Forecast

• Subdued Near-Term Economy: The economy is rebalancing from strong demand and high inflation. Real GDP is forecasted to contract by 0.2% for the year ending June 2024. This is due to weaker tax revenues and high core Crown expenses, resulting in elevated OBEGAL deficits and rising net core Crown debt in the near term.

• Gradual Economic Strengthening: From the second half of 2024, economic conditions are expected to improve, supported by a tax package, tourism recovery, and easing inflation. Real GDP growth is expected to increase to 1.7% by June 2025 and average 2.9% annually over the next three years.

Fiscal Outlook and Deficit

• OBEGAL Deficit: The fiscal outlook is weaker than previously expected, with OBEGAL deficits remaining high and only returning to surplus by 2027/28, a year later than previously forecast. This is due to softer economic outlook and lower business income tax revenue forecasts.

• Core Crown Tax Revenue: Despite tax policy changes, core Crown tax revenue is forecast to increase by $35.8 billion from $112.4 billion in June 2023 to $148.2 billion in June 2028, driven by employment and wage growth.

• Core Crown Expenses: These remain elevated in the near term but are expected to decline as a share of GDP after 2025, reflecting reduced spending on benefit expenses and finance costs due to lower inflation and interest rates.

Inflation, Interest Rates, and Unemployment

• Inflation and Interest Rates: Inflation is expected to fall below 3% by the second half of 2024, with interest rates gradually easing from late 2024.

• Unemployment: The unemployment rate has risen to 4.3% in March 2024 and is forecast to peak at 5.3% by the end of 2024 due to weak demand and high net migration.

Sectoral and Global Economic Conditions

• Domestic Activity and Housing: As interest rates ease, domestic activity is forecast to pick up, supported by rising house prices, residential investment, and household spending. The recovery in tourism is expected to continue.

• Global Economic Conditions: Growth in New Zealand’s major trading partners is expected to slow to 2.1% in the year to June 2025, but gradual monetary easing should support a modest recovery to 2.3% growth by June 2026.

Fiscal Policy and Debt

• Fiscal Policy Impact: Fiscal policy is contractionary over the forecast period, contributing less to inflation pressures as the fiscal deficit narrows.

• Net Core Crown Debt: This is expected to peak at 43.5% of GDP in June 2025, then decline to 41.8% by June 2028, funded primarily by the Government’s bond programme.

Long-Term Productivity and Growth

• Productivity Growth: Treasury has downgraded forecasts for future productivity growth, impacting long-term economic potential. Labour productivity and potential output growth estimates have been revised downward.

• Nominal GDP Growth: Weak near-term demand and falling inflation are expected to reduce nominal GDP growth to 4.4% in the year to June 2024, with slight improvements in the subsequent years as real GDP growth picks up.