Treasury Prefers Optimism over Risks in Improved Fiscal Outlook

New Zealand's financial outlook has improved due to higher tax revenue, according to Treasury's pre-election economic and fiscal update (PREFU). The improved tax forecast is primarily driven by an increase in business income tax, as well as a stronger nominal GDP growth forecast. This has resulted in a reduction of government borrowing, leading to lower net finance costs.

Treasury points out that higher prices lift tax revenue by increasing nominal incomes, spending, and profits, while many areas of government expenditure do not automatically rise with inflation. However, this also makes it more difficult for agencies to operate within existing funding baselines and allowances, increasing pressure on future Budgets.

Finance Minister Nicola Willis said the numbers give 'real grounds for optimism,' citing higher business tax and boosted revenue as positive effects expected to flow into future years. The operating balance deficit is shrinking from $11.4 billion forecast at the Budget to $6.8 billion this financial year, and to less than $1 billion next year.

Risks remain skewed towards weaker growth and higher inflation, with cyclical risks affecting near-term growth and inflation, unexpected events like natural disasters, financial market volatility, and geopolitical conflicts, and structural factors affecting the economy's long-run growth potential as key concerns. Treasury forecasts house prices to fall 0.4% this year, rise 0.6% next year, before increasing through 2028 to 2031.