The Government's final financial update of 2021 shows spending is higher than tax intake and inflation will continue to outpace wage growth in the near future.
Treasury's latest economic and fiscal update, known as HYEFU, shows strong tax revenue - $98 billion - is offset by the Government's COVID-19 financial support, resulting in a $20.8 billion deficit.
This is expected to improve as the Government winds back its Delta response, resulting in a financial recovery in 2022-2023 and a return to surplus in 2023-2024. But that's all dependent on how serious Omicron turns out to be.
The Government's financial position will be helped by rising tax revenue in the coming years - compared to the $98 billion in 2021, it's expected to grow to $102.6 billion in 2022, eventually reaching $134.5 billion in 2026.
While unemployment is at a record-low 3.4 percent and is expected to drop to 3.2 percent next year, the bad news for Kiwis is that wage growth is not keeping up with inflation, meaning it'll cost more to live.
Inflation is forecast to peak at 5.6 percent in the March 2022 quarter, up from 4.9 percent, which Treasury notes is "significantly higher than the peak expected" in the Government's Budget update earlier this year.
By comparison, wage growth is forecast to reach a peak of 4.6 percent in the December 2023 quarter, before tapering off to 4.2 percent. It's not until the 2023 forecast period when wage growth will be 4.5 percent and inflation will be 3.1 percent.
"There is no doubt this will put pressure on the cost of living, especially for low-income households," Finance Minister Grant Robertson told reporters on Wednesday. He said it was important to note that inflation is a "global phenomenon" due to COVID-19.
"Aggregate demand and wage pressures have combined with ongoing supply chain disruptions to push Consumer Price Index inflation well outside the Reserve Bank of New Zealand's target range of 1 percent to 3 percent," Treasury's update reads.
Blame has often been pointed at the Government for pumping $50 billion of borrowed money into the economy to ensure banks kept lending during the COVID-19 crisis, which kept people employed. But prices will rise if there is more money chasing fewer goods and services.
House prices were significantly inflated thanks to cheap borrowing and historically low interest rates. However, this is now tipped to change with the Reserve Bank increasing interest rates and tightening conditions for mortgage borrowing.
ASB Bank expects house prices will fall in the second half of 2022 as supply meets demand, interest rates increase and credit conditions tighten. Treasury anticipates a "slight fall in house prices" in 2023, with a peak of 30 percent reached in June this year.
Interest rates are now expected to "rise more rapidly and to a higher level than previously assumed", according to Treasury, which is expected to ease house price growth.
"The key reason we expect house price inflation to slow is interest rates," officials say, though they acknowledge the Government's policies announced in March aimed at helping first-home buyers into the market, including the controversial move to end tax deductions on interest costs for rental properties, after it was revealed investors made up the biggest share of buyers in the housing market.
Treasury also acknowledges the good news that housing supply is increasing. In the year to October, 47,715 new homes were consented, up 26 percent.
Looking ahead, Robertson said the Government's spending focus for 2022 will be on health - most notably the enormous task of amalgamating District Health Boards into the centralised Health NZ - and climate change.
"New Zealand cannot afford not to do this," Robertson said of the Government's mammoth "one-off" $6 billion operating allowance, or new money, for 2022.
Budget 2022 is expected to allocate $4.5 billion out to 2026 on the soon-to-be-established Climate Emergency Response Fund, which will spend proceeds from the Emissions Trading Scheme on initiatives to combat climate challenges.
The response to COVID-19 has dominated the Government's spending since 2020, and the financial update shows net core Crown debt is expected to peak at $165.5 billion in 2023-2024, 40.1 percent of GDP.
The Government's $50 billion COVID-19 fund established in 2020 was topped up with $7 billion in September and $3 billion was made available from previously unallocated spending. As of November, $4.3 billion remains.
Financial records show a whopping $18 billion has spent on subsidising the wages of some 1.76 million workers throughout the COVID-19 pandemic.