New Zealand is in for speed-bump recession, according to the Treasury's latest forecasts, with the economy expected to contract in 2023 before growing at a faster than expected pace.
It's in line with projections last month from the Reserve Bank that New Zealand would have a shallow technical recession next year.
Unemployment is predicted to rise as the slowdown occurs. In the June 2022 quarter, unemployment sat at a very low 3.3 percent, but will jump to 3.8 percent in 2023 and peak at 5.5 percent in 2024, before slowly falling down to 4.3 percent in 2027.
Treasury's Half Year Economic and Fiscal Update (HYEFU) released on Wednesday forecasts Gross Domestic Project (GDP) to contract 0.8 percent across three quarters in 2023. Growth is then expected to accelerate at a quicker pace than projected at the May Budget.
"All the components of domestic demand are forecast to decline through 2023 as household and firm incomes and balance sheets come under increasing presure, savings built up during the COVID-19 period run down and the terms of trade decline," the update said.
"The unwind of COVID-19 related expenditure contributes to real government spending failing."
It comes against a backdrop of higher inflation prompting large cuts to the official cash rate (OCR) by the Reserve Bank. In November, Reserve Bank Governor Adrian Orr admitted the central bank is purposfully manufacturing a recession to reduce demand in the economy.
Treasury said since the May Budget, "inflation has been higher and more persistent than forecast and interest rate expections have risen markedly".
"While we think annual CPI inflation is near its peak, we forecast it will be relatively slow to fall away - not moving back inside the 1 to 3 percent target band until end-2024 - and interest rates will need to rise to a higher level than previously expected to help slow growth and reduce price pressures."
As Kiwis are told to pare back their spending, Finance Minister Grant Robertson said the Government will also "run a prudent fiscal policy and "return spending to normal levels following the COVID emergency".
"This position will support the direction of monetary policy to bring inflation down," he said.
The Government will keep the operating allowance - new spending - for Budget 2023 at $4.5 billion. That is unchanged from what the Government said at the May Budget, and is below the $6 billion it gave itself for Budget 2022.
"Ministers have been directed to run a repriortisation process ahead of Budget 2023 to create space for new intiatives within their existing budgets, outside of the cross pressures that will be funded from the $4.5 billion operating allowance," Robertson said.
New Zealand is still forecast to return to surplus in 2024/25 as was previously predicted. In 2023, the country's Operating Balance Before Gains and Losses (OBEGAL) is expected to be in deficit at $3.6 billion, before rising to a $0.5 billion deficit a year later and then a surplus of $1.7 billion.
"The recovery in OBEGAL in the near-term is expected to be at a faster pace compared wth the Budget Update and returns to a surplus ($1.7 billion) in 2024/25," Treasury said.
This is due to higher than forecast tax revenue, higher interest income and stronger ACC results. When the Crown accounts to the end of June 2022 were opened earlier this year, it showed core Crown tax revenue had crossed $100b.
Robertson on Wednesday made the point that the current Government would have run just five deficits following the onset of COVID, compared to six years of deficits run by the previous Government after the Global Financial Crisis.
However, increases in surplus from 2024/25 will be at a slower pace than predicted. This is being put down to higher finance costs due to higher interest rates, benefit expenses increasing due to wage growth, and an increase to the Government's climate response fund.
Net debt is projected by Treasury to peak in 2023/24 at 21.4 percent of GDP and then fall to 14.1 percent of GDP by 2027. These figures are higher than what was included in the May Budget.
"We are continuing to manage the Government finances carefully by repriortising savings, setting aside money for future investments while getting the books back into surplus," said Robertson.
"Savings identified from unspent funding has taken pressure off debt, and allowed some of it to be redirected to important priorities, like the money to pay for the fuel tax cut, half price public transport and Cost of Living Payment."
At the 2023 Budget, Robertson said the primary focus will be supporting Kiwis experiencing cost of living pressures. The Government will also "carefully and responsibly manage our finances".
"We will continue our balanced approach in Budget 2023. We also need to ensure we are investing in getting the basics right - the strong public services that New Zealanders rely on in health, education, housing and infrastructure.
"Finally, even in tough times, we have to have an eye to the future. The Government's economic plan is driving towards creating higher wage jobs in a low emissions economy while providing economic security. It is vital we invest now in skills and innovation to get us there."