Economic outlook
New Zealand has recently emerged from a protracted economic downturn. Tight monetary policy was implemented to bring down inflation that peaked at 7.3 per cent in 2022. High interest rates constrained demand and in the two years to September 2024, real GDP per capita fell 4.8 per cent - more than in the global financial crisis.
A recovery is now underway, with real GDP rising 0.7 per cent in the December 2024 quarter. The Reserve Bank has reduced the Official Cash Rate by 200 basis points and indicated scope for further reductions over 2025. Lower interest rates, strong dairy and meat production, a recovery in tourism, and higher terms of trade will support an increase in activity. Within the forecast period, the Government's new Investment Boost policy is expected to increase real GDP by up to 0.4 per cent. Other factors, however, are weighing on growth, notably the imposition of new tariffs by the United States, and the resulting global uncertainty and volatility.
BEFU forecasts show annual average growth in real GDP accelerating to 2.9 per cent in 2025/26 and 3.0 per cent in 2026/27. BEFU forecasts for real GDP are weaker in the short term than those presented at the Half Year Economic and Fiscal Update 2024 (HYEFU) but slightly higher later in the forecast period. The unemployment rate is expected to peak at 5.4 per cent in the first half of 2025 - the same as at HYEFU - before easing over the rest of the forecast period.
There are two main reasons for the weaker growth forecasts. First, in December, after HYEFU, Stats NZ made significant revisions to GDP. There were large upwards revisions over the past two years, but much of the increase was unwound by steep contractions in the June and September quarters of 2024. While the level of real GDP was higher at the end of these revisions than previously expected, the initial stage of the recovery is expected to be more subdued than in HYEFU.
Second, tariffs and global instability have had an impact on the forecasts. As a result of the tariffs, the Treasury has lowered its assumption of trading partner growth by 0.2 percentage points in 2025 and 0.5 percentage points in 2026, and lifted its forecast for world inflation by 0.3 percentage points in each of these years. Trade uncertainty is also expected to reduce business investment, compared to what it would otherwise have been. These factors mean real GDP growth is expected to be cumulatively 0.2 percentage points lower than otherwise over 2025/26 and 2026/27. There remains much uncertainty around the international outlook and the BEFU presents both upside and downside scenarios of the consequences for New Zealand.
Trend productivity growth, which is a key determinant of the medium-term forecast, is assumed to be the same as in HYEFU.
The recent GDP revisions increased the level of nominal GDP, although this has no impact on tax already collected. Slightly weaker-than-expected growth in nominal GDP across the forecast period, together with compositional changes, leads to slightly lower forecast tax revenue. Forecast tax revenue is also lower - deliberately so - because of Budget 2025 decisions, particularly Investment Boost, which has a cost of around $6.6 billion across the forecast period. In total, core Crown tax revenue is expected to be $13.3 billion lower across the forecast period than previously anticipated (Table 1).
Table 1 - Changes in nominal GDP and core Crown tax revenue forecasts
| Year ending 30 June $billions |
2025 | 2026 | 2027 | 2028 | 2029 |
|---|---|---|---|---|---|
| Nominal GDP | |||||
| BEFU 2025 | 435.1 | 456.5 | 477.8 | 500.9 | 524.1 |
| HYEFU 2024 | 427.3 | 450.4 | 473.2 | 495.4 | 517.7 |
| Change | 7.9 | 6.0 | 4.6 | 5.5 | 6.4 |
| Change (%) | 1.8 | 1.3 | 1.0 | 1.1 | 1.2 |
| Core Crown tax revenue | |||||
| BEFU 2025 | 120.9 | 125.0 | 133.0 | 140.5 | 148.2 |
| HYEFU 2024 | 120.6 | 128.3 | 136.7 | 144.1 | 151.2 |
| Change | 0.3 | -3.3 | -3.7 | -3.6 | -3.0 |
| Change (%) | 0.2 | -2.5 | -2.7 | -2.5 | -2.0 |
Numbers may not add due to rounding
Source: The Treasury
Tax forecasts flow through to the fiscal outlook, as tax is by far the Government's largest source of revenue. The majority of Budget 2025 tax policy decisions are, however, offset by spending reductions within the operating allowance, so will not have an impact on OBEGALx or other operating balance measures.