Fiscal Strategy
Report 2025

Fiscal outlook

The BEFU fiscal forecasts are set out in detail in Annex 1.[4]

Core Crown expenses are expected to increase in dollar terms across the forecast period. This largely reflects the indexation, and growth in recipients, of benefits and NZ Superannuation, together with higher finance costs and funding set aside for future operating allowances. NZ Superannuation expenses, in particular, are expected to grow by around 25 per cent over the forecast period, from $23.2 billion in the current year, to $29.0 billion in 2028/29. Growth in expenses is much more subdued than in recent years, however. As a percentage of GDP, core Crown expenses fall over the forecast period, reaching 30.9 per cent of GDP by 2028/29. Tight future allowances account for a large part of this decline.

The OBEGALx deficit is expected to widen in the near term but then gradually improve after 2025/26, by an average of around $4.1 billion per annum, returning to a modest surplus of $0.2 billion by the end of the forecast period. At this point, the OBEGALx structural deficit will have closed.

The residual cash deficit - which includes net cash flows from capital investments as well as operating activities - totals $62.3 billion over the forecast period, with over 80 per cent of the deficit attributable to capital investments. This cash deficit is largely funded from borrowing, so net core Crown debt is $63.1 billion higher at the end of the forecast period than it was in 2023/24. As a percentage of GDP, net core Crown debt is expected to peak at 46 per cent in 2027/28 before beginning to decline.

Figures 7, 8 and 9 show how the fiscal forecasts have changed since HYEFU.

In dollar terms, core Crown expenses are broadly similar to those forecast in HYEFU, although one-off factors make more of a difference in the current financial year. Nominal GDP has been revised upwards across the forecast period (Table 1) so as a share of GDP, core Crown expenses are lower in every year compared to HYEFU (Figure 7).

Figure 7 - Core Crown expenses

Source: The Treasury

The OBEGALx deficit is forecast to be lower in the current year than previously expected, but greater in the years thereafter (Figure 8). The downward revision in OBEGALx is largely driven by economic factors impacting tax revenue, finance costs, and NZ Superannuation indexation, although these are partially offset by Budget 2025 decisions such as a lower operating allowance (Table 2). The increased forecast for debt impairments reflects Inland Revenue's expectation that overdue tax debt will be higher than previously forecast.

Figure 8 - OBEGALx

Source: The Treasury

Source: The Treasury

Net core Crown debt in dollar terms is forecast to be lower in the first few years of the forecast period compared to HYEFU, but $1.7 billion higher in 2027/28 and $4.4 billion higher in 2028/29 to meet additional funding requirements. New Zealand Government Bond (NZGB) issuance is expected to increase by $7.0 billion across the forecast period compared to HYEFU. As a share of GDP, net core Crown debt is expected to peak at 46.0 per cent of GDP, compared to 46.5 per cent at HYEFU (Figure 9).

Figure 9 - Net core Crown debt

Source: The Treasury

Economic uncertainty translates to the fiscal forecasts, and a range of outcomes are conceivable. The BEFU downside economic scenario - where global trade tensions deteriorate - results in OBEGALx deficits throughout the forecast period and net core Crown debt at 49.3 per cent in 2028/29. The upside scenario - with stronger net migration and productivity growth - shows a return to surplus in 2027/28 and net debt down to 43.1 per cent of GDP in 2028/29.

Projections of fiscal variables over a 10-year horizon, starting from the end of the forecast period, are in Annex 2.