Treasury is forecasting smaller deficits, lower borrowing and a return to surplus as stronger tax revenue improves the Government’s financial position.

The Pre election Economic and Fiscal Update released today forecasts the operating deficit falling to $6.8 billion this financial year, compared with $11.4 billion forecast at the May Budget.

It is expected to shrink further to $800 million in 2027/28 before moving to a $4 billion surplus the following year and reaching $11.7 billion by 2030/31.

Finance Minister Nicola Willis said the figures showed New Zealand’s economic position was improving.

“I’m pleased that New Zealanders’ hard work, resilience and adaptability through tough economic times is bearing fruit.”

Treasury said higher tax revenue was the primary reason for the stronger fiscal outlook.

Core Crown tax revenue has been revised up by $11.4 billion across the four comparable forecast years, driven by stronger than expected tax receipts, higher business profits, consumption and employee earnings.

Willis said  “Businesses have been doing better than anticipated, which feeds into the Government’s bottom line through increased tax revenue.”

Treasury expects net core Crown debt to rise from $186.7 billion in 2025/26 to $223 billion in 2027/28, when it is forecast to peak at 43.9 percent of GDP.

Debt is then expected to decline as a share of the economy, reaching 39.5 percent of GDP by 2030/31. In dollar terms it is forecast to peak at $232.8 billion in 2029/30 before falling to $229.8 billion the following year.

The stronger revenue outlook is also expected to reduce Government borrowing and lower finance costs.

Treasury said net finance costs had been revised down by $1.7 billion despite higher market interest rates because less borrowing would be required.

Willis said the Government would issue $15 billion less in bonds over the next four years than previously forecast.

“The amount New Zealand spends servicing our debt each year is significant, equivalent to the cost of building more than four Dunedin Hospitals every single year.”

The economic outlook itself remains mixed.

Treasury said an emerging recovery had been delayed by higher oil and fuel prices linked to conflict in the Middle East, which had increased inflationary pressure and contributed to higher interest rates.

The economy is forecast to regain momentum during the second half of 2026 as those pressures ease.

Real GDP growth is forecast at 2.3 percent in 2026/27, rising to 2.9 percent the following year before settling at around 2.5 to 2.7 percent later in the forecast period.

Unemployment, currently 5.6 percent, is forecast to gradually fall to 4.3 percent by the end of the forecast period.

Inflation is forecast to drop from 4.1 percent to 1.9 percent by June next year before remaining around the Reserve Bank’s target range.

Treasury also cautioned that the improvement was not guaranteed.

It said risks were weighted towards weaker economic growth and higher inflation, particularly if elevated energy prices associated with instability in the Middle East persisted for longer than expected.

Natural disasters, financial market volatility, geopolitical conflict, productivity, migration and demographic pressures were also identified as risks.

Treasury said the forecasts were based on current Government policy settings, including future spending allowances and tax policies, meaning different policy choices would produce different fiscal outcomes.

Willis said the improved forecasts should not be treated as permission for significant new spending.

“A stronger fiscal position cannot be taken for granted and treated as a green light to open the chequebook.”

She said the Government would continue its focus on spending restraint and economic growth through the election campaign.