Economic and fiscal outlook
The economy is recovering from a deep and protracted downturn, with economic output well below potential. The Reserve Bank has provided monetary stimulus by reducing the official cash rate. The HYEFU forecasts show GDP growth strengthening over the next year and unemployment declining from early 2026.
This recovery is at a slightly slower pace, at least initially, than was forecast in the 2025 Budget Economic and Fiscal Update (BEFU) in May. Both real GDP (the volume of goods and services produced in the economy) and nominal GDP (the value of these in dollar terms) are lower in the near term than was forecast in the BEFU, but are expected to pick up in the second half of 2025 and across 2026 as lower interest rates are felt more widely across the economy and uncertainty around tariffs passes. Nominal GDP is also supported by historically high terms of trade.
Forecasts of tax revenue are driven by forecasts of nominal GDP so are slightly lower than they were in the BEFU. Core Crown tax revenue is expected to be $0.8 billion lower than previously expected in the current financial year. By 2028/29 it is expected to recover to a similar level as in the BEFU forecast. Across the forecast period, the total tax take is expected to be $1.7 billion lower than previously expected.
The HYEFU fiscal forecasts are summarised in Table 2. Maintaining tight operating allowances in future Budgets drives a reduction in core Crown expenses as a percentage of GDP, reaching 30.5 per cent by the end of the forecast period. This track is slightly higher in nominal terms than the BEFU forecast. Forecasts of benefit expenses, for example, have been lifted as slightly higher inflation increases the annual indexation adjustment for benefits and a slower cyclical recovery raises forecasts of recipient numbers.
Table 2 - Key fiscal indicators from the HYEFU
| Year ending 30 June | 2025 Actual |
2026 Forecast |
2027 Forecast |
2028 Forecast |
2029 Forecast |
2030 Forecast |
|---|---|---|---|---|---|---|
| $billions | ||||||
| Core Crown revenue | 134.4 | 136.9 | 144.8 | 153.2 | 161.8 | 170.6 |
| Core Crown expenses | 141.7 | 149.0 | 153.5 | 157.6 | 162.6 | 167.9 |
| OBEGALx | (9.3) | (13.9) | (10.4) | (5.1) | (0.9) | 2.3 |
| Net core Crown debt | 182.2 | 197.0 | 220.6 | 235.7 | 246.8 | 253.9 |
| Net worth | 189.1 | 182.5 | 175.8 | 175.3 | 179.6 | 187.5 |
| % of GDP | ||||||
| Core Crown revenue | 30.8 | 30.1 | 30.2 | 30.5 | 30.8 | 31.0 |
| Core Crown expenses | 32.5 | 32.8 | 32.0 | 31.4 | 30.9 | 30.5 |
| OBEGALx | (2.1) | (3.0) | (2.2) | (1.0) | (0.2) | 0.4 |
| Net core Crown debt | 41.8 | 43.3 | 46.0 | 46.9 | 46.9 | 46.1 |
| Net worth | 43.4 | 40.2 | 36.7 | 34.9 | 34.1 | 34.0 |
Source: The Treasury
OBEGALx also improves over the next four years, reaching a surplus of $2.3 billion in 2029/30. However, a combination of slightly lower revenue forecasts, slightly higher expense forecasts and lower expected returns from state-owned enterprises and Crown entities means the OBEGALx track is lower than previously forecast in the BEFU. At the time of the Budget, a small surplus of $0.2 billion was expected in 2028/29. This has been revised to a small deficit of $0.9 billion.
Net core Crown debt is initially lower than was forecast at the BEFU but peaks 0.9 percentage points of GDP higher, reflecting additional funding requirements from larger OBEGALx deficits. This peak – 46.9 per cent of GDP in 2027/28 and 2028/29 – is close to the Treasury’s recommended prudent limit for net core Crown debt of 50 per cent of GDP.
The slower recovery in the fiscal outlook, compared to the BEFU, is almost entirely driven by revisions to revenue and expense forecasts rather than discretionary fiscal decisions. Relatively few fiscal decisions have been made since Budget 2025, outside those managed within existing allowances and contingencies. This is illustrated in Table 3, which details the changes in the OBEGALx forecast track between the BEFU and the HYEFU.
Table 3 - Changes in OBEGALx forecasts between the BEFU and the HYEFU 2025
| Year ending 30 June $billions |
2026 | 2027 | 2028 | 2029 |
|---|---|---|---|---|
| OBEGALx - 2025 BEFU | (12.1) | (8.1) | (3.1) | 0.2 |
| Core Crown tax revenue | (0.8) | (0.8) | (0.2) | 0.2 |
| Core Crown benefit and New Zealand Superannuation expenses | (0.4) | (1.1) | (1.0) | (1.3) |
| Tax impairments and student loan write-downs | (0.2) | (0.2) | (0.4) | (0.3) |
| Net Emissions Trading Scheme revenue | (0.2) | (0.2) | (0.2) | (0.3) |
| NZ Super Fund, state-owned enterprises and Crown entity results (excluding ACC) | (0.3) | (0.4) | (0.2) | (0.1) |
| Net core Crown finance costs | 0.4 | 0.4 | 0.3 | 0.1 |
| Other | (0.3) | (0.0) | (0.3) | 0.6 |
| Total movement | (1.8) | (2.3) | (2.0) | (1.1) |
| OBEGALx - 2025 HYEFU | (13.9) | (10.4) | (5.1) | (0.9) |
Source: The Treasury
The downward revisions to fiscal forecasts in the HYEFU are relatively modest but follow a series of such revisions over the past two years. While the Government has exercised tight control of discretionary spending, continued forecast changes - outside the Government's direct control - have resulted in a deteriorating fiscal position over time as automatic stabilisers (tax revenue falling and benefit expenses rising) operate in response to weaker economic conditions. Annex 1 extends the analysis in Table 3 back to the Pre-election Economic and Fiscal Update (PREFU) 2023.