By Lucy Craymer and Stella Qiu
WELLINGTON, May 28 (Reuters) - New Zealand on Thursday reported a narrower budget deficit for the current financial year, as it pressed ahead with fiscal tightening while warning the Middle East conflict is sapping some momentum in its trade-reliant economy.
In its annual budget presentation in parliament, the government forecast a budget deficit of NZ$15.06 billion for the fiscal year ending June 30 2026, narrower than a deficit of NZ$16.93 billion its half-year update
in December and is now expecting to reach surplus in 2029/30.
“This budget takes careful steps to support New Zealanders now while strengthening the economy for the years ahead,” New Zealand Finance Minister Nicola Willis said in a statement, while promising little short term relief for those struggling with higher fuel prices and an ongoing weak economy.
Operating allowance for the 2027 financial year is NZ$2.1 billion on average per annum.
Willis pledged to boost capital spending in areas such as defence, schools and hospitals while making cuts to the public service, reducing social housing construction costs and ending a scheme that made the final year of university education free.
Net debt excluding advances was forecast to peak at 46.1% of gross domestic product (GDP) in 2027/28. In December, the government had expected it to peak at 46.9% of GDP in 2027/28 and 2028/29.
Since coming to power in late 2023, the centre-right government has tightened the purse strings, arguing it must curb waste and rein in debt but critics counter that the squeeze is choking an economy that has already spent two years struggling to find its footing.
When the government called the election in January for November 7, it had expected the economy to be on a path of sustained growth, inflation around 2% and falling unemployment.
Willis said in a speech that some will suggest offering "band-aids and sugar hits, all slapped on Afterpay" in an election year.
"Not only does that approach ignore the real challenges New Zealand faces but in the absence of a magic money tree it's our future selves who'd have to foot the bill, with interest," she said, adding she had decided on a "responsible and durable approach."
The challenges are stark, with the Iran war boxing policymakers into a corner. Global shocks have soured the outlook since Treasury's last forecasts in December, fuel prices have reignited inflation above the Reserve Bank of New Zealand's 1%–3% target, and growth is expected to be softer, crimping tax revenues.
Treasury now sees gross domestic product at 2.3% higher in the year end June 30 2027, down from forecast growth of 3.4% at the December update. It expects inflation to be tracking at 4.0% in the current financial year before falling to 1.6% next year.
"This is an unexpectedly positive budget, I think, from the perspective of the fiscal outlook," said Westpac chief economist Kelly Eckhold.
"There's probably downside risks, I think, to the assumption about just how tax rich the outlook is," he added.
(Reporting by Lucy Craymer)
