Books look better, but Willis says not a licence to spend

The Government's books look better than they did in May, but the Finance Minister is urging restraint. The Pre-Election Fiscal Update (PREFU), released on Tuesday, shows a $4 billion surplus now expected in 2028/29, or 0.8% of GDP. The May Budget update (BEFU) had pencilled in $2.6 billion, or 0.5% of GDP.

Nicola Willis says New Zealand is "within a hair's breadth of surplus", but that the improvement is not a licence to spend. With the general election on 7 November 2026, that message matters. Every party will be reading these numbers for what they can afford to promise.

The improvement is real, but so are the caveats. Oil prices are higher than when the forecasts were finalised, and debt is still rising.

The record

The near-term picture has shifted the most. The deficit forecast for 2026/27 has fallen from $11.4 billion in May to $6.8 billion. For 2027/28 it has dropped from $4.3 billion to $0.8 billion. The surplus is then projected to grow to $8.1 billion in 2029/30 and $11.7 billion by 2031, up from the $6.1 billion BEFU had for 2029/30.

On debt, the Government is now expected to borrow $15 billion less over the next four years. Net core Crown debt is projected to peak at 43.9% of GDP in 2027/28, down from the 46.1% forecast in May. In dollar terms that is $223 billion, compared with $232.4 billion in BEFU. It is then projected to ease to 39.5% of GDP in 2031.

Treasury secretary Iain Rennie noted that projected debt levels do not fall below current levels before the end of the projection period in 2031. So debt is better than expected, but it is not shrinking in dollar terms within the forecast window.

Growth is broadly unchanged. Willis says the economy is forecast to grow at an average of 2.6% a year. The 2026/27 figure stays at 2.3%, but the rebound is weaker than May's, at 2.9% in 2028 against 3.2% for 2027/28 in BEFU. Unemployment is forecast slightly higher in the next two years, at 5.2% in 2026/27 and 4.7% in 2027/28, compared with 5% and 4.5% in May.

Open questions

If the Government is this close to surplus, what does "not a licence to spend" mean in practice? The PREFU itself lists pressures. It flags the public service transformation, which could save money in the long term but may carry upfront costs. It flags the Defence Capability Plan, which will need a substantial increase in annual spending. And it flags development levies, which the Crown will begin paying to councils for infrastructure they build. Their cost depends on how much development happens.

Youth justice residences are also listed as a pressure. Willis says that reflects the Government's position that young people who have committed crimes need to be held accountable. How much these commitments cost, and how they are weighed against a thin surplus, is a question for every party.

There is also a question for the Opposition. The house price forecast has softened. Prices are now projected to rise 2.4% in 2027/28, down from 4% in May, and 3.7% in 2028/29, down from 4.3%. Labour is relying on a proposed capital gains tax to fund its pledge of three free doctors visits for every New Zealander. Slower house price growth could mean that tax raises less than Labour expected. How would the policy be funded if it does?

The other side

The Government's case is that the numbers vindicate its fiscal path. A bigger surplus, lower borrowing and smaller near-term deficits are all improvements on May. Willis's caution can be read as consistency. A surplus this narrow can vanish if forecasts move, so she says it should not be treated as spare cash.

Rennie's comments back up that caution. He said the lower borrowing will help offset higher interest rates, which are rising significantly around the world, and that the implications are still unclear.

For Labour, the case is that a forecast is not a fixed outcome. The house price projections are still climbing every year from 2027/28, and the party's policy is built on a longer-term view of revenue. The PREFU shows less revenue than May's outlook implied, not none.

What happens next

The biggest swing factor is oil. Rennie said prices remain volatile and are now higher than when the forecasts were finalised. On Tuesday morning they were about $15 a barrel higher. The May forecasts already carried a growth downgrade tied to the oil price shock from the Iran war, so a further rise puts pressure on the numbers.

The next test is the election campaign. Parties will be asked to show how their promises fit within a surplus of $4 billion in 2028/29, and what happens if that figure moves. The next fiscal forecasts after the election will show whether the improvement has held.