There is still no surplus in sight, according to Treasury’s latest economic forecasts.

Treasury sees the deficit deepening further, from $14.0 billion in the year to June 2025 to $16.9b in 2025/26, before narrowing to $60 million in 2029/30.

While this is an improvement from when Treasury last published forecasts at the May Budget, it still undershoots National’s pre-election pledge to return the books to surplus by 2026/27.

Treasury, in its Half-Year Fiscal and Economic Update (Hyefu) released this afternoon, said the economy had been “slow to recover from a deep cyclical downturn”.

Indeed, the economy took a hit by the Reserve Bank engineering a recession with high interest rates to reduce inflation.

While the Reserve Bank has now completely removed it handbrake from the economy, Treasury said, “Uncertainty around global trade policy has exacerbated the lasting impact of high interest rates and has dampened consumer spending, business profitability and investment activity.”

Looking at the next four years, it saw the economy recovering a little more slowly than expected in May.

However, it still saw annual Gross Domestic Product (GDP) growth rising from -0.6% in 2024/25 to 3.3% in 2025/26 and 3.0% in 2026/27.

Net core Crown debt is expected to be marginally higher than forecast at the Budget.

Treasury forecast it continuing its upward trajectory from 41.8% of GDP in 2024/25 to a peak of 46.9% of GDP in 2027/28 and 2028/29 before tracking down.

Finance Minister Nicola Willis had committed to putting debt-to-GDP on a downward trajectory towards 40% and keeping it below this level in the longer term.

In light of Treasury’s latest forecasts, she has watered down her latest goal to get the books back to surplus.

In May, her goal was to get the new measure she created, which excludes the impact of ACC, back to surplus by 2027/28.

She is now aiming to get that measure, known as “Obgealx”, to surplus a year later. Treasury sees it reaching surplus another year later by 2029/30.

The measure mentioned at the start of the story is the traditional measure, known as Obegal, or the operating balance before gains and losses.

Looking ahead, Treasury Secretary Iain Rennie expected a third of the Obegalx deficit to narrow due to the economy entering a more favourable part of the cycle.

He expected the other two thirds to narrow due to the Government limiting expenditure growth, improvements in the performance in the likes of Kainga Ora and Health New Zealand, and rising tax revenue as a percentage of GDP.

While the Government adjusted income tax brackets when it first came into power, wage inflation has continued to put people in higher tax brackets, enabling the Government to collect more tax revenue.

Willis wouldn’t detail any large spending cuts she might unveil at Budget 2026.

However, the Government is, in coming days, expected to announce changes to ACC that will likely save it money.

Taking a step back, New Zealand Debt Management increased its forecast bond issuance programme slightly, broadly in line with what was expected.

It plans to issue $135b of New Zealand Government Bonds in the four years to 2028/29. In May, it forecast issuing $132b over this time.

The Government is issuing a lot more debt than it did pre-Covid, when it issued about $8b of bonds a year.

It is currently renewing its Covid-era debt, which it is unable to pay off, all the while issuing new debt to pay for new initiatives and cover its interest bill, which is worth about $9b.

Quantitative tightening, or the unwinding of the Reserve Bank’s money printing programme, is also requiring the issuance of more debt.

Willis confirmed she would increase operational expenditure by $2.4b and capital expenditure by $3.5b in Budget 2026.

This level of increase in operating costs is small. Much of the $2.4b has also already been committed.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.