Yesterday’s Pre-Election Economic and Fiscal Update from the Treasury has given political parties their clearest picture yet of the economy they could inherit after November’s election.

The near-term fiscal outlook is brighter than expected. Treasury now forecasts a $6.8 billion deficit in 2026-27 – down from the $11.4 billion predicted at the May Budget – while higher tax revenue is expected to reduce government borrowing by $15 billion over the next four years.

That gives parties a firmer basis for costing the promises now being made on the campaign trail, in an economic environment somewhat brighter than that of the last election.

In 2023, New Zealand was struggling with weak growth and high inflation. Three years on, inflation has fallen substantially and the economy has returned to growth. GDP increased 0.2% in the June quarter, following 0.9% growth in March, and was 1.7% higher than a year earlier.

Still, as yesterday’s update also highlighted, the recovery remains fragile. Annual inflation has climbed back to 4.1%, while Treasury is warning that the global oil shock poses a renewed risk to both inflation and economic growth.

Perhaps even more importantly, beyond those immediate pressures lies a problem that neither an economic recovery nor a change of government can quickly fix: New Zealand’s long-standing productivity problem.

The elephant in the room

Productivity is ultimately about how much value an economy can produce from its workers, capital, technology and resources.

Higher productivity allows wages and living standards to rise without people simply working longer hours. It also increases the resources available to fund health,........

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