Finance Minister Nicola Willis says a downgrade to New Zealand's outlook is a "reminder" of why fiscal discipline matters.
Fitch Ratings shifted the country's outlook on Long-Term Foreign-Currency Issuer Default Rating (IDR) from "stable" to "negative". However, the ratings agency kept New Zealand's core rating grade at AA+.
In its report, Fitch warned a substantial debt reduction was "becoming more difficult to envisage", citing delays to fiscal consolidation in recent years.
"The general government debt-GDP ratio has increased substantially over the past six years as the economy has been buffeted by a number of shocks," it said.
Willis said the decision underscored the importance of sticking to the Government's plan.
"Over the past two years, this government has pursued a balanced fiscal strategy - lifting investment in frontline services like health, education, and law and order, while charting a credible path back to surplus," Willis said.
"That has required hard decisions: $43 billion of savings across the last two Budgets, with further savings planned in Budget 2026."
Willis said the government would remain committed to its three fiscal goals — reducing spending as a share of GDP, returning to surplus and bringing debt down, but acknowledged global uncertainty could complicate that path.
"Treasury's preliminary economic forecasts — prepared before the latest volatility in the Middle East — showed New Zealand's economic recovery gaining momentum, with growth of around 3% by early 2027 and a corresponding improvement in revenue that would support a more positive fiscal outlook," she said.
"Those forecasts will now need to be revised. Energy market disruption adds real uncertainty, and that is precisely why careless spending is off the table."
Willis said her focus remained on a "balanced" approach and would continue to invest in frontline services including health, education and law and order.
"Increasing borrowing, spending and debt, as some political parties have proposed, would damage New Zealand’s reputation for responsible fiscal management and lead to increased borrowing costs for all Kiwis.
'Advanced and wealthy economy'
In its report, Fitch said New Zealand's AA+ rating reflected an overall "advanced and wealthy economy" with "high governance standards, and robust policy framework".
"These strengths are balanced by the economy's vulnerability to external shocks given its size and openness, an elevated current account deficit (CAD), and high household debt."
Fitch forecasted general government gross debt to rise to 56% of GDP in the fiscal year ending June 2027 (FY27), from 53.6% in FY25, and to only return to the FY25 ratio in FY30.
"This would be well above the outer year (FY27) forecast of 36.1% when we upgraded New Zealand in September 2022. The debt reduction will be driven by a large 2.8pp of GDP improvement in the primary balance by FY30.
"The authorities project the net core crown debt-to-GDP ratio to reach 46.9% of GDP by FY29, above the 45.5% projection at the May 2025 fiscal update."
It said the government's "key fiscal measure", operating balance before gains and losses excluding revenue and expenses of the accident compensation corporation (OBEGALx), was expected to return to surplus by FY30, a year later than previously forecast.
"This follows repeated delays in the target year since December 2022 under successive governments. The delays are due to weak economic growth since then and expenditure proving more persistent than anticipated," Fitch said.
Fitch said the Government expected the OBEGALx deficit to widen to 3% of GDP in FY26, from 2.1% in FY25, and to improve thereafter to a 0.4% surplus by FY30. It said the actual FY25 OBEGALx deficit was slightly lower than the 2.3% assumed in the May 2025 fiscal update, "but this largely reflected one-off factors".
"We expect the deficit under Fitch's internationally comparable general government definition to rise to 4.1% of GDP in FY26 from 3.6% in FY25 before falling to 3.5% by FY27. The decline will be driven by the economic recovery, with some upside potential to revenue projections, and the consolidation policy after the election, which is scheduled for November 2026."
The credit ratings agency also flagged risks from the conflict involving Iran, noting New Zealand's "substantial dependence" on energy imports.
"Direct trade linkages to the Middle East are small, but inflationary effects and a broader global weakening could have a negative impact," it said.
Monetary policy was another thing considered, with Fitch expecting the Reserve Bank to increase the Official Cash Rate by the end of this year, "although the Iran war could lead to earlier tightening".
Fitch said the curent account deficit had narrowed to 3.7% of GDP in 2025 from 4.7% in 2024.
"This is well below the peak deficit of 9.0% in 2022, but much weaker than the 'AA' category median surplus of 8% in 2025.
"Net external debt remains elevated, reflecting a structural savings-investment gap. We forecast net external debt of 51.4% of GDP in 2026, while the 'AA' median is in a net creditor position of 29% of GDP."
Despite these concerns, Fitch expects the economic growth to recover, forecasting GDP to "expand by 2.8% in 2026 and 2027, after weak growth of 0.2% in 2025".
"The recovery will be driven by improving household demand, supported by the monetary easing since August 2024 and the continued strong performance of exports."
It also said "recent data" suggested outward migration over the last few years was "reversing in response to, and supporting, the recovery".
Fitch explained how the outlook could return to "stable", saying: “Strengthened confidence towards fiscal consolidation could lead to a revision of the outlook to ‘stable’,” it said.
“A sharp decline in both public and net external debt, and increased confidence in New Zealand's resilience against external shocks, could result in an upgrade.”
SHARE ME