By Lucy Craymer

WELLINGTON New Zealand’s government on Tuesday predicted a larger budget deficit but better-than-expected economic conditions in the year ahead, as it updated forecasts heading into the October election.

The government forecast a budget deficit of NZ$11.4 billion ($6.7 billion) for the year ending June 30, 2024, much larger than a deficit of NZ$7.6 billion estimated in May.

It now expects to return to surplus by 2026/27, one year later than first planned.

The global economy has deteriorated since May, which is having a direct impact on New Zealand's economy while tax revenue is also falling, Finance Minister Grant Robertson said in a statement.

With the country in a technical recession and inflation at three-decade highs, the economy is shaping up as the key issue as New Zealanders head to the polls. The government was required to release revised fiscal forecasts ahead of a general election on Oct. 14.

The economy, which contracted in the fourth quarter of 2022 and the first quarter of 2023, is holding up better than anticipated and is expected to remain in positive territory over the next year, according to the economic and fiscal update from the Treasury.

"The economy is holding its own in an uncertain global environment," said Robertson. "Our economic plan to support New Zealanders dealing with the cost of living while investing in building a stronger, more resilient and inclusive economy is working."

In May, the centre-left government announced heavy spending on infrastructure, including new schools and the health system. Centre-right parties criticised government spending and a planned delay in returning to surplus.

"Treasury’s latest forecasts show the economy isn’t working for Kiwis," said National Party leader Christopher Luxon.

Inflation will not return to the government's target band of 1% to 3% until late 2024, according to the Treasury's update. In the second quarter of 2023, consumer prices were 6.0% higher than a year earlier.

The Reserve Bank of New Zealand is more pessimistic than Treasury, forecasting last month contractions in the third and fourth quarters of 2023 due to steep interest rate rises it has implemented to control inflation.

($1 = 1.6926 New Zealand dollars)

(Reporting by Lucy Craymer; Editing by Sam Holmes and Edwina Gibbs)