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The Government pulled the proverbial rabbit from the hat in Budget 2026. It did what it had to do. It wrung a return to surplus in 2028-29 forecast from Treasury, a year ahead of the expectation in the December Economic and Fiscal Update.
And it has also delivered a range of initiatives aimed at promoting economic growth.
But whether this will provide the lift in mood and in activity that the Government needs in the run-up to the 7 November election remains an open question, as there is still plenty of reason to suspect that there is more hardscrabble ahead.
The picture from the 7th floor
Finance Minister Nicola Willis, although generally upbeat in tone, was frank about the difficult context in which the Budget was created, saying:
“An economic recovery has been unfolding but scars run deep. The Government is also carrying a significant burden of debt – more than twice as heavy as it was seven years ago, with an annual interest bill of $9b.
“New Zealand’s sovereign credit rating has a negative outlook from ratings agencies Fitch and Moody’s, which is a warning that we must start bending the debt curve down.
“New Zealand’s population is getting older, meaning the bill for delivering healthcare, New Zealand Superannuation and other public services is becoming heftier for workers to shoulder. The annual cost of Superannuation is rising sharply, from less than $20b in 2023 to more than $30b by 2030. In the next year alone, the cost of Super will rise by around $1.8b”.
Then she ticked off the greater frequency of extreme weather events and the economic shocks that “will keep happening”, adding there was “no hiding from these big issues”.
Painting by numbers
Consistent with the approach taken by the International Monetary Fund and the OECD, the Treasury’s central economic forecast path assumes that oil prices will normalise over 2026 and 2027. Key forecasts are:
- GDP at 1.2% this year, rising to 2.3% and 3.2% over the next two years
- unemployment to reach 5.5% this year then drift back to 5% and then to 4.5%, and
- CPI inflation at 4% this year before dropping sharply to 1.6% and 2.1%.
More ominously:
- the current account deficit is forecast to remain at above $14b and the ten-year bond rate (which will feed into the Government’s debt costs) is projected to stay at 4.5 to 4.6%, and
- core Crown expenses will continue to exceed core Crown tax revenue over the next four years, and net core Crown debt will continue to rise.
Given this scenario, the return to a slender surplus of 1.3% on the traditional OBEGAL measure (smaller at just 0.5% on the Government’s preferred OBEGALx formula) seems counterintuitive - but other sources of income come into play, in particular from the SOEs and Crown entities.
Budget initiatives
Infrastructure
The Budget delivers a $7b boost to infrastructure, offset by $1.3b in savings for a net capital impact of $5.7b. The biggest allocation is the $1.7b for the Waikato Expressway, although Transport Minister Chris Bishop’s press statement didn’t mention any PPP arrangements.
Other beneficiaries will be a new courthouse for Rotorua, a 158-bed tower block at Whangārei Hospital, new police stations in Greymouth and Westport, 232 new classrooms, defence and rail.
An Incentives for Growth Fund will pay councils through a sliding scale 0.25% of the national average consent value for each new home consented up to an equivalent of 1% of their existing housing stock, 0.5% for consents between 1% to 2% of stock and 1.25% for consents above 2%.
Tax
This is a busy tax budget, although the changes are all relatively small. In addition to the usual increase for compliance activity (this year, another $15m), the budget will improve the Research and Development Tax Incentive (RDTI) by enabling claimants to claim their tax credits during the year the expense was incurred, allowing IRD to accept and amend late RDTI filings, and expanding RDTI access for mining businesses.
But it’s not all good news, with a reduction in the cap on non-administrative internal software eligible for the RDTI from $25m to $3m.
Recent Foreign Investment Fund (FIF) rule changes introducing a new method of determining tax on FIF interests are being extended to all New Zealand taxpayers, which will allow a choice to pay tax on unlisted offshore shares on realised gains and actual dividends. In addition, de minimis threshold for overseas investments is being raised from $50,000 to $100,000.
Charities
The net income a non-charitable not-for-profit can earn before becoming liable for tax will increase tenfold (from $1000 to $10,000), donations eligible for donation tax credits will be capped at $100,000, and donors will be able to receive their tax credit refunds during the year and to gift them directly to a charity of their choice.
Banks
Banks, non-bank deposit takers, insurers and other financial market participants will have to pay a prudential levy to the Reserve Bank, with the revenue returned to the Government through an increased dividend. It is expected that this will raise around $209m over the next four years. Banks will also be required to hold more capital for tax purposes (broadly aligning with prudential capital requirements).
FBT
Long-discussed simplification to FBT rules will finally see some compliance savings, with changes proposed to FBT on motor vehicles that should be welcomed by many taxpayers.
