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Budget 2025 is remarkable for its fixation on the bottom line. Governments almost always promise this but usually lose their nerve as they contemplate the political cost. Not this time.
However, although the forecasts project a return to budget balance in 2029, it is a fragile projection.
It is at the end of the forecast horizon, and forecasts become more contingent the further out they are, and it would not have been achieved under the old OBEGAL measure, only under the new one adopted last year, which excludes ACC.
It also would not have been possible without the controversial changes to pay equity which delivered a $12.8b cost saving to the Government, essentially by reducing the scheme’s scope and by sending existing claims back to Square One. (Treasury notes that around $1.8b was freed up this year from “anticipated settlements that have not eventuated”.)
The ’growth budget’
The Government’s strategy to get the books back into black consists in two parts – reducing spending and growing the economy – and it was the second theme that the Government chose to highlight in its budget presentation materials all of which were slugged “The Growth Budget”.
The economic picture painted in the budget is relatively good. It has GDP hovering at around 3% over each of the next three years and unemployment hitting 5% next year before drifting down to 4.5% in 2028.
The Budget’s most obvious pro-business initiative is the ‘Investment Boost’ – this will be legislated for today to apply immediately and allows businesses to deduct 20% of the cost of new capital assets purchased from that year’s taxable income in addition to normal depreciation (on a cost base reduced by 20%).
The Investment Boost will apply to most assets that are depreciable for tax purposes (e.g. machinery, equipment and work vehicles) and also to the purchase of new commercial and industrial buildings (which are not otherwise depreciable).
The changes on the KiwiSaver front were widely telegraphed and:
- increase the default contribution rate for both employers and employees to 3.5% (from 3%) at 1 April 2026 and to 4% in 2028. There will be an opportunity to apply to Inland Revenue for a 12-month opt-out
- halve the already inflation-ravaged Government KiwiSaver contribution of $521 a year to $260.72 from 1 July and remove it entirely from persons earning $180,000 a year or more (saving the Crown $2.3b over the next four years), and
- extend mandatory employer contributions (and the eligibility for the Government’s $260.72 payment) to KiwiSavers aged 16 and 17.
It wasn’t a big budget for infrastructure. The capital allowance for this year was increased by $4b, to be spread across health, education, rail and the recovery of local roads damaged in the 2023 North Island weather events.
Social housing will get $128m over four years for 550 more social homes in Auckland; $82m for Upfront Operating Supplement payments for community housing providers, and $150m for the Community Housing Funding Agency.
The Budget also provides:
- a $200m contingency fund to allow the Crown to take a commercial stake of up to 10-15% in new gas field developments, and
- $85m over four years to set up Invest New Zealand – an autonomous Crown entity to attract global capital and talent into New Zealand’s high value industries,
Other initiatives:
- an additional $35m a year to Inland Revenue for tax compliance and collection
- denial of Job Seeker support to single youth under 20 where their parents can provide for them.
A shrinking public sector
Much of the new spending in the budget was funded by savings achieved by government departments and ministries.
Among those which delivered savings and received no new funding are: Agriculture, Biosecurity, Fisheries and Food Safety, Conservation, Courts, Environment, Housing and Urban Development, Māori Development, Pacific Peoples, Sport and Recreation.
And Radio New Zealand sustained a $4.6m a year cut.
The priority areas for new spending had been identified in advance but – even here – the increases were relatively small. Health got another $7b which the Government billed as a “record” but which will be nowhere near enough to meet demand as only $1.37b will go to baseline funding.
Defence got $957 opex and $2.7b capex but this is only a tiny step toward the 2% of GDP New Zealand has committed to and which our allies expect of us. Education got $1.5b and Law and Order $1.1b.
Chapman Tripp comment
The Budget carries significant political risk. The shrinking departmental budgets will affect the quality of services and even if the budget does deliver a growth dividend, that will not happen immediately and will not be experienced by everyone.
It will also become harder to keep the foot on the brake as the next election comes closer.
But New Zealand, as a small export-dependent country with a poor private savings culture and a substantial exposure to natural hazards, cannot afford to remain in structural deficit so some form of corrective action is required.
