Budget 2025: Why this year in particular it may not pay to rush to judgment

Tuesday, 20 May 2025

ANALYSIS: Will Finance Minister Nicola Willis’ narrative on government debt “delaminate” further from the Treasury’s officials forecasts, on Budget day?

Are the savings she will be predicting from reducing cash set aside for “contingencies” including curtailed pay equity claims — principally those affecting teachers’ pay — likely to prove realistic?

Will any changes to KiwiSaver prove quite as they seem?

And will some skeletons, such as a presumed liability of at least $2.5 billion for meeting New Zealand’s Paris 2030 climate-change commitment finally come out of the closet and on to the Government’s books?

This year, given the small $1.3b operating allowance for net new spending, almost every fresh Budget initiative will need to be paid for by a corresponding “reprioritisation”.

Normally the clouds start to clear very soon after 2pm on Budget Day, when the media is able to start reporting what they gleaned from an elbow-to-elbow “lock-up” that starts at 10.30am.

But the above are just some of the reasons that could mean Thursday’s Budget takes longer than usual to interpret and digest.

And it is not only the coalition government that will need to be held to account.

Labour finance spokesperson Barbara Edmonds has committed the party to live within the same already rather-full fiscal envelope as the Government.

So if the Opposition complains about the choices that are announced on Budget Day, what exactly will it be suggesting?

These may be some of the curve balls to keep an eye on.

April fools?

The Treasury’s Budget Economic and Fiscal Update, which the Government will release on Thursday, is a key part of the Budget, setting out what the Treasury expects will happen to the economy and government finances through to June 2029.

But will it be built on what might now appear sound economic assumptions, given the Treasury finalised its forecasts on April 7.

That was just five days after US President Donald Trump’s calamitous “Liberation Day” announcement on reciprocal tariffs, and the exact day on which global equity markets — including the NZX top 50 index — fell to their 2025 nadir on the back of concerns for fading global growth.

A Treasury spokesperson confirmed it had accounted for the impact of the tariff announcement in those forecasts.

The unfortunate timing raises the prospect that its projections for economic growth and tax revenues — and therefore the probable trajectory of government debt over the next four years — might now look unduly pessimistic.

‘Delamination’

Notwithstanding that, it is safe to assume that the Treasury will still predict that the Government’s books will return to surplus in the year ending June 2029, at least after ignoring the deficit at ACC.

Normally, it is the Treasury’s predictions that determine the Government’s narrative on such matters.

But Willis has already driven a small wedge between the Treasury’s forecasts and her own commentary on balancing the books by indicating the Government hopes to beat the Treasury’s current forecast by delivering that so-called “ObegalX” Budget surplus a year earlier, in the June 2028 year.

A potential risk in allowing the signals sent by Treasury and the Government to diverge in that manner is that it could undermine the intent of the fiscal rules that the Treasury recommends governments abide by.

It would be possible to envisage a future finance minister saying, “well the Treasury is estimating government debt will rise above 50% of GDP, but we think we’ll do better”.

Would the Government then have broken the rule that it should act to keep its debt under the cap, or not?

That’s probably not a conundrum financial markets would relish ever having to consider.

But at the same time, if the Treasury based its forecasts for growth and taxation on overly-pessimistic assumptions made in the immediate aftermath of “Liberation Day”, the Government might feel entitled to at least point that out.

It is a simple truth that we are living in more uncertain times, when forecasts will need to be taken with an extra pinch of salt.

Pay equity and contingent liabilities

A significant chunk of the savings the Government is likely to book in the Budget are expected to flow from its decision to limit pay equity claims.

In particular, its decision to only allow claims from professions that are at least 70% dominated by women would appear to close off the avenue for secondary school teachers to succeed in a claim, given “only” 63.6% of them were female as of 2020.

Probation officers, who were 68% female in 2020, would appear another casualty.

The Budget should reveal how many billions of dollars the Treasury is forecasting that will save.

But it may be simplistic to assume that disallowing pay equity claims will kill off pressure for more competitive pay in sectors of the economy where females make up the majority of workers.

It would not seem fanciful to imagine it might lead to more militancy in those affected workforces, as they sought to achieve long-anticipated pay rises through other means.

The extent of that pressure is not something that is going to be immediately evident on Budget Day.

In total, the Treasury earmarked almost $17b in last year’s Budget for so-called “unallocated operating contingencies” in the four-year period ending June 2028.

Willis told the Hutt Valley Chamber of Commerce late last month that preparations for the Budget had involved “a line-by-line review of previous funding commitments, including money put aside in contingency”.

It will be hard to guess in advance what proportion of those savings will ultimately materialise.

“Optimism bias”, our natural tendency as human beings to convince ourselves that bad things won’t happen and don’t need to be planned for, is the risk.

Take with one hand, appear to give with the other?

There is speculation that the Government will announce it is withdrawing, or at least means-testing, the $521 annual contribution that it makes to most people’s KiwiSaver accounts.

The hit to households if the incentive was to be completely withdrawn would amount to roughly half the benefit they gained on average from tax cuts that the coalition government approved soon after coming to power.

There has been further speculation the Government could soften any such blow by agreeing to divert the “savings” into the NZ Superannuation Fund, which was established to help fund a portion of superannuation payments when a wall of retirees starts to hit the economy from 2028.

Extra contributions to the super fund wouldn’t increase pension payments though; it would only perhaps make them a little more secure by ensuring a larger proportion of pension payments were pre-funded, with the net effect simply being to reduce government expenditure down the track.