Finance Minister reaches for the defibrillator to get investment pumping again

Friday, 23 May 2025

Luke Malpass, Janet Wilson and Vernon Small discuss the key moments in Budget 2025.

ANALYSIS: The political debate around the Budget may centre on cuts to KiwiSaver subsidies and benefits available to 18 and 19 year-olds ‒ and of course lingering ill-feeling over the extinguishment of pay equity claims.

But businesses would seem to have nothing to complain about.

They are the beneficiaries of the biggest ticket item ‒ the Investment Boost initiative that is expected to cost $6.6 billion over the next four years, and they can probably still look forward to lower interest rates.

Budget documents show the fiscal outlook has, as expected, deteriorated since the Treasury’s last forecasts in December.

Investment boost has arrived early and small deterioration in fiscal outlook probably not enough to put further interest rate cuts in doubt.

The Government is forecast to need to raise $7 billion more than previously estimated over the next four years through the issuance of government bonds to fund higher debt.

But the weaker fiscal outlook doesn’t appear to have endangered expectations of further falls in interest rates, so that may not greatly rattle most business owners.

ANZ senior economist Miles Workman described the downgrade to the fiscal outlook as small and, like all other banks, ANZ is continuing to forecast another 0.25% rate cut next week.

Barbara Edmonds is signalling Labour wouldn’t make a rushed decision on whether to retain the Government’s “Investment Boost”.

There could still be further skeletons waiting to pop out of the fiscal cupboard, of course, which has rather been the pattern of the past.

The Treasury has greatly revised down its expectations for economic growth in the year to June, to 0.6% growth from 1.6% growth previously.

But if there is a surprise in the Treasury’s modelling it may be that most of its assumptions are still based on the economy growing by more than 3% in the year to June next year and by almost that amount in each of the two years after, despite acknowledging heightened global uncertainty.

The Treasury nailed down its economic assumptions in the immediate aftermath of President Trump’s “Liberation Day” tariff announcement on April 7, but a cursory glance at its growth forecasts might suggest it viewed the implications of that as a bit of a flash in the pan.

Labour finance spokesperson Barbara Edmonds says she hasn’t yet formed a view on whether the Treasury’s economic forecasts are too optimistic but appears somewhat suspicious, saying she expects to have to do some work to “marry up” its figures with its commentary.

She also notes with concern that the Treasury still hasn’t deemed it necessary to factor-in any costs into its forecasts for buying-in the overseas carbon offsets that it is assumed will be needed if New Zealand is to have a chance of meeting its 2030 commitment under the Paris climate change agreement.

“It’s listed as a specific fiscal risk, but I don't think that they have put aside any funding for that,” she says.

It is reasonable to expect Investment Boost will deliver a fillip to economic growth in the short term, at the expense of lower tax revenues.

It had been widely expected in the run-up to the Budget that the Government would change the rules around the tax treatment of business investments.

Firms are usually allowed to deduct their spending on capital items such as plant and machinery from their taxable profits, so they don’t pay company tax on operating profits that they invest straight back into their business.

But the change announced by Finance Minister Nicola Willis to immediately allow businesses to deduct an additional 20% of their new investments in capital assets in the first year of each investment is more generous and should be more faster-acting than expected.

Business investment has been falling to anaemic levels, and if any government policy has a shot of quickly turning that around, it could be this.

Edmonds wouldn’t “rule in or out” a future Labour Government reversing the depreciation change.

Ironically, the best way for a future Opposition government to deliver a second sugar hit to investment might be to leave that question unanswered, to encourage businesses to invest before the benefit was possibly cancelled.

“Ultimately, it's always good to help businesses reinvest in capital items for their business, so that’s a good measure when you look at it, but within the wider context of the Budget, which is ‘who's paying for this?’ ”

Women, through lower future pay, she answers.