New Zealand is poised to become a fiscal basket case
Thursday, 18 December 2025
Janet Wilson is a regular opinion contributor and a freelance journalist who has also worked in communications, including with the National Party.
OPINION: If politics in Aotearoa last week was all about the performative prospect of a debate between two female finance ministers, one former, one current, over how fast fiscal debt should be paid back, then Parliament’s last sitting week delivered the stark reality.
Treasury’s Half Year Economic and Fiscal Update (HYEFU) showed the Government’s books experienced slower growth, higher than anticipated deficits with a return to surplus delayed by a year, again.
Yes, this is a rear-view mirror snapshot of what we all know has been a bleak year, but HYEFU 2025 seemed like some purgatory Groundhog Day with the delay in getting to surplus stretching into the horizon.
It remains a shimmering mirage, much like National’s 2023 promise to return the books to surplus by 2026/27.
And with wafer-thin new spending budgets set at $2.4 billion for the next four years, with most of that allocated to health, Finance Minister Nicola Willis will have to continue her pea-under-the-walnut shell game of spending cuts while continuing to reallocate that spending elsewhere at a rate higher than her predecessor ever did.
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It could be argued that she got lucky in finding $12.8 billion from cuts to the pay equity programme, but it’s becoming an increasingly short bet that, as she prepares for her third Budget, there won’t be that kind of money lying around,
So what social services will Willis be prepared to cut to achieve Budget 2026? Unemployment benefits for 20-year-olds? Slashing sickness benefits?
And for all her zingers about not tolerating a level of human misery that her bete noire, Ruth Richardson, now chair of the Taypayers’ Union, would, the longer she takes to get the Government’s books from red to black the greater the risk we’ll suffer structural deficits not for years but for generations.
Her strategy blithely ignores the known and unknown risks that economists and Treasury itself have been asserting continually.
Known risks like skyrocketing superannuation costs (in another three years there’ll be a million pensioners to pay for) coupled with lower birth rates. And unknown ones that we’ve had more than our fair share of since the turn of the century, such as earthquakes, floods or volcanoes exploding.
Willis seems happy to ignore Treasury’s estimation that a shock every decade would cost 10% of GDP when she would know that since 2015 the country’s been through the Kaikoura earthquake, the eruption of Whakaari/White Island, the Auckland Anniversary Weekend floods and Cyclone Gabrielle.
And while the finance minister is happy to accept net core Crown debt growing to $72 billion by 2030, she’s putting greater store in Treasury’s rosier economic outlooks, which will see growth in GDP rising to 3.4% next year before dropping to 2.5% for the next three years.
But if HYEFU showed us where we’ve been, then it was Willis’ own Budget Policy Statement that showed us where we’re going. Despite debt projected to be $250b in another five years, she’s resolutely sticking to her plan and aiming for a surplus in 2028/29, despite Treasury pushing its forecast out a year.
Which sets the scene for Budget 2026 becoming a flashpoint as the Government tries to fulfil its infrastructure promises while saving pennies, but not enough to slash services.
Willis has staked out her claim that she’s charting the mid-course, a well-trodden path of former National finance ministers.
Except this recession hasn’t followed the script or Treasury projections. Our living standards, as defined by GDP per capita, have fallen 5%, energy prices have ripped the guts out of the rural heartland and productivity remains a handbrake on substantial growth.
Which will become part of the conundrum for Willis and National as they head into 2026’s election.
Yes, the inflation lion has been put back in its cage but at 3% - the top edge of the Reserve Bank’s inflation target. An election-year Budget containing big ticket items will drive growth, but will it allow the inflation lion to escape its cage?
Because while Willis may be saving in some places, she’s also spending in others. As Treasury head Ian Rennie pointed out in Parliament’s scrutiny week recently, consolidation hasn’t even started. If you put it off there’s a risk that the money won’t be there when the next shock happens.
Which makes Willis’ hope-and-pray strategy, that somehow the old normal will replace the new, a delusion, as HYEFU’s alarming figures illustrate.
Instead, we’re poised to become a fiscal basket case with a high-debt, low-growth economy, as our living standards slip further away from the OECD average.
Nicola Willis inherited unheralded levels of debt in 2023 but since then she’s been the tortoise in getting fiscal spending under control as she continues to cut but also spend.
Little wonder then that Ruth Richardson chose to back out of the “circus” of a debate. She may have orchestrated that sideshow, but she was right when she said Willis was walking the wrong way.