Budget 2025: Willis delivers more with less but fiscal risks remain
Thursday, 22 May 2025
ANALYSIS: Budget 2025 is a mixture of investment boosts, nipping and tucking and with an eye towards growth.
It is a modest affair, that has redirected money towards coalition Government priorities - especially defence, health, education and law and order - and has reprioritised more spending, while eschewing any major cuts.
Despite the rhetorically tough talk in the lead-up to the Budget, it is a document in which the debt and deficit track have not been materially improved - but remain broadly in line with where they were six months ago.
The political achievement has been to fit the new spending - especially around defence, health and the new “investment boost” 20% tax rebate on new assets in addition to conventional depreciation - into roughly the track that was revealed last year.
It is undoubtedly a Budget that has done more with the fiscal envelope allowed. Here is where the ‘fiscal discipline’ the Government consistently talks about can be seen. But it has yet to tackle the long-run debt and deficit challenges - and is relying on growth to right the ship, when interest rates come further down the growth resumes. A slow and steady sort of approach - assuming it materialises to plan.
It is a Budget that has tried to fit it all in and make some microeconomic changes around the margins that could improve growth. But fundamentally it leaves Budget repair for an expected sunnier next couple of years when the economy is generating more growth and tax receipts.
The extent to which this is successful will probably only be known at Budget 2026.
The result is that, on the forecasts, the Government won’t be running a traditional OBEGAL surplus in the next five years. OBEGAL is the operating balance before gains and losses - whether what the Government has spent is more or less than what it has taken in in taxes. It will also continue running underlying cash deficits. On the Government’s new preferred measure, OBEGALx - which strips ACC out of calculations - it means a wafer thin surplus by 2028/2029. On the forecasts, in the short run deficits widen, before closing up.
Overall, the economy still looks a bit sickly, tax revenue is expected to be down by $13.3 billion over the forecast period, mostly as a result of lower business profits, while Government decisions (such as the new changes to depreciation rules) account for $4.8b of the reduced revenue.
For 2025 both core Crown revenue and tax revenue are more or less static while expenses have gone up by about $3b. Finance costs (interest on government debt) is expected to be $9.5b this year.
Overall total Crown spending is forecast at $184b in 2025, while revenue is $169b. Net core Crown debt is going to peak at over $200b and at 46% of gross domestic product in 2028 - slightly lower than forecast six months ago.
Real GDP growth is expected to rise to 2.8% in 2025/26 and to 3% the following year.
Wages growth is also forecast to continue to continue.
This Budget sits firmly in the backdrop to lower overall economic growth, reflecting an economy coming out of recession and still struggling with high costs baked in by the inflation of the past few years. Overlaid on this, the Trump tariffs and the continuing uncertainty of the global trading regime and US posture on China and the war in Ukraine have had a dampening effect on global growth.
And reading the documents, there is no doubt that this has been achieved - in significant degree - by the poorly politically managed pay equity changes announced a bit over two weeks ago.
Totalling some $11b over the four-year forecast period, or an average of $2.8b per year, these are the changes that have kept the overall Budget numbers more or less in check. The total clawback is about $12.8b.
When Associate Finance Minister David Seymour said that his minister Brooke van Velden had “saved the Budget”, as a statement of fact, it is a difficult one to argue with.
The politics of that particular move have a long way yet to play, but as a fiscal measure it has delivered big for Finance Minister Nicola Willis, who is staunchly defending the changes as preventing massive cost blowouts that were out of whack with sex discrimination.
Aside from the politics hanging around that, there are some real long-term bright spots in this Budget.
The first is the Investment Boost, which allows companies investing in new assets to get 20% of the cost back against their tax bill. This will cost nearly $1.7b a year. It isn’t huge, but it is a pro-growth move and will be very useful for potentially a lot of businesses.
The most significant move in a long-term structural sense is the change to KiwiSaver. While these have little effect on the current Budget, they are an important long-term structural change to the economy.
It includes an overdue and important lift to KiwiSaver savings rates which will see most New Zealanders contributing 8% of their income into a retirement savings fund by 2028 by lifting both the employee and employer contributions to 4%. It will be extended to 16 and 17-year-olds. At the same time, the Government is cutting the government contribution rate in half to about $260 - and to zero for those earning over $180,000 per year. Those changes will take effect in the next financial year.
Reducing the subsidy - still forecast to cost $1.2b per year over the forecast period - makes good policy sense. The subsidy has little incentive effect on behaviour and in the long run, lifting contributions is the far better move.
The only mild quibble here is that Willis could have been bolder and outlined a boost to, say, 6% employer and employee contributions, but over a decade or so, to get retirement savings rates up to a level comparable to the Australian compulsory super system.
While definitely a big improvement, its modesty means that KiwiSaver still remains a little bit neither fish nor fowl. Really ramping up the rate would have given more options for Government down the line around the NZ Super system. Willis, for her part, said that bedding in the more modest changes was the first priority. Maybe one for the next couple of years.
It will mean a more developed funds management industry and, no doubt, investment into New Zealand firms over time.
Extra money in education is tilted towards early interventions for kids who are struggling - to the tune of nearly $700 million per year. There’s some money for gas exploration, law and order and another decent $1.7b increase to health. There are also little things that’ll help every day life - such as 12-month repeats for prescriptions and extra rates rebates for more SuperGold card holders.
Overall, looking through the papers there are little nips and tucks all over the place which will take some days and weeks to fully absorb. Things such as $163m saved by tightening the benefit to teenage parents, or stopping indexing of student loan repayment thresholds. RNZ gets its budget clipped by 7%, with the cash given to NZ on Air.
It is a Budget that has been designed to contain costs wherever possible in order to up spending in the core areas of health, education, law and order and defence.
Fiscally, this is a status quo Budget with the hope for economic upturn over the coming years as the economy fully recovers from Covid-19, inflation and as things (hopefully) settle down on the tariff front. It also reflects the Bill English view that slicing big bits off Government is counterproductive and often quickly reversed in an MMP environment - better to make the Government bit of the economy more efficient. The degree to which this Budget does that won’t be known for months or even years.
While the Trump tariffs looks a lot better than they potentially did six weeks ago, they are still the highest in a hundred years. That means low global growth, which will flow through to New Zealand - it just depends on how.
It is in this context that the defence investment - flagged before the Budget - remains vitally important. There are two big constituencies for getting New Zealand’s defence spending up to 2% over the coming decade: Australia and the United States. The extent to which they think this is real money on a credible path will remains crucial as China becomes more overtly adventurous in the region and the US potentially pulls back into more of an America-First posture that cosies up to strongmen and eschews traditional friends and alliances.
Overall, there are significant global risks to New Zealand’s prosperity.
Most of this year’s Budget won’t be able to be assessed until next year. It is easy to lean on forecasts and keep pushing surpluses out a year. This is what happened under the previous Government after the Covid shocks.
The litmus test for this Government will be that that does not happen.