The key take-outs from Nicola Willis’ second budget

Thursday, 22 May 2025

Vernon Small is a journalist and former Labour government adviser.

OPINION: Finance Minister Nicola Willis is adamant that her 2025 Budget is not a recipe for austerity, but the sort of Budget you produce to avoid austerity.

But there is no doubt it is austere.

It is smaller overall than the Budget outlined in the December half-year update, and for a document spruiked as a growth Budget the best you could say is that the focus is on the long term.

In fact Treasury itself, in a panel on the impacts of the Budget on the economic forecasts, notes that “real activity over the forecast period as a whole is similar to that which would have occurred should the Budget 2025 allowance been maintained at the half year update 2024 level” of $2.4 billion which was later cut to $1.3b.

But the growth dial has barely moved.

Interestingly the Government is, for now, maintaining future operating allowances at $2.4b.

A careful hedge perhaps against needing some extra political-vote winning spending in the run up to the 2026 election?

The number we were all hanging out for - the amount saved by cutting the money budgeted for future pay equity settlements - is $2.7b a year on average. But the Government is still keeping its powder dry on how much will be available for future equity settlements.

Overall, some of the Budget’s most significant changes support the impression that benefits are loaded up in favour of business in the hope that the benefits will spread more widely. That applies to the $200 million fund NZ First Minister Shane Jones has wrangled for co-investments in gas exploration (which will further scandalise the environment lobby and those concerned about climate change) and the Investment Boost that is the centrepiece of the Government’s new initiatives.

It will allow businesses to deduct 20% of the cost of a new asset from taxable income in the first year, on top of depreciation.

That amounts to a tax break of $1.7b a year - and so the same reduction in government revenue.

Aware of the politics of another business tax cut, the Government is selling its long-term benefits to the economy and workers. It is expected to generate 1% on GDP and 1.5% on wages over the next 20 years.- with half in the next five years. Some things that are really cuts have been dressed up to look positive.

Any increase in KiwiSaver balances, for instance, will be generated by you saving more or your employers paying more.

The KiwiSaver default rises from 3% to 3.5 and then to 4% by April 2028.

Employees can opt down to 3%.

There is a boost for 16 and 17 year olds that will qualify for the Government contribution but the contribution itself is halved to just over $260 a year and if you earn over $180,000, you won’t get it at all.

Those KiwiSaver changes save the Government $2.5b over four years.

The Jobseeker unemployment benefit will be cut for some 18 and 19 year olds - with a parental assistance test at a level not yet set - unless they are married! Again that was dressed up, this time as parents “stepping up”.

The Working for Families threshold increases slightly but again it is paid for elsewhere - by means testing the Best Start payment which will cut off at household income of $97,000 a year instead of being universal for the first year.

The overall impact of the Budget on child poverty is slightly positive or slightly negative depending on the measure you use, but none of the differences are statistically significant.

What will be widely welcomed is a change that allows prescriptions to be issued for 12 months instead of three months. It will lower costs to patients and free up some health professionals’ time.

Turning to the big picture, deficits are still forecast to be running at $3b in 2029, or a narrow $214m surplus if you accept the lipstick-on-a-deficit ObegalX measure.

At that point the structural deficit will be eliminated, which is something to celebrate.

Growth is tipped to rebound from a 0.8% contraction this year to around 3% in the next and subsequent years. That is weaker in the short term and slightly higher later than was forecast in the half-year update in December.

Wages are forecast to grow faster then inflation and unemployment peak at 5.4% this year and then start dropping to 5% in election year. And then gradually decline after that.

Net nominal core crown debt to increase from $175.5b in 2023/4 to $238.5b by 2028/29.

Not so much a growth Budget as one that holds the line, for now, while hoping more tax breaks for businesses will bring greater growth long term that will trickle down to the broader electorate.