Budget 2026: Debt, deficits and dwindling room to move
Monday, 25 May 2026
ANALYSIS: When the Budget is handed down on Thursday, May 28, it will confirm a reality that has been clear for some time: the road back to surplus remains fiscally imperative, but politically difficult to achieve.
When Finance Minister Nicola Willis delivers the Budget, current projections suggest core Crown expenses will sit at $153 billion against revenue of roughly $144b, leaving an OBEGALx (Operating Balance before Gains and Losses excluding ACC) deficit of more than $13b.
Those figures will be updated when Treasury releases its forecasts alongside the Budget, but they are expected to remain broadly similar.
More concerning than the OBEGALx deficit itself — which also incorporates the performance of Crown entities and state-owned companies — is the fact the Government is expected to remain in cash deficit throughout the forecast period. In 2027, that deficit is projected to hit $23 billion before narrowing to $6.5 billion by 2030.
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In plain language, the Government is borrowing to cover day-to-day costs, not just to invest in productivity-enhancing assets.
Despite the Government’s rhetoric about restraining spending, the new operating allowance — the annual envelope for new spending — is still expected to rise by about $2.1b. That is less than was signalled in the Budget Policy Statement in December, but it still represents a nominal increase in expenditure.
The war in Iran is also expected to weigh on economic activity, although the scale and duration of that impact will depend heavily on developments in the Strait of Hormuz. Most analysts expect elevated fuel prices to persist at least through the end of the year.
At the same time, debt is forecast to rise to 46% of gross domestic product in 2027 and remain around that level across the forecast period, peaking at roughly $253b by 2030.
The issue is not simply the size of the debt burden, but what the borrowing is funding. Debt used to build roads, schools, hospitals and other productivity-enhancing infrastructure is one thing. Borrowing to fund ongoing operating costs is another.
The politics of the Budget have been difficult for the Coalition from the outset, in part because the three governing parties have markedly different fiscal instincts. ACT believes the Government remains too large and that the Budget should be balanced much sooner. Indeed, ACT leader David Seymour told The Post he did not bother offering many savings suggestions this year after most were ignored last year.
At the same time, the Government has made deliberate political choices that have increased both debt and deficits. Its first-year tax relief package adjusted tax brackets and included spending decisions that increased, rather than reduced, overall expenditure.
Meanwhile, while avoiding swingeing cuts, the Government has tried to — in Willis’ words — “bend the debt curve down”.
That has left National in an awkward position: the fiscal conservatives on the Government’s right are unhappy with its management of the books, while voters appear largely unmoved by the restraint already imposed. Strategically, some within the broader centre-right now wonder whether the Government has absorbed substantial political pain for relatively modest fiscal gain.
From Willis and Winston Peters’ point of view, the Coalition was not elected on a mandate for rapid fiscal consolidation. From ACT’s perspective, it was.
For Willis in particular, the democratic legitimacy of both the tax relief package and the broader fiscal strategy has mattered. The argument inside Government has been that it would have been politically — and democratically — worse to abandon campaign promises in favour of cuts voters had not endorsed.
The de facto election campaign this Budget will begin may ultimately determine whether the next Government has a mandate for more radical fiscal surgery.
While Treasury’s Half Year Economic and Fiscal Update forecast annual GDP growth rebounding to 3%, it now appears increasingly likely that persistently high fuel and import costs linked to the conflict in Iran will continue to drag on growth.
At the same time, the Government faces substantial spending pressures.
Although cuts and mergers across the public service were announced this week, spending continues to rise elsewhere. Superannuation cost a little over $23b in 2025 and is forecast to exceed $30b by 2030. Wider welfare spending is expected to increase by another $3b over the same period. Health expenditure is forecast to rise from around $30b to $34.5b.
Other major areas of spending — including education, law and order, and core government services — are expected to remain broadly flat or decline slightly after substantial injections of funding in 2024 and 2025.
Meanwhile, finance costs — effectively interest payments on government debt — are forecast to rise from $8.8b in 2025 to more than $13b by 2030.
In practice, that means most spending growth over the next five years will be concentrated in superannuation, health, welfare and debt servicing — all areas driven either by demographic pressure or existing obligations.
Everything else is being tightly constrained.
It is not expected that Thursday’s Budget will significantly alter that overall strategy.
The Budget is likely to reveal a Government with very little room for new spending, while unavoidable cost pressures continue to build in areas already locked in structurally.
The biggest uncertainty will be the extent to which Treasury revises down economic growth — and therefore tax revenue — because of the war in Iran. Even relatively small changes to growth assumptions can have major implications for the Crown accounts over time.
That, perhaps more than anything announced on Budget day itself, will shape the fiscal and political debate that follows.
There is little room for either side of politics to promise substantially more spending without materially increasing debt, deficits or taxes.
Budgets are always about choices. This one will underline how constrained those choices have become.