One policy proposal gaining traction is full expensing of
capital expenditure.
This is a measure that could address New Zealand’s capital
shallowness problem, while providing businesses with greater
flexibility to invest in productive assets – including modern energy
solutions.
“Capital shallowness” is a term used by economists to
describe insufficient investment in machinery, equipment, and
technology (capital equipment) compared with other developed nations.
This deficiency directly impacts productivity, which remains the key
long-term driver of wages and living standards.
A recent New Zealand Taxpayers’ Union report neatly pins the
issue: we rely too heavily on “cheap labour” when we should be
investing in what makes labour more productive.
This mismatch keeps our wages lagging behind the countries
NZ would usually be compared with, creating a cycle of economic
underperformance.
Beyond Empty Rhetoric: Cornerstone Prerequisites for
Growth
There’s a gap between aspiration and implementation, and
this has become a defining feature of New Zealand’s economic policy
landscape.
For nearly two decades, politicians have spoken grandly
about New Zealand becoming a “Pacific tiger” of a mould similar to the
economies of Ireland or Singapore.
Frustratingly, the rhetoric remains just that … words
without corresponding actions. Much like building a house without
foundations, one cannot hoist an economy into a growth phase without
firmly establishing the cornerstone prerequisites.
Successive Governments have embraced the language of
transformation, yet have consistently failed to implement the
fundamental reforms necessary to drive sustained growth.
Flexible energy solutions would be a strong starting
point.
New Zealand’s comparatively high energy costs remain a
significant contributor to business overhead and a barrier to
manufacturing competitiveness. Reducing these costs through
diversified generation, improved transmission infrastructure, and more
competitive market structures would provide an immediate boost to
productivity across sectors.
Full Expensing Presents a Targeted Solution
While the Minister of Finance has hinted at reducing New
Zealand’s corporate tax rate as a way through (currently 28% – the
OECD average is 23.85%), full expensing provides a more targeted
approach to stimulating investment and growth.
Full expensing allows businesses to immediately deduct the
full cost of capital investments from their taxable income in the year
the purchase is made, rather than spreading deductions over years
through depreciation schedules.
This significantly improves cash flow and makes new
investments more financially viable.
Research from international implementations suggests full
expensing generates more investment than an equivalent reduction in
corporate tax rates.
The Taxpayers Union’s comparative analysis found that full
expensing provided more than twice the GDP growth compared with
corporate rate cuts of equivalent revenue cost.
Why Focus on Energy Flexibility and Innovation?
I mentioned energy flexibility earlier in the piece. In many
countries, including New Zealand, energy production is not keeping
pace with growing demand – and to top up our energy from other markets
typically means consuming non-renewable energy, which is essentially
kicking the proverbial can down the road while sending our money
offshore.
For New Zealand’s energy sector, full-expensing small-scale
generation could prove transformative. Energy producers which face the
dual challenges of meeting growing demand while transitioning to more
sustainable models could immediately write off investments in
renewable infrastructure, grid modernisation, and emerging
technologies.
The “big is best” approach appears alive and well, with the
minister favouring reliable and consistent energy sources. However, he
can rest assured that the sun always rises – distributed solar
generation, combined with storage, presents a resilient alternative to
centralised models that have dominated New Zealand’s energy thinking
since the time of Muldoon.
Full expensing would level the playing field, allowing both
large-scale and distributed solutions to compete on their merits
rather than their accounting treatment.
This approach would accelerate the deployment of flexible
energy solutions (from grid-scale battery storage to distributed
energy resources) that New Zealand needs to enhance energy security
while reducing emissions. Smaller businesses could similarly benefit
by investing in energy efficiency measures, on-site generation, and
electrified transport fleets.
With full expensing, the private sector could lead much of
this transition, reducing the need for direct government subsidies
while still advancing national climate and energy
objectives.
Fiscal Considerations of Full Expensing
Critics might question the fiscal impact of full expensing,
particularly given New Zealand’s existing deficit challenges. However,
the fiscal impact is largely a matter of timing rather than permanent
cost.
Full expensing shifts existing tax deductions forward into
the investment year rather than spreading them over multiple years.
While this creates a short-term revenue reduction, it doesn’t increase
the overall tax benefits available to firms.
Based on British experience, where official projections
initially overestimated costs, the first-year fiscal impact for New
Zealand would likely be around $1.5 billion. That’s less than half the
cost of the 2024 Budget’s personal income tax relief. Britain’s
Institute for Fiscal Studies found that most upfront revenue loss is
later recouped, with the long-term fiscal cost being significantly
lower than initial projections.
Looking Forward to Growth
As the 2025 Budget takes shape, full expensing deserves
serious consideration as a centrepiece of New Zealand’s “Going for
Growth” agenda.
Unlike broad tax cuts or increased government spending, it
specifically targets the investments most likely to enhance
productivity, energy flexibility, and long-term economic growth. For a
nation facing prolonged economic stagnation, capital shallowness, and
energy transition challenges, full expensing represents not just a tax
policy adjustment but a strategic realignment toward investment-led
growth.
It may well be the most effective lever available to move
beyond rhetoric, address fundamental economic prerequisites, and build
the more productive, energy-resilient economy that New Zealand has
long aspired to become.
But we shall see – like everyone else, I will be eagerly
awaiting the Budget announcement to confirm the direction our
coalition Government is taking in 2025.
