<[link removed]>Dear Friend,

I’m just back from the 2025 Budget lock-up, where the team have been pouring through the documents under embargo released by the Government (i.e. the new spending announcements and political ’spin’) and the Treasury (where the real juice is - the state of the economy, the Government books, and the forecasts).

TL:DR: Budget 2025 could easily have been delivered by Labour’s Grant Robertson

The “Growth Budget" is a fudge. It was supposed to do three things: tackle overspending, get on top of the deficit, and ‘go for growth’. It's failed all three.

Spending continues to explode 💥

In opposition, Nicola Willis described Labour’s Grant Robertson as having an “addiction to spending”. But Budget 2025 continues to increase Core Crown spending compared to the current year both in nominal terms and as a percentage of the economy!

Forecast debt trajectory worse: and the structural deficit has actually increased! 🚨

Nicola Willis promised to balance the books. The OBEGAL (the traditional measure of whether a government is in surplus) never gets into surplus according to Treasury forecasts! Nicola Willis has had to make up a new measure to exclude the ACC deficit to create an illusion of a laughably small $214m surplus in 2029 (she calls it “OBEGALx”).

And the underlying ‘structural deficit’ (which removes the one-offs and swings in the economic cycle) has actually increased this year, according to Treasury’s analysis.

Debt is already hitting hard. This year, Treasury forecasts interest costs this year alone amount to $9.5 billion (that’s $467 for every Kiwi household). To put in perspective, that interest amount is the same money needed to fund the entire Police, Ministry of Justice, Customs Service, Corrections, and the defence forces combined!

If this is what fiscal responsibility looks like, God help us.

‘Going for Growth’ to deliver just 1.0 percent extra GDP over 20 years! 🤦‍♂️

The Government has made a huge deal about this being a “Growth Budget”. But the sole growth measure (they’ve labelled it “Investment Boost”) is an accelerated depreciation regime that is laughably small: Nicola Willis says the headline ‘go for growth' policy will add 1.0 percent of additional GDP over 20 years.

Friend - that is not a typo. Going for Growth amounts to 1.0 percent over 20 years. Not one percent per year. One percent in total.It’s literally in the Finance Minister’s press release.  <[link removed]>

What can I say other than, if you were hoping for something bold <[link removed]>, you’ll be disappointed.

Summary of initiatives:

As always, there’s quite a bit more for health, education, and a little for law and order/justice. The main surprise is changes to Kiwisaver (increasing the default rates and reducing the taxpayer contribution).

There’s also a great little initiative to stop 18 and 19 year olds getting the dole unless they actually need it! (Basically, it won’t be available if they have family support - so they can’t sit at home on the couch while being subsidised by the taxpayer). But it doesn’t come into effect until 2027!

There’s also an initiative we quite like: doctors’ prescriptions will be extended to up to one year, rather than the current three months. That will save on doctors visits, and will help those on repeat medications.

Education

- An investment of $646 million to support children with additional learning needs, including early intervention support.
- Extra maths help for students who need it, with $100 million of new funding for early intervention and support.
- Increases to schools’ operational grants, Early Childhood Education and tertiary education subsidies.
- A $140 million package for services to lift school attendance.

Law and order

- Support for frontline policing, with $480 million of additional funding.
- $472 million to manage prison growth from stronger sentencing laws.
- $246 million to reduce court delays and improve access to justice for victims across courts, tribunals and the legal aid system.
- $14 million for Māori Wardens, Pasifika Wardens, and the Māori Women’s Welfare League.
- Addressing serious youth offending, with upgraded Youth Justice facilities, running Military Style Academies, and implementation of the new Young Serious Offenders regime.
- $35 million for Customs to combat drug smuggling and organised crime with up to 60 more frontline staff and upgraded technology.

Social services

- Funding of $774 million to respond to the Royal Commission of Inquiry into Abuse in Care, strengthening the care system and providing redress for survivors.
- $275 million for social investment initiatives to improve the lives of vulnerable New Zealanders, including the creation of a Social Investment Fund.
- $760 million to support the provision of Disability Support Services.
- Creating a fairer and more efficient welfare system, including through investment in new technology.

KiwiSaver

- The default rate of employee and employer contributions for KiwiSaver will rise from 3 per cent of salary and wages to 4 per cent in two steps. From 1 April 2026, the rate will go to 3.5 per cent and, from 1 April 2028, it will go to 4 per cent. The increases are being phased in over a three-year period to help workers and employers plan ahead.
- Employees will be able to temporarily opt down to the current 3 per cent rate, if they choose, and still be matched at that rate by their employer. They may wish to do that, for example, if they feel they are unable for a time to afford an increased contribution.
- The Government will extend the government contribution to 16 and 17-year-olds from 1 July 2025, and extend employer matching to 16- and 17-year-olds from 1 April 2026.
- To make the scheme more sustainable, the annual government contribution will be halved to 25 cents for each dollar a member contributes each year, up to a maximum of $260.72 from 1 July 2025.
- Members with an income of more than $180,000 will no longer receive the government contribution from 1 July 2025.
- These changes will not impact the current year’s government contribution, which will be paid out in July/August this year.
- Putting all these changes together, KiwiSaver balances of employees contributing at the new default rate will grow faster than they do at the current default rate, providing a larger balance at age 65 or to buy a first home.

Cost of living support

- Lower family medical costs, and better access to long-term medications, by increasing the maximum prescription length from three months to twelve months.
- Lifting the income threshold to enable up to 66,000 additional lower-income households with a SuperGold cardholder to get a rates rebate.
- Better targeting Working for Families to low- and middle-income families with children, by raising the family income threshold and increasing the abatement rate, so that 142,000 families receive an average of $14 more per fortnight. The cost of this additional support will be met by income testing the first year of the Best Start tax credit, in the same way the second and third years are currently tested.
- Lower costs for around 115,000 teachers by covering their registration and practising certificate fees through to 2028, saving them up to $550.

Defence and foreign affairs

- $660 million to improve core Defence Force capabilities across air, sea, land and cyberspace.
- Funding to support troop deployments, including to train Ukrainian soldiers and provide other support.
- Funding for new maritime helicopters to replace the current, ageing fleet.
- Funding for two aircraft to replace the ageing 757s operated by the Royal New Zealand Air Force
- $368 million to deliver overseas development assistance, focused on the Pacific.
- $84 million to lift New Zealand’s engagement in Asia, address trade barriers and support the Government’s goal to double exports.

Capital investment

- Over $1 billion for hospitals and other health facilities.
- Over $700 million for new schools, school expansions and additional classrooms.
- $2.7 billion for the New Zealand Defence Force to boost capability.
- Funding to deliver 240 new high security beds at Christchurch Men’s Prison delivered through a Public Private Partnership.
- A new housing fund to support the delivery of additional social houses and affordable rentals.
- Over $460 million to upgrade New Zealand’s rail network to keep people and freight moving.

The Economist’s take

This year, we went into the Budget with our friend, former Reserve Bank and Treasury Economist, Michael Reddell. Writing for Economic News, he provided this initial analysis:

This year’s Budget represents another lost opportunity, and probably the last one before next year’s election when there might have been a chance for some serious fiscal consolidation. The government should have been focused on securing progress back towards a balanced budget. Instead, the focus seems to have been on doing just as much spending as they could get away with without markedly further worsening our decade of government deficits.

OBEGAL - the traditional measure of the operating deficit, and the one preferred by The Treasury - is a bit further away from balance by the end of the forecast period (28/29) than it was the last time we saw numbers in the HYEFU. There will be at least a decade of operating deficits, and even the reduction in the projected deficits over the next few years relies on little more than “lines on a graph” – statements about how small future operating allowances will be - that are quite at odds with this government’s record on overall total spending. Core Crown spending as a share of GDP is projected to be 32.9 per cent of GDP in 25/26, up from 32.7 per cent in 24/25 (and compared with the 31.8 per cent in the last full year Grant Robertson was responsible for). The government has proved quite effective in finding savings in places, but all and more of those savings have been used to fund other initiatives. Neither total spending nor deficits (as a share of GDP) are coming down.

Fiscal deficits fluctuate with the state of the economic cycle, and one-offs can muddy the waters too. However, Treasury produces regular estimates of what economists call the structural deficit - the bit that won’t go away by itself. For 25/26, Treasury estimates that this structural deficit will be around 2.6 per cent of GDP, worse than the deficit of 1.9 per cent in 24/25 (and also worse than the last full year Grant Robertson was responsible for). There is no evidence at all that deficits are being closed, and the ageing population pressures get closer by the year.

Some things aren’t under the government’s direct control. The BEFU documents today highlight the extent to which Treasury has revised down again forecasts of the ratio of tax to GDP (which reflects very poorly on Treasury who rashly assumed that far too much of the temporary Covid boost would prove to be permanent). But, on the other hand, the forecasts published today also assume a materially high terms of trade (export prices relative to import prices), which provides a windfall lift in tax revenue. Forecast fluctuations will happen, but the overall stance of fiscal policy is simply a series of government choices. Unfortunate ones on this occasion.

A few weeks ago the IMF produced its latest set of fiscal forecasts. I highlighted then that on their numbers New Zealand had one the very largest structural fiscal deficits of any advanced economy (and that we were worse on that ranking than we’d been just 18 months ago when the IMF did the numbers just before our election). The IMF methodology will be a bit different from Treasury’s but there is nothing in this Budget suggesting New Zealand’s relative position will have improved. We used to have some of the best fiscal numbers anywhere in the advanced world, but as things have been going – under both governments - in the last few years we are on the sort of path that will, before long, turn us into a fairly highly indebted advanced economy, one unusually vulnerable to things like expensive natural disasters.



Last two cents

This is my eleventh Budget lock-up. My impression from the Q&A with the Ministers is that the Government are proud that they’ve managed to basically keep stuff the same while squeezing a little more from the whole government. They have shifted money into higher priority initiatives (a good thing!), but it tends to be within the existing classes of spending. That means none of the sacred cows or unaffordable elephants in the room have been touched.

My greatest surprise is the lack of growth initiatives. Going for growth means macroeconomic reform to get the Government out of the way of business. A 20 percent accelerated depreciation regime is good, but it’s surely the least significant Budget headline grabber / key initiative, I can recall.

And the fundamentals stay the same: we’re spending too much, as laid out by Treasury. The underlying ‘structural deficit’ is larger than last year, not smaller. We’re going to need a bigger debt clock!

Such a disappointment after so much talk of ‘going for growth’ and ‘getting the books back into shape’.


Jordan Williams
Executive Director
New Zealand Taxpayers’ Union

Ps. here are the media releases issued by the team.

Budget 2025 Media Releases:

The Fudge Formerly Known as the Growth Budget <[link removed]>
<[link removed]>

Local Councils Get a Bailout in Budget 2025 <[link removed]>
<[link removed]>

Parents, not the nanny state, should be responsible for school leavers <[link removed]>
<[link removed]>

‘We’re going to need a bigger debt clock’ – no plan for tackling runaway debt <[link removed]>
<[link removed]>

Nicola Willis' fudge-it 'growth' budget <[link removed]>

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