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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.
What can I
say other than, if you were hoping for something
bold, 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’.
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Jordan
Williams
Executive Director
New Zealand
Taxpayers’ Union
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Ps. here
are the media releases issued by the team.
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