Budget 2025’s tricky balance of surplus and growth challenges – Hayden Wilson

The outline for Thursday’s Budget is becoming clear.

Compared to previous Budgets, it has been exceptionally difficult to write because of two key factors: a commitment to return to a Budget surplus at a time of weak economic growth; and the unpredictability caused by global trade wars on economic forecasting.

Despite those difficulties, or perhaps because of them, Budget 2025 appears likely to be a simpler document, with fewer of the inevitable “announceables” than usual, because there is not a lot to announce when the purse-strings are pulled tight and the focus on new initiatives will be tight.

It is already a Budget of winners and losers. The women covered by pay equity claims learnt this with the reset on that policy that has delivered “billions of dollars” in savings on spending that had been booked in future Budgets.

We expect the Budget to prioritise new operational spending in just a few select areas: health, education, justice, and defence being particular beneficiaries. This will be achieved within a far tighter new spending allowance of just $1.3 billion in the fiscal year ahead, a cut from the $2.4 billion announced in last year’s Budget.

It will expand the capital expenditure budget a little more than was previously announced, allowing the Government to give an extra nudge to the economic recovery now emerging without this extra spend showing up in the Budget deficit, which ignores capital commitments.

The new, pre-announced $190 million Social Investment Fund is a careful experiment in new ways of delivering social services that the Finance Minister, Nicola Willis, is deeply committed to.

Anyone hoping for announcements that might kick-start the stalled pipeline of infrastructure projects is likely to be disappointed. While it is not the job of a Budget to tick every box, the perception of a disconnect between the Government’s determination to fund major new public works and to actually start doing so lingers.

This is disappointing, but it appears to be a fact of life.

However, there may be some additional announcements on bespoke property replacements such as schools, hospitals, courthouse buildings, and defence housing.

What the Budget will particularly prioritise is fiscal prudence, meaning a few politically impactful new spending initiatives, while pushing the boat out carefully into more user-pays funding and, we believe, a possible move to means-test the annual government KiwiSaver funding boost.

Surprises may await on the government spending front. On top of the pay equity savings, Willis has also claimed $337 million a year in savings from a 75% reduction in the use of motels for emergency housing in just one year: an early win for the social investment approach.

Willis also spoke for the first time last week about the fact that, from 2028, governments will start drawing down from the New Zealand Superannuation Fund to help fund the universal pension.

These factors, and perhaps others, should materially make the improvement necessary in the Crown accounts to allow the Government to meet its totemic promise of a forecast fiscal surplus (Obegalx being the technical term) in the 2029 fiscal year.

But those billions may also allow a little more unexpected largesse in areas that meet coalition promises and scratch political itches. Recently announced $100 million-plus funding for maths education and a new school truancy service appear to fall into that category. There may be more.

Will the Government have a little more room for political creativity than has been suggested by the pre-Budget rhetoric, which has been dominated by the language of restraint?

Billed as “the Growth Budget,” it needs also to deliver something to lift the weak, albeit improving, spirits in the business community.

Already announced is a $100m capital injection to the government-backed Elevate venture capital fund.

That is welcome and builds on a model that is succeeding in creating new, high-value New Zealand technology companies.

But the Finance Minister has said Treasury increased its growth forecasts on the basis of one particular Budget decision, suggesting something bigger is in the works.

Comments earlier in the year about the potential, perhaps just desire, to cut the corporate tax rate, have not been repeated.

More likely is a move to significantly change accelerated depreciation on a range of capital inputs.

This could be justified not only the grounds of incentivising productive investment, but also to encourage the reversal of New Zealand’s very low capital intensity, a major part of the country’s chronic productivity problem.

The three key considerations for any Budget are whether it will drive economic growth and investment, and will it make New Zealanders’ lives better?

So far this term, the Government has given three messages: New Zealand is open for business, particularly infrastructure, the Government is focused on growth, and the Government is committed to lowering the cost of living.

The Budget will be judged on whether it does enough to move the needle in those areas.