Inside Economics: Everything you need to know about today’s Budget

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Happy Budget Day, everyone.

Today‘s the big day. We’ll find out if we’ve been naughty or nice. Will it be an austerity Budget? Or not austere enough.

Can the Government invest in economic growth at the same time as putting the books back in order?

There’s no shortage of speculation and commentary about how Finance Minister Nicola Willis plans to divide the revenue pie.

But first, let’s take a step back and refresh some of the basics.

What even is a Budget?

At its most basic, the Budget is just the document that outlines the Government’s spending plans each year.

It lays out how much the Government expects to take in through tax revenue and investment, how much it expects to spend and how much it intends to borrow ... and what for.

Budgets are a political battleground because they reveal the choices the Government is making about how much to tax, how much to borrow, how much to spend and where it will be spent.

The accounts can show a surplus where the Crown has taken in more revenue than it spent, or a deficit where it has spent more than it earned.

Spoiler alert: there won‘t be a surplus this year. In fact, we’re not expecting to see a Government surplus until at least 2029.

Four-year horizon

The Budget offers an outlook for the next year, but also spending over four years, something that can often make the big multibillion-dollar announcements look more generous at first glance.

Most of the big announcements we’ve seen so far have been for spending across four years.

Which is fine, but let’s be honest, it does make it all look more generous when you just see the headline.

Here’s the list of major announcements so far, courtesy of a stock take by NZ Herald senior political reporter Derek Cheng (you can read his full Budget preview here)

• $12 billion over four years in planned commitments for Defence, with $9b in new funding – including $2b for five new helicopters;
• $140 million over four years to improve student attendance;
• $100m over four years to address student underachievement in maths;
• $774m for redress for those abused in state care;
• $100m for a venture capital fund;
• $275m over four years for Social Investment 2.0;
• $577m in film-making subsidies;
• $604m over four years for cancer medicines, put together in a hurry and announced in the aftermath of last year’s Budget.

Is it really new spending?

Budget announcements can also sometimes include existing spending as well as new spending.

That’s why journalists, economists and Opposition politicians are so enthusiastic about digging into the numbers to decode the exact amount of new spending that has been allocated.

Government ministries will put out a barrage of press releases at 2pm.

They will all have headlines trumpeting millions of spending but how much of it is really new? It’s not always clear.

Mostly the big pre-Budget announcements (ie those listed above) are new spending, but even that can be a little misleading.

Take the $100 million allocated for the venture capital (VC) fund Elevate.

It is technically new funding because the old funding had run out, and neither the last Labour Government nor the coalition had allocated any more.

As the Herald tech editor Chris Keall reported: “Elevate was set up by the previous Government with $300m allocated in 2020 (the final dollop of funding not arriving until 2023).

“The aim was to pep up New Zealand‘s sluggish venture capital scene by contributing to funds raised by local VC firms – and those attracted from across the Tasman – so they had more funds to invest in local start-ups.”

Keall points out that the Startup Advisory Council, formed by the last Government and Blackbird Ventures (Australasia’s largest VC fund) had argued that Elevate should be refreshed to the tune of $500m.

Ultimately, though, Elevate has been topped up with a fifth of that amount.

How much debt?

Outside of the pandemic years, the biggest areas for spending are typically social welfare (including New Zealand Super), health and education.

The Covid-19 response shifted the balance, with the Government borrowing billions more to fund policies like the wage subsidy and other targeted support initiatives.

As a result the Government now faces more pressure on spending because its debt levels are much higher.

In the December 2019 update – just a month before the outbreak – NZ Debt Management outlined plans to raise a total of $42b over the ensuing five years, starting with a meagre $10b bond programme for fiscal 2020.

Since Covid, net public debt has jumped by $120b.

Economists expect the Budget to represent a “high water mark” for government debt, Jamie Gray has reported.

Finance Minister Grant Robertson's Budget 2019 was predicted to put people's wellbeing and the environment at the heart of its policies. Photo /Mark Mitchell

The Treasury’s December fiscal update – which revealed a $20b upward revision of Budget 2024 borrowing projections – came as a shock to the market at the time.

Back then, the department forecast borrowing of $40b for the current year, $40b for 2025/26, $38b for 2026/27, $28b for 2027/28 and $22b for 2028/29.

Economists do not expect to see a big variation from those already large numbers, but an increase nevertheless of a few billion over the forecast period.

Darren Gibbs, senior economist at Westpac, expects $4b to be added to the programme over the duration.

ANZ economists are forecasting an additional $2 billion.

Two kinds of spending

The Budget typically talks about two different types of spending: “Operational” and “Capital”.

Operational spending refers to ongoing costs for things like public sector wages and maintenance of existing infrastructure.

That’s the one that’s attracted a lot of attention this year. The Government has cut the discretionary operating allowance from $2.4b to $1.3b.

Those calling for more dramatic spending cuts have pointed out that the $1.3 billion is still a nominal increase.

But last year, Treasury estimated that a $2.5b operating allowance was needed just to maintain existing services, largely because of inflation and a higher population.

On that basis, perhaps it is a cut.

Regardless, it means the Government will have to find money for new spending by cutting spending elsewhere.

It means that beneath the headline spending announcements, there may be some big news about cutbacks to dig out.

Perhaps I’ll be proved wrong, but I doubt that stuff will be at the top of the press releases.

Where the Government has increased spending allowance is on the capital side.

Prime Minister Christopher Luxon has confirmed that total capital expenditure is “a little higher than forecast at $6.8 billion”.

Prime Minister of New Zealand Christopher Luxon appears on Newstalk ZB Mike Hosking Breakfast. 19 May 2025, NZ Herald photograph by Michael Craig

“When that is offset by savings identified in this year’s Budget, it means the net capital allowance is $4 billion, compared to $3.6 billion previously signalled in the Budget Policy Statement,” he said in a pre-Budget speech.

Capital spending refers to big one-off investments in things like public buildings (eg schools and hospitals) and new investments such as in transportation infrastructure (eg roads, railways, bridges).

This year, it will also have to cover the Government’s proposed increase in defence spending.

The Government has announced a $12b defence plan over four years, with $9b in new spending.

Fiscal impulse

There are always risks that too much new spending can add to high inflation woes.

The Government needs to be sure that the spending is going to add value to the economy without just artificially pumping up the amount of cash in the economy.

On the flip side, if it cuts back spending too hard, this can slow the economy. It can mean less cash in the economy, big projects grinding to a halt and unemployment rising.

In theory, it would make sense for Governments to spend more when the economy is in recession and less when it is booming.

But timing it isn‘t easy.

Whether the Budget adds stimulus to the economy or whether it does the opposite is sometimes described as the “fiscal impulse”, which can be expansionary or contractionary.

This should be relatively neutral. In September Treasury forecast that it was expected to be mildly expansionary. After the operating allowance cut, it may be mildly contractionary.

Economists believe this can easily be offset by the Reserve Bank if it leans into an extra rate cut.

Going for growth

Despite being mildly contractionary, or neutral at best, the Government is still calling this a Growth Budget.

How does the maths work on that? And what will the Government actually do to boost growth?

The short answer is that the Government is focused on reprioritising money from areas it thinks aren‘t boosting growth, to ones it thinks will.

This week, we saw tax changes announced to encourage more foreign investment.

The Government has set aside $75m in the Budget for tax changes it hopes will spark investment and productivity growth.

Of the funding, $65m has been set aside to change the rules around the amount of tax-deductible debt that foreign investors can put into New Zealand investments.

A further $10m will be put aside to defer tax liability of some employee share schemes to help startups and unlisted companies.

These look like useful tweaks but are hardly transformational sums of money.

Another tax break that businesses are hoping to see is an increase in the speed with which investments in new capital can be depreciated.

The idea is that allowing it to be depreciated faster, with the loss offset against tax, would encourage businesses to be more proactive about investing in new machinery and technology.

That would help boost New Zealand’s overall productivity.

Talking to Mike Hosking on Newstalk ZB this week, Luxon appeared to express enthusiasm for the idea.

“If you look at the small and medium enterprises in New Zealand, the top 10% are seven times more productive than the bottom 10%,” Luxon said.

“A lot of it is to do with their adoption of capital, plant and equipment and automation and all that good stuff. I’ve got a lot of sympathy for that.”

The bad old days

Budgets aren‘t what they used to be in the 1970s and 1980s.

Back then, the public watched with bated breath for tax announcements and then queued to buy petrol, cigarettes and alcohol before price changes took effect at midnight.

For financial markets, the process was even more harrowing, so in 1989, the Public Finance Act was introduced.

During Sir Robert Muldoon's time in power in the 1970s and early 1980s, Budget statements were all about micro issues. Photo / NZ Herald

Since then, big spending plans and other policy changes like tax cuts or hikes have had to be signalled in advance in pre-Budget announcements.

Financial markets will factor new details about the Government’s debt track into their equations on the outlook for interest rates and currency.

For that reason, the Budget can make the Kiwi dollar rise or fall (although not as much as it did before 1989).

The Budget can also influence the extent to which the Reserve Bank (RBNZ) will need to adjust the Official Cash Rate (the interest rate the RBNZ sets for borrowing and lending between banks).

There’s no question the Budget is still a very big deal, as these things can have a very real effect on our lives in terms of mortgage rates and the cost of living. But these days, the Budget is also a political exercise.

Governments typically save one or two big spending announcements to unveil on the day, in the hope they will dominate the news cycle with positive headlines.

Beyond that, they are a chance for the Finance Minister to grab the media spotlight and outline the Government’s grand plans for the economy.

While it is not an election year, the stakes remain high for Willis and the new coalition as it looks to set the agenda for the rest of this term.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.