The Government has reallocated almost $200 million from the fees-free policy as part of Finance Minister Grant Robertson's push to cull $1 billion of low-priority spending.
The money was cut as the enrolments were not as high as the Government was expecting.
The fees-free policy was designed to provide access to vocational training, apprenticeships and tertiary study for tens of thousands of people, according to last year's Budget.
It offered a free year of study for students. The package also boosted both student allowances and living-cost entitlements for eligible students.
At his pre-Budget speech today, Robertson said he had directed all ministers to cut 1 per cent of their spending in areas that were deemed the lowest priority.
"Out of this, we have identified just over $1 billion worth of spending over the forecast period that is no longer a priority or where the funding allocated is no longer needed."
One area of this underspend, Robertson said, was on the fees-free policy where enrolments have not meeting the Government's forecasts.
The $197m has been reallocated to implementing reform of the vocational education sector – an area that Education Minister Chris Hipkins is in the process of working through.
Robertson said this was an area where many have indicated they want reforms.
"And so do we.
"Put at its most simple, we need to value apprenticeships, trades and workplace training more.
"We need it to be higher quality, more accessible, more co-ordinated and more relevant to businesses and regions."
Although the proposals are still being finalised, Robertson said the reprioritisation he has announced is an "initial indication of our commitment to making this work".
He said the issue that many businesses raise with him is the need for more skilled staff.
"For New Zealand to become a more productive nation, it is vital for us to get this right – these reforms are an important step in that direction."
The May 30 Budget will be the so-called Wellbeing Budget and Robertson's speech was centred around that concept.
In fact, this was why Robertson asked ministers to slash low-priority spending.
"Fiscal sustainability is an inherent part of a wellbeing approach. It's about making sure we meet the challenges of today without comprising the ability of future generations to do so."
National's tertiary education spokesman Shane Reti said Robertson's reallocation shows the fees-free policy had failed.
"This is another case of Labour over-promising and raising expectations in Opposition and now under-delivering. Fees-free joins a long list of Government failures, including welfare reform, KiwiBuild and a capital gains tax. The Government is big on talk but has no plan.
"The Government has poorly allocated money in education and now it's in a situation where teachers are engaging in the largest ever industrial action in New Zealand, and one of its key policies has fallen over."
When it comes to New Zealand's economy, Robertson continues to remain optimistic.
"The IMF projections for New Zealand are that we will grow at around 2.5 per cent in 2019 and 2.9 per cent in 2020."
He said the average growth for advanced economies in the same period is projected to be 1.8 per cent and 1.7 per cent respectively.
New Zealand, he added, is projected to grow faster than the US, the UK and Japan.