Finance Minister Nicola Willis receives a standing ovation from her colleagues after reading her Budget 2025 in Parliament. Photo / Mark Mitchell
Finance Minister Nicola Willis receives a standing ovation from her colleagues after reading her Budget 2025 in Parliament. Photo / Mark Mitchell
Opinion by Thomas Coughlan
Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people's stories and explaining the way things like transport and finance touch our lives.
The Government announced its 2025 Budget this week, the centrepiece of which was a $6.6 billion investment tax incentive.
Treasury forecasts showed no surplus under the old OBEGAL measure in the forecast period.
Labour insists it has a consistent position on paying to bring back the old pay equity regime, although National says the party has no plan to foot the $12.8b cost.
If you’re looking for the meaning of Nicola Willis’ second Budget in just two words, you could do no better than the Public Finance amendment bill she introduced to the House during the traditional Budget night urgent sitting of the House.
In that bill – or rather10 parts of that bill – the word “repeal” nearly abutted the word “wellbeing”. Wellbeing reports – repealed; requirements related to wellbeing reports – repealed; references to those reports – repealed.
Two years on from the last Grant Robertson budget, the wellbeing approach, which Labour hung its economic hat on, is off to the legislative incinerator.
What’s replacing it is the ideological inverse. Budget 2024 was pretty standard National fare – modest spending cuts (in fiscal terms) funding modest tax cuts. Yawn.
This Budget, barring a couple of NZ First inflections ($200 million to fund an Aotearoa-Aramco for new gas exploration thanks to Matua bin Salman himself, Shane Jones) is something closer to classical liberal economics.
Putting aside NZ Superannuation (much like the Government, which has cut everything but its single largest spend), the Budget signals a powerful ideological shift in how the Government thinks about the economy. The neolibs are back, thawed from the political permafrost. Self-reliance, self-sustainability, animal spirits, etc, etc.
Willis was right. This Budget was no lolly scramble. There was no pulling a rabbit out of a hat. In Willis’ new world, if any rabbit wants to escape its millinery incarceration, it’ll have to pull itself out.
Much of the commentary has focused on how small this Budget is – its $1.3 billion allowance of “new” operating money being the smallest in decades. While correct, that misses the fact that the package of new spending decisions, the line-upon-line of budget decisions (the tax credit change, the learning support funding, etc) actually totalled $6.7b a year – a vast sum, which might be larger than some of Labour’s last budgets.
What makes this Budget different is that $4.8b of that new spending came from cuts, money siphoned from somewhere to somewhere else. Some $600m came from new charges and just $1.3b was chucked on the credit card. That’s quite different from Labour’s final budgets, which were weighted in favour of funding new spending by borrowing.
Treasury has got the message.
Since the inflation spike, its Budget Economic and Fiscal Update included a commentary on how much new funding would be needed each year for “cost pressures” ($2.8b recommended in the 2023 budget for 2024 cost pressures for example) and obliquely compared this number to the operating allowance, implying these cost pressures would be funded through “new” borrowed money.
The Budget marks a return of pro-market thinking. Photo / Mark Mitchell
This section of the BEFU has now changed, with a box explaining that “similar to households, the Government faces the pressure of price increases that could lead to an increase in expenses in the future to maintain existing services”.
How to fund those costs? Well, Treasury cites the example of this year’s “savings exercise”, and said this will need to continue: “Given the potential pressures on the Budget 2026 allowances, there is likely to be an ongoing need for expenditure (both operating and capital) savings, reprioritisation or revenue raising policy changes”.
This is a subtle but significant change. Budgets, measured by the number of new things, aren’t getting smaller. It’s the way they’re funded that’s changing and the fact that departments can no longer assume rising costs will be funded.
Now, rising costs somewhere will be paid for by cutting spending somewhere else. It’s a powerful strategy, but who knows how long the Government can keep it up for. You can’t slash pay equity every year (“or can you?” you can almost hear them thinking).
The annual list of Budget “winners” and “losers” reveals another change in approach. Labour played a clever game in government, with its budget funding small, targeted spends that were directed at particular constituencies. It looked like the fiscal corollary of identity politics, in which funding was partitioned out with a focus on race, gender, and sexuality (although with the exception of some funding directed at Māori, this funding was never large).
A lot of that funding (though far from all) has been rolled back, with the coalition making enemies of those very same constituencies.
The sheer detail of the cuts is striking. On the campaign trail, the coalition parties said they would go “line-by-line” through the Budget to find savings, but the 2024 Budget didn’t really deliver this, mainly leaving that to agencies themselves. Budget 2025, however, really does; it dredges up spending lines from budgets past, many long-forgotten and either trims or kills them.
But again, a change from previous years, it is clearly the private sector that’s expected to be leading this growth. Quoting from a regulatory impact statement in the Budget lock-up, Willis said her new Investment Boost tax credit (National seems to have coopted the word “boost” (back pocket boost, familyboost, visa boost, and now investment boost) in the way Labour once co-opted “Kiwi” before KiwiBuild put paid to all that) would drive employment and wage growth through investment.
The incentive was well received. New Zealand is a bit of an outlier in not allowing significant deductions.
Where you start to feel a bit sorry for Willis and the Government at large is that having torched their political capital to pay for all of this, it’s very difficult to point to the economic benefits in Treasury’s forecasts. In fact, Treasury’s GDP, employment and wages forecasts have been revised downward since December.
Willis’ pro-growth feels (Treasury’s flawed fiscal impulse considers this Budget to be expansionary relative to the last) are netted out by Trump’s anti-growth idiocy, leaving the economy more or less back where we started: on track for average growth in the coming few years, but with slightly higher house prices (the winners and losers of this very Tory budget are quite predictable).
That’s quite a success, given the gale-force headwinds blowing from Washington, but try telling that to voters. You don’t have to be Dominic Cummings to realise that “thanks to cutting pay equity we’re back where we started” isn’t going to win an election.
While Labour cries “austerity”, the other side of the political equation is nervous the cuts don’t go far enough. Bond vigilantes are making a comeback, joining their neolib kin in their march out of the permafrost, warning of unsustainable borrowing costs should the country fail to get on top of its fiscal deficit.
Ratings agency S&P dialled up the not-angry-just-disappointed style of criticisms it’s been making since 2022, warning the promised fiscal consolidation risked slipping. The Government is already on track for its longest deficit since modern accounting methodology began in the 1990s.
Although a quick analysis of Treasury forecasts by the Herald suggests Willis might be able to close the deficit (under the old OBEGAL measure within seven or eight Budgets, a shade longer than it took her predecessor Bill English, but far longer than the rapid but brutal consolidation undertaken by Ruth Richardson).
Austerity is in the eye of the beholder, but it’s worth remembering that if you go by the way the Government treats discretionary spending, Willis’ path back to surplus is far gentler than Richardson’s or even English’s.
The reason the path is so slow is not for lack of cutting, it’s for the fact the biggest and most obvious place to cut, NZ Super, is off limits. Every other part of the state must be subjected to extra fiscal pressure to make up for this omission. You don’t need other be a genius to see that isn’t politically sustainable.
With the exception of KiwiSaver and Best Start, very few things are being cut in nominal terms. Instead, the strategy for hitting surplus is ensuring inflation makes tax income rise faster than public sector expenses, eventually bringing the books back to balance – an old Treasury trick. It’s not painless, but it’s far less painful than the nominal cuts to supports that were part of the Richardson approach.
In other ways, the pain is hidden. You’ve heard about the cuts to KiwiSaver (revealed in the Herald earlier this month), Best Start, and, of course, pay equity. But what about little tweaks like $35.5m saved by upping the amount homeowners must pay out of pocket before receiving the accommodation supplement, or the money raised from freezing the student loan repayment threshold.
On the retail side of things, the Government is taking a huge gamble dialling back KiwiSaver subsidies. When Labour tried to levy GST on KiwiSaver fees, the backlash was so fierce it U-turned within 24 hours. A press release from Willis at the time said, “Labour can’t be trusted on Super… Labour is the party that threatened to tax KiwiSaver, wiping billions off New Zealanders’ KiwiSaver nest eggs. New Zealanders can’t trust Labour to keep their retirement nest egg safe”.
Willis had better have a good appetite, because Labour will make her eat those words every day from now until the election.
Shifting the burden for saving further on to savers themselves by upping minimum contributions seems to lack understanding of people’s daily economic lives. People making hardship withdrawals from their KiwiSaver accounts were at near record highs in March (the second highest month on record). Plenty of people don’t have enough money to keep money in their KiwiSaver funds, let alone contribute more.
There are other problems bubbling away in the forecasts. The Government made the right call lifting the Working for Families abatement threshold allowing working families to keep more while they worked, but it gave with one hand and took from the other, lifting the abatement threshold yet again. In 2007, the threshold was just 20%. This Budget lifted it from 27% to 27.5%. It acts as a massive disincentive to work. So far, almost no one has picked up on this little tweak, because this Government, like all of its predecessors has relied on the public’s poor understanding of how abatement rates work to quietly lift them.
What this means in practice, however, is that if you receive working for families and have a job paying roughly the minimum wage and decide to take on extra hours, your effective marginal tax could be 45%. If you have a student loan, that rises to 57%. Those high marginal tax rates act as a big disincentive to work because going for a promotion or taking on extra hours would only see someone retain 43 cents of ever extra dollar they earn.
The Budget paper fossil record shows the Government considered going even harder, with a 40% abatement rate on people earning over $100,000 or $120,000 - effectively a tax on people with large families (who would be the only people receiving WFF at that income level).
National and NZ First kiboshed it, but interesting to see this sort of welfare thinking, trialled by the British Conservatives, make its way to New Zealand.
Other social problems are bubbling up to the surface. In Budget 2024, the Government found a relatively enormous $803.1m over four years to pay for the increasing prison muster expected by the coalition’s promised crime crackdown. Just 12 months later, it’s had to top that appropriation up by another $393.4m.
Over the coalition’s two Budgets (for the years 2025 and 2026) law and order expenses, driven by Corrections, is one of the fastest growing departments by spend, increasing by 12.48% – nearly equal with the increase in social development spend, despite the fact that line includes super and unemployment benefits, which are currently elevated thanks to the economy. It’s rising faster than health (up 9%) and education (up 6%).
You don’t have to be Tamatha Paul to wonder, with budgets this tight, whether we can find something better to do with $1.2b. “A moral and fiscal failure” is what Bill English called it. The coalition may not believe the first leg of that, but its accounts stand testament to the second.
Labour leader Chris Hipkins and finance spokeswoman Barbara Edmonds have been less than clear about where the cost to bring back the old pay equity regime will come from. Photo / Mark Mitchell
Labour’s $13b problem
This brings us to the Opposition. Somehow, Labour has had a gruelling week, flip-flopping on its debt and surplus promises.
The big political shift in the Budget was that pay equity, which until then had been a dreadful issue for the Government, became a dreadful issue for Labour too.
Leader Chris Hipkins has been mostly, kind of, sort of clear he’d reverse the Government’s pay equity changes, but he and his finance spokeswoman have laid out no plan to pay for it.
No wonder. The $12.8b cost of reverting to the status quo is immense — at $3.25b a year, you could up spending on jobseeker by 75% for the same amount of money. Even if Labour revived its 2023 wealth tax ($10.99b in today’s prices) and funnelled every dollar at pay equity, they’d still be $2b short, and have nothing left in the kitty for more retail policies.
Pay equity is likely to become a major issue for Labour. The party will find it difficult, perhaps impossible, to fund the policy as it is, but will face a members’ rebellion if it cuts the policy back too much – and it needs to cut the policy back significantly if it is to bring it within cooee of the money raised from the preferred CGT.
Who’d have thought that after a Budget as stern and severe as this, one that leaves so many victims, so many targets, that it might actually be Labour that comes off in the more vulnerable political position?
But that’s just the nature of these fiscally constrained times.
Wellbeing might soon be gone from the statute books.
The $155b in borrowing racked up by the Wellbeing Budgets is not so easily got rid of.
