Top ministers have ordered a "deep dive" into the Defence Force's spending in a bid to free up more funding to "lift the wellbeing of New Zealanders".
Finance Minister Grant Robertson said the cost-cutting exercise would focus on projects which aren't delivering.
The Opposition is critical of the Government plan, as it comes at a time of "heightened global instability".
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But a spokesperson for the Finance Minister said there is no plan to cut defence funding.
"Any low value spending would be reprioritised into other areas of the defence budget that supports wellbeing objectives, such as disaster relief and support."
In fact, he said, reviews such as this can result in increased funding, which the recent MSD one did.
"The same could be true of the look at defence spending."
A July report from Treasury, obtained under the Official Information Act, reveals the Treasury and the Ministry of Defence were instructed to conduct a baseline review of the NZDF's and the Ministry of Defence's spending ahead of this year's budget.
"The review will address issues of value for money, cost pressures and reprioritisation to feed into upcoming budgets," the report said.
Any funding identified as "low value" would be made available to other areas of Government in a bid to "lift the wellbeing of New Zealanders".
The report does not say how much of NZDF's budget needed to be reprioritised.
National's Defence spokesman, Mark Mitchell, is critical of the plan.
"Our defence forces are already run very efficiently, and it was always our fear that the Labour/Green/NZ First Government would start cutting defence budgets at a time of heightened global instability."
He said New Zealand's Defence Force has an important role to play in the Pacific and has called for the Government to "think twice before limiting its capabilities in this area".
"Siphoning money away from operational spending to pay for Grant Robertson's so-called 'wellbeing' initiatives is more evidence the Government doesn't know how to deliver on its plans."
In 2018, then Australian Immigration Minister Peter Dutton was critical of how much New Zealand spends on defence.
When asked about illegal boat migrants, he told ABC's Foreign Correspondent programme: "New Zealand don't contribute really anything to the defence effort that we've got where we're trying to surveil boats that might be on their way to New Zealand."
By the numbers, New Zealanders contribute $426 per capita to the country's defence. Australians spends A$1438 ($1535).
The reprioritisation review was ordered by Robertson and Defence Minister Ron Mark, who agreed to the "deep dive analysis into some areas of current spending [which would] look at the effectiveness and efficiency of that spend".
It is not unusual for the Government to instruct ministries to reprioritise some of their spending in the lead-up to a budget.
The Ministry of Social Development has also been asked to conduct a similar cost-cutting exercise.
In 2017 and 2018, ministers were ordered to identify at least 1 per cent of expenditure which is not in line with the Government's objectives which could be cut.
Robertson said he hasn't asked ministries to do the same this year.
Instead, the approach the Government is taking ahead of this year's budget was a series of baseline reviews – such as the one he asked of the Defence Force.
"We will be continuing to look wherever we can for cost savings and obviously we're taking a very close look at where there have been any underspends within Budget allocations."
Asked why the Government's approach changed, Robertson said the Government had asked departments to slash their funding for two Budgets in a row and it was time for a change in Budget 2020.
"I felt like we had set up the disciplined approach I was looking for. This is a budget where everyone in the process understands this new process."
But he stressed the Government always looks for whether or not projects are delivering and any areas of underspend.