Venkat Raman
Auckland, May 22, 2025
Finance Minister Nicola Willis today (May 22, 2025) unveiled New Zealand’s Budget 2025-2026, a fiscally restrained blueprint designed to steer the country back to a surplus by 2029.
Dubbed the ‘Growth Budget’ and “No BS Budget” in the lead-up, its core tenet is an aggressive ‘reprioritisation’ of government spending, with billions cut from existing programmes to fund new initiatives and address pressing national priorities in Health, Education, and Law And Order.
The Treasury’s Budget Economic and Fiscal Update (BEFU) confirms the challenging economic backdrop against which this Budget has been framed. Weaker-than-expected growth forecasts for 2025 and 2026, partly attributed to global uncertainties and their spill-over effects, have reduced anticipated tax revenues and underscored the government’s determination to bring the Crown’s books back into the black.
This has translated into the tightest operating allowance in a decade, slashed from $2.4 billion to $1.3 billion. While new operational spending is severely curtailed, the capital allowance has seen a modest increase from $3.6 billion to $4 billion, with an additional $6.8 billion specifically earmarked for capital expenditure across health, education, defence, and transport over the forecast period.
Tax Incentives: Nudging Growth and Investment
The Budget introduces targeted tax adjustments designed to foster economic growth and encourage investment, rather than broad-brush tax cuts. Ms Willis emphasised the removal of ‘tax roadblocks’ to stimulate the economy.
Foreign Investment in Infrastructure: A significant $65 million over four years is allocated for changes to ‘thin capitalisation rules.’ These rules currently limit the tax-deductible debt for foreign investors, and the proposed changes, pending consultation, aim to make New Zealand a more attractive destination for foreign direct investment, particularly in much-needed infrastructure.
Employee Share Schemes: To support the growth of startups and unlisted companies, an additional $10 million is allocated to defer tax liability for certain employee share schemes. This addresses an issue where employees could face a tax bill on shares before they can realise their value, allowing deferral until a ‘liquidity event’ such as a share sale.
Depreciation for Businesses: A key new tax break is the introduction of a rule allowing businesses to write off 20% of the value of new assets such as machinery, tools, and equipment from their tax bill, in addition to regular depreciation. This measure is projected to boost GDP by 1% and wages by 1.5% over the next two decades by incentivising capital investment and enhancing productivity.
The Budget explicitly rules out ‘full capital expensing’ due to its prohibitive cost, demonstrating a cautious approach to tax relief, preferring targeted incentives over sweeping changes.
KiwiSaver: Shifts and Speculation Confirmed
KiwiSaver, New Zealand’s cornerstone retirement savings scheme, has indeed seen significant changes, confirming much of the speculation that preceded the Budget.
Halved Government Contribution: The government’s annual Member Tax Credit, previously up to $521, will be halved to 25 cents for every dollar saved, up to a maximum of approximately $261 per year. This represents a considerable reduction in the direct government subsidy.
Minimum Contribution Rate Increase: The minimum employee contribution rate to KiwiSaver will increase in two steps over the next three years, rising from the current 3% of wages to 4%. This aims to boost individual retirement savings.
Means-Testing for High Earners: As anticipated, the government contribution will now be means-tested, with individuals earning more than $180,000 a year no longer receiving any government contribution from July.
Inclusion of Younger Savers: In a move to encourage early saving, 16 and 17-year-olds, previously excluded, will now begin receiving government contributions from July. Furthermore, requirements for employers to match their deposits will commence next year.
These changes represent a significant recalibration of the KiwiSaver scheme, designed to reduce the government’s annual outlay (which currently stands at around $1 billion) while encouraging greater individual responsibility for retirement savings.
Health: Bolstering Frontline Services and Access
Health remains a top priority, with substantial funding allocated to address existing pressures and improve access to care.
Pharmac Funding Boost: The much-anticipated additional $604 million over four years for Pharmac has been confirmed. This critical injection aims to fund up to 54 new medicines, including 26 cancer treatments and is projected to benefit approximately 175,000 individuals in the first year. This fulfils a key election promise and addresses a long-standing public concern.
Urgent and After-Hours Care Expansion: An investment of $164 million over four years will expand and maintain urgent and after-hours healthcare services across the country. This includes establishing new 24-hour urgent care services in key regions (Counties Manukau, Whangārei, Palmerston North, Tauranga, and Dunedin) and new daytime services in others (Lower Hutt, Invercargill, and Timaru). The objective is to ensure that 98% of New Zealanders can access these services within an hour’s drive, particularly benefiting rural and remote communities and easing pressure on emergency departments.
Meeting Cost Pressures: While specific new initiatives are targeted, the Budget also provides a significant $1.43 billion increase in baseline operating funding for Health New Zealand this year, with further pre-commitments for 2026, to meet ongoing cost pressures, population growth, and the demands of an ageing demographic.
Education: Tackling Truancy and Lifting Basic Skills
Education funding focuses on foundational improvements, particularly in addressing student absenteeism and strengthening core academic skills.
Tackling Truancy: A comprehensive $140 million package over four years is dedicated to improving student attendance. This includes $123 million for a new attendance service and nearly $17 million to bolster frontline attendance services. The new services, to be fully operational by early 2026, will be more accountable and data-driven, aiming to significantly reduce chronic absenteeism.
Boosting Maths Achievement: Nearly $100 million over four years is allocated to lift maths achievement in primary and intermediate schools. This includes a new ‘early maths check’ at the end of Year Two, funding for 143 new full-time equivalent maths intervention teachers, and small-group tutoring for up to 34,000 Year Seven-Eight students annually.
Charter Schools Expansion: As a part of the government’s education agenda, $153 million is allocated to convert 35 state schools into charter schools and establish 15 new ones between 2025 and 2026, bringing the total to 50.
Financial Literacy: Financial literacy will be integrated into the primary school curriculum from 2027 within social sciences education.
Teacher Registration Fees: To support the teaching workforce, $53 million will be provided to fund teacher registrations and practising certificates through 2028, saving individual teachers up to $550.
Law and Order: Strengthening Borders and Community Safety
The Budget reinforces the government’s commitment to law and order, with specific investments aimed at enhancing border security and community safety.
Border Protection: An allocation of $35 million over four years will enable the hiring of 60 new customs officers and generally boost border protection efforts, with a particular focus on intercepting illegal drug smuggling.
Māori Wardens Support: $1.5 million is invested to train, equip, and support more Māori wardens, recognising their vital role in community safety, cultural support, and crime prevention initiatives.
A Leaner Public Service and Targeted Investment
The headline act of this Budget is the substantial reduction in public service spending, aimed at freeing up ‘billions of dollars’ for redeployment. This includes significant savings through the controversial Pay Equity Amendment Bill, rushed through Parliament recently, which alters the criteria for historical undervaluation claims and is projected to save the government a considerable sum.
Beyond these cuts, the Budget confirms several pre-announced initiatives:
Film Industry Boost: A substantial $577 million over four years has been allocated to the International Screen Production Rebate, effectively doubling the government’s film subsidy to over $1 billion. This aims to cement New Zealand’s position as a global film destination and attract significant foreign productions.
Rail Network Revitalisation: Over $600 million is committed to upgrading the country’s dilapidated rail network, with $461 million for freight rail and over $140 million for metropolitan lines in Auckland and Wellington. This addresses a critical need for maintenance and reliability improvements.
Social Investment Fund Trial: A new $190 million Social Investment Fund will trial commissioning social services directly from community organisations. This innovative approach signals a potential shift in how significant portions of social spending could be allocated in the future, aiming for more tailored and effective outcomes.
Abuse Survivor Redress: While a new compensation scheme has not been established, the Budget commits $774 million to improve the existing system for survivors of abuse in state care. The intention is to increase average payments and expedite the processing of claims, acknowledging the ongoing need for support.
New Zealand’s Budget 2025-2026 appears to be a pragmatic and disciplined financial statement.
It reflects a government acutely aware of economic headwinds and determined to achieve fiscal responsibility. By aggressively reprioritising existing expenditure and making targeted investments in key public services and growth-enabling initiatives, Ms Willis is charting a course back to surplus, albeit with significant changes to some long-standing programmes like KiwiSaver. The focus is clearly on a leaner, more efficient public sector, aiming to drive productivity and lay a solid foundation for future prosperity.
