As Finance Minister Nicola Willis prepares to deliver her second budget today at 2:00 pm, concerns loom over whether bold promises will translate into meaningful economic recovery for New Zealand.
In what may be the most pivotal budget in recent memory, New Zealanders will discover if the government's "Going for Growth" mantra is simply rhetoric or the foundation of a genuine economic turnaround. Against a backdrop of record government debt, persistent economic stagnation, and global uncertainty, Finance Minister Nicola Willis must balance tough fiscal constraints with the need to stimulate a sluggish economy.
Austerity Amid Adversity
Despite claims of "brutal cuts," the reality is government spending continues to rise. The perception that Nicola Willis is cutting spending is far from accurate - both as a percentage of the economy and in inflation-adjusted terms, spending is actually higher than when the previous government left office.
All signs point to "an extraordinary budget," as the government must make cuts elsewhere to balance the books while maintaining its spending commitments.
The economic landscape remains challenging. Recent data shows the service sector - accounting for about two-thirds of the economy - contracted for the third consecutive month in April with a Performance of Services Index of 48.5, signalling ongoing struggles in tourism, retail, and hospitality sectors.
Pre-Budget Announcements: Showpieces or Strategy?
The government has already revealed several major spending initiatives ahead of budget day:
$164 million over four years for 24-hour urgent care clinics
$12 billion over four years for defence
Funding increases for education, mathematics support, and science innovation
A controversial $577 million boost to film industry subsidies that Willis previously criticised in opposition
These pre-budget announcements serve as strategic communication, preventing important initiatives from getting "lost" among the 20-30 press releases typically issued on budget day.
Yet critics have questioned certain pre-budget reveals, particularly calling the $577 million film subsidy "bloody nuts" at a time when the government is borrowing to fund core services.
The Critical Productivity Question: Full Expensing as the Missing Key
Perhaps the most promising potential announcement centres around full expensing of capital expenditure - a policy many economic experts consider transformational for New Zealand's stagnant productivity.
If you really want to put a rocket under the economy and go for growth, full expensing of capital items would deliver significant results. This approach allows businesses to immediately deduct the full cost of capital investments from their taxable income in the year of purchase, rather than spreading deductions over years through depreciation schedules.
This would provide a genuine economic incentive that could be a "game changer" for productivity. New Zealand's productivity crisis stems partly from businesses historically choosing to hire more workers rather than investing in capital equipment and technology - essentially "overvaluing labour and undervaluing capital."
Recent statements from government figures have sent mixed signals. While Finance Minister Willis has reportedly said full expensing is "too expensive," Prime Minister Luxon countered in his Monday interview with Mike Hosking that the policy "has merit." A potential compromise could emerge, perhaps like Australia's approach during Covid which capped eligible capital expenditure at $150,000, or targeting specific business segments based on turnover to "laser focus" the productivity benefits, as the Prime Minister suggested.
This "capital shallowness" problem has become a defining weakness of New Zealand's economy. With GDP per capita having fallen for eight consecutive quarters (the longest decline on record), the need for bold tax policy to stimulate business investment has never been more urgent. Instead of creating incentives for productivity-enhancing investments, New Zealand's current tax system forces businesses to spread deductions over many years, discouraging capital expenditure precisely when it's most needed.
Research suggests full expensing generates more investment and economic growth than equivalent reductions in corporate tax rates. The Taxpayer’s Union has found that full expensing could provide more than twice the GDP growth compared to corporate rate cuts of equivalent revenue cost - making it arguably the most effective lever available to address New Zealand's fundamental economic challenges.
Beyond Empty Rhetoric: Will This Budget Finally Deliver?
With New Zealand running a structural budget deficit and national debt approximately $92,000 per household, the government faces immense pressure to reduce borrowing.
Willis has already halved the operating allowance for this budget from $2.4 billion to $1.3 billion, characterising it as "no lolly scramble." This reduction means only select government departments will receive additional funding, primarily health, education, law and order, defence, and "critical social investments."
Meanwhile, the economic picture remains concerning. The service sector's Performance Index continues to show contraction at 48.5 in April, indicating the crucial sector that represents two-thirds of the economy is "still going backwards," according to BNZ senior economist Doug Steel. This signals ongoing struggles in tourism, retail, and hospitality - key drivers of New Zealand's economic engine.
Economist Tony Alexander has warned that Treasury forecasts may prove too optimistic given recent weak economic data, noting that "it is a bit of bad luck that the Government needs to put in place measures to reverse the previous administration's overspending and set the Crown's accounts on a more sustainable path."
For nearly two decades, politicians have spoken grandly about transforming New Zealand into a "Pacific tiger" like Ireland or Singapore, yet the rhetoric remains just words without corresponding actions. Simply repeating "Going for Growth" as a mantra while failing to implement the fundamental building blocks for productivity improvement is a recipe for continued economic stagnation.
Growth requires more than political slogans – it demands concrete policy foundations that address New Zealand's structural weaknesses. One cannot levitate economic growth through rhetoric alone, just as King Canute could not hold back the tide. Without the right ingredients – particularly policies that incentivise capital investment and boost productivity – economic growth will remain an elusive goal, regardless of how often it's mentioned in political speeches.
The Bottom Line: Courage to Reform or Another Missed Opportunity?
Today’s budget will reveal whether the government truly has the courage to implement meaningful reforms or will continue the "comms-led, bumper sticker type policy" that has characterised a generation of politicians.
The stakes could not be higher. According to Treasury data, New Zealand's per capita GDP has fallen 4.6% since late 2022, creating a deeper per-capita recession than the global financial crisis. With rising unemployment, declining business confidence, and a record exodus of New Zealanders migrating to Australia, Budget 2025 may represent the last best chance to reverse the country's economic decline.
Critics may question the fiscal impact of full expensing, especially given New Zealand's existing deficit challenges. However, the fiscal impact is largely a matter of timing rather than permanent cost. Full expensing shifts existing tax deductions forward rather than creating new ones. Based on UK experience, the first-year fiscal impact would likely be around $1.5 billion - less than half the cost of the 2024 Budget's personal income tax relief.
Unlike broad tax cuts or increased government spending, full expensing specifically targets the investments most likely to enhance productivity and long-term economic growth. For a nation facing prolonged economic stagnation and capital shallowness, it represents not just a tax policy adjustment but a strategic realignment toward investment-led growth.
The fundamental truth remains: no amount of political rhetoric about "Going for Growth" can substitute for sound economic foundations. The ingredients for genuine productivity improvement must be present for growth to materialise. These include incentives for capital investment, flexible labour markets, reasonable regulatory frameworks, and a tax system that rewards entrepreneurship and innovation.
Will the budget deliver these ingredients, or will it merely repackage existing policies with growth-oriented language? By today evening, New Zealanders will know whether this administration has the conviction to make the tough but necessary decisions required for genuine economic transformation, or if it will join the long line of governments that talked about productivity but failed to deliver the fundamental reforms needed to achieve it.
As always, we will be publishing our comprehensive budget commentary in our Canny View column this Saturday - available in hard copy in the Hawke's Bay Today and online at the NZ Herald with a premium subscription.
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay and Wellington based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Blog no. 17.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
