All eyes are on this year’s Budget, set to release next Thursday. The Coalition Government faces significant economic challenges that demand innovative solutions. With GDP per capita having fallen for eight consecutive quarters (the longest decline on record) and a structural deficit that continues to widen despite increased tax revenue, conventional approaches are proving insufficient to restore economic vitality.[I]
One policy proposal gaining traction is full expensing of capital expenditure. This is a measure that could address New Zealand's capital shallowness problem, while providing businesses with greater flexibility to invest in productive assets - including modern energy solutions.
“Capital shallowness" is a term used by economists to describe insufficient investment in machinery, equipment, and technology (capital equipment) compared to other developed nations. This deficiency directly impacts productivity, which remains the key long-term driver of wages and living standards.
A recent New Zealand Taxpayers’ Union report neatly pins the issue: We rely too heavily on “cheap labour” when we should be investing in what makes labour more productive.[ii] This mismatch keeps our wages lagging behind the countries NZ would usually be compared to, creating a cycle of economic underperformance.
Beyond Empty Rhetoric: Cornerstone Prerequisites for Growth
There’s a gap between aspiration and implementation, and this has become a defining feature of New Zealand's economic policy landscape.
For nearly two decades, politicians have spoken grandly about New Zealand becoming a "Pacific tiger" like Ireland or Singapore.[iii] [iv] [v] Frustratingly, the rhetoric remains just that… words without corresponding actions. Much like building a house without foundations, one cannot hoist an economy into a growth phase without firmly establishing the cornerstone prerequisites.
Successive governments have embraced the language of transformation yet have consistently failed to implement the fundamental reforms necessary to drive sustained growth.
Flexible energy solutions would be a strong starting point.
New Zealand's comparatively high energy costs remain a significant contributor to business overhead and a barrier to manufacturing competitiveness. Reducing these costs through diversified generation, improved transmission infrastructure, and more competitive market structures would provide an immediate boost to productivity across sectors.
Full Expensing Presents a Targeted Solution
While the Minister of Finance has hinted at reducing New Zealand's corporate tax rate as a way through (currently 28% - the OECD average is 23.85%), full expensing provides a more targeted approach to stimulating investment and growth.[vi]
Full expensing allows businesses to immediately deduct the full cost of capital investments from their taxable income in the year the purchase is made, rather than spreading deductions over years through depreciation schedules. This significantly improves cash flow and makes new investments more financially viable.
Research from international implementations suggests full expensing generates more investment than an equivalent reduction in corporate tax rates. The Taxpayers Union’s comparative analysis found that full expensing provided more than twice the GDP growth compared to corporate rate cuts of equivalent revenue cost.
Why Focus on Energy Flexibility and Innovation?
I mentioned energy flexibility earlier in the piece. In many countries, including New Zealand, energy production is not keeping pace with growing demand – and to top up our energy from other markets typically means consuming non-renewable energy, which is essentially kicking the proverbial can down the road while sending our money offshore.
For New Zealand's energy sector, full expensing small scale generation could prove transformative. Energy producers face the dual challenges of meeting growing demand while transitioning to more sustainable models could immediately write off investments in renewable infrastructure, grid modernisation, and emerging technologies.
The "big is best" approach appears alive and well, with the Minister favouring reliable and consistent energy sources. However, he can rest assured that the sun always rises - distributed solar generation, combined with storage, presents a resilient alternative to centralised models that have dominated New Zealand's energy thinking since the time of Muldoon.
Full expensing would level the playing field, allowing both large-scale and distributed solutions to compete on their merits rather than their accounting treatment.
This approach would accelerate the deployment of flexible energy solutions (from grid-scale battery storage to distributed energy resources) that New Zealand needs to enhance energy security while reducing emissions. Smaller businesses could similarly benefit by investing in energy efficiency measures, on-site generation, and electrified transport fleets.
With full expensing, the private sector could lead much of this transition, reducing the need for direct government subsidies while still advancing national climate and energy objectives.
Fiscal Considerations of Full Expensing
Critics might question the fiscal impact of full expensing, particularly 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 into the investment year rather than spreading them over multiple years. While this creates a short-term revenue reduction, it doesn't increase the overall tax benefits available to firms.
Based on UK experience, where official projections initially overestimated costs, the first-year fiscal impact for New Zealand would likely be around $1.5 billion. That’s less than half the cost of the 2024 Budget's personal income tax relief. The UK Institute for Fiscal Studies found that most upfront revenue loss is later recouped, with the long-term fiscal cost being significantly lower than initial projections.
Looking Forward to Growth
As the 2025 Budget takes shape, full expensing deserves serious consideration as a centrepiece of New Zealand's "Going for Growth" agenda.
Unlike broad tax cuts or increased government spending, it specifically targets the investments most likely to enhance productivity, energy flexibility, and long-term economic growth. For a nation facing prolonged economic stagnation, capital shallowness, and energy transition challenges; full expensing represents not just a tax policy adjustment but a strategic realignment toward investment-led growth.
It may well be the most effective lever available to move beyond rhetoric, address fundamental economic prerequisites, and build the more productive, energy-resilient economy that New Zealand has long aspired to become.
But we shall see – like everyone else, I will be eagerly awaiting the Budget announcement to confirm the direction our Coalition Government is taking in 2025.
[i] https://www.parliament.nz/mi/pb/library-research-papers/monthly-economic-review/monthly-economic-review-february-2025/
[ii] https://www.taxpayers.org.nz/full_expensing_mr
[iii] https://www.nzherald.co.nz/business/economy/steven-joyce-nz-must-keep-moving-forward-to-become-pacific-tiger/KLCHJCEZG44DN5T7EGA3TAGCV4/
[iv] https://www.nzherald.co.nz/business/economy/new-zealand-should-follow-singapore-and-ireland-to-grow-economy-winston-peters-says/6PJUOVYRDFGD3PDWIAJKAXZRIM/
[v] https://www.beehive.govt.nz/release/economic-growth-key-better-days-ahead
[vi] https://www.thepost.co.nz/politics/360569873/i-want-be-bold-willis-puts-corporate-tax-budget-table
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. Article no. 407.
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