Finance Minister Nicola Willis says the Government will reduce the amount of new spending in the upcoming budget by $1.1 billion as it strives to deliver a surplus in a weakening economy.
In a speech to the Hutt Valley Chamber of Commerce, Willis said the Treasury had lowered its growth forecasts due to the trade war launched by the United States.
While the economy was still expected to grow it would do so more slowly than previously forecast, reducing government revenue and slowing any return to fiscal surplus.
Prior to US President Donald Trump’s “Liberation Day”, Willis had planned to add up to $2.4 billion of new spending in Budget 2025 and still achieve a small surplus in 2029.
She said that was no longer possible and now plans to trim that operating allowance to just $1.3 billion, and make further cuts to existing spending to free up money for new initiatives.
“The fiscal forecasts will not be finalised until later this week, but according to the latest numbers I have seen, this smaller operating allowance means we will continue to forecast a surplus in 2029,” she said in the speech.
New spending would only occur in health, education, law and order, defence, and a small number of critical social investments. Most government agencies would not get any increase in funding in Budget 2025, and some previously committed spending would be withdrawn.
Willis said every dollar had to be directed towards the “most pressing priorities” or be sacrificed to reduce borrowing.
Fiscal policy appears to have moved from targeting just what some call 'wasteful' spending to also cutting some ‘decent-but-not-best’ spending as well.
This received a mixed reception among the business audience gathered in a local manufacturer’s production floor. One attendee said he’d come hoping to hear some good news, and was disappointed.
His firm has developed a new kind of CNC (computer numerical control or automated cutting) machine but has yet to make any sales. Businesses liked the product but were unable or unwilling to make new capital investments right now, he said.
Chamber chairman Mark Skelly said the Hutt Valley feels the impact of changes in government spending more sharply than other regions but understood why it may be needed.
“Many of us would love a lolly scramble … but the reality is that is not where we are now,” he said.
Austerity-lite
The speech was a change in tone from Willis’ previous visit to the Hutt Valley in 2024, where she promised Budget 2024 would avoid “austerity” which was a “mistake of history”.
The Coalition’s fiscal policies are best described as fiscal consolidation after years of deficits. Austerity generally refers to much more dramatic spending cuts and/or tax increases which noticeably reduce public services and hurt household incomes.
However, opposition parties were already describing the previous fiscal settings as austerity. In a press release, Green Party co-leader Chloë Swarbrick said the additional cuts would usher in "new age of austerity”.
On the other hand, James Ross from the Taxpayers’ Union said cutting the operating allowance to $1.3 billion was a "good start" but Willis needed to balance the budget much more quickly.
“If the Government can’t set the operating allowance at zero this year, it must lock it in for Budget 2026. Anything less is just kicking the can toward a cliff,” he said in a statement
Willis told reporters she was being careful not to fall into austerity, but said the surplus target effectively slipped back a year in the half-year update.
“We are conscious that it can't keep slipping. New Zealand has been in deficit since 2019 and at a certain point, governments can get themselves in a position … that becomes extremely hard to manage,” she said.
“What history shows us, and what events around the world show us, is that it's when you let that get out of control that you actually run out of choices, and others decide your path for you”.
There will still be new investment in hospitals, schools, and infrastructure, as well as some small initiatives targeted at business growth and cost of living support, all within the reduced operating allowance, Willis said.
The Finance Minister wouldn’t commit to repeating the $1.3 billion operating allowance in the future budgets, leaving the possibility of a small lolly scramble ahead of the election next year.
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