The Government will spend an extra $400 million on capital projects and continue a business tax incentive for research, Christopher Luxon reveals in a pre-budget speech

Prime Minister Christopher Luxon says the Government will spend $400 million more than planned on capital projects in Budget 2025, despite cutting operating spending by $1.1 billion. 

In a speech to BusinessNZ on Thursday, he said the budget would focus on reducing the operating deficit while also making capital investments and regulatory reforms to support economic growth. 

Finance Minister Nicola Willis announced last week that the operating allowance would be reduced from $2.4 billion to just $1.3 billion — the smallest since 2012 in real terms.

But Luxon said an additional $400 million would be spent on capital projects mostly in the health, education, defence, and transport portfolios.

The net capital allowance would be $4 billion instead of the $3.625 billion signalled in the Budget Policy Statement which was published in December. 

“For businesses, that investment represents an opportunity to develop critical skills and capability, promoting growth for many years to come. For Kiwis, it will mean another big investment in the quality frontline services, like health and education, they deserve,” he said. 

Luxon said Treasury analysis indicated the lower spending track could shave up to 30 basis points off interest rates in 2029 and five-to-10 points in the near term.

The prime minister also announced the Government would retain a $500 million research and development tax credit National and Act initially opposed and which was put under review in August last year.

The R&D Tax Incentive gives businesses a 15% discount on their tax bill, effectively covering part of the cost of research up to a maximum value of $18 million.

BusinessNZ chief executive Katherine Rich thanked Luxon for continuing the policy, saying it was “very important” for many members and it would give them confidence to invest.

She also thanked him for other parts of the “red tape revolution” such as allowing medical conferences to be hosted in New Zealand.

Net worth declining

Also on Thursday, the Treasury published the Crown’s financial statements for the nine months to March, which is the final report before Budget 2025 on May 22. 

Despite Luxon’s pledge to keep investing in capital projects, net spending on physical and intangible assets for the nine months ended March fell to $10.7 billion, down nearly 20% on the same period last year.

Full-year capex is still forecast to be $18 billion, up slightly from $17 billion, meaning a significant portion would need to be delivered in the final quarter to stay on track.

This forecasted spending is distinct from the Government’s annual capital allowance, which governs how much new capital funding can be committed, not how much is actually spent in a given year.

The financial statements showed a smaller-than-expected operating deficit of $8.4 billion and net core Crown debt at $182 billion, or 42.6% of GDP. Excluding the Accident Compensation Corporation (the new OBEGALx measure), the nine-month deficit was $6.6 billion. 

Tax revenue came in 0.2% above forecast at $89.5 billion, while core spending was 0.5% below forecast at $104 billion. The Treasury said this was mostly due to timing, not savings.

The smaller operating deficit and a helpful change in foreign exchange rates left net core Crown debt $2.1 billion lower than expected. 

Total net worth, which is the most comprehensive measure of the Crown’s finances, declined $9.6 billion to $183.8 billion, or 43.1% of GDP, and was $300 million lower than forecast.