Nicola Willis heads into Budget 2025 more confident and better prepared than she was for her first, which was assembled under tight time pressure and shaped by election promises.
The Finance Minister still has to contend with her coalition partners, Cabinet colleagues, and a shortage of spare cash, but even so, she feels less constrained this time around.
For all the talk of tough times, the Government is still finding money for some ‘nice-to-haves’. On Friday, Willis announced she would continue subsidies for international film productions shot in New Zealand.
An extra $577 million will bring total funding for the scheme—which offers productions up to 25% cashback on eligible spending—to $1.1 billion over the next four years.
The announcement got a “slamming” from the Taxpayers’ Union, which accused Willis of putting corporate welfare on the credit card while claiming to be balancing the budget.
Earlier in the week, she announced a $100 million capital top-up for the Elevate NZ venture programme, which aims to crowd private sector investment into Kiwi venture funds.
These are not policies typically supported by the ACT Party or even by National, most days. Willis herself said the incentives were not her “favoured approach”, but the screen sector’s success made them a worthy exception.
“This was one of the areas we looked at [for spending cuts] … but if we were to remove this rebate scheme, we would be saying goodbye to the New Zealand movie industry,” she said.
“We would see an exodus of talent, of skill and we would say goodbye to the investment that has been coming here, and that has been so important in creating jobs and economic growth”.
Growth, not spending restraint, is the theme this year. Willis has dropped last year’s reluctance to use nicknames and has started to call this one “The Growth Budget”.
Film subsidies and venture capital contribute to economic growth**, so they stay despite the fiscal cost to taxpayers. Willis has shown she can win these debates when needed.
“You know, I do like to be a director,” she said, during the film rebate announcement.
“I'm sure that sitting in that chair as I give budget commands might have given me a bit more authority, but as it happens, the budget has landed just fine, even without a director's chair”.
Tightest in decades
Despite the focus on growth, there will be spending cuts. The $1.3 billion operating allowance will be the smallest since 2015 in nominal dollars and similar to the Zero Budget delivered by Bill English in 2012.
Matt Brunt, an economist at BNZ, says the allowance likely won’t cover natural cost pressures from population growth and inflation. Real spending will fall, even if the nominal figures and share of GDP don’t make it obvious.
But some economists argue that, taken as a whole, the Budget will not be particularly constrained. Forecasts prepared in December show core Crown spending will be about $150 billion in Budget 2025 — more than a third of total economic output.
Miles Workman, an ANZ economist, says large budgets passed under the Labour Government have been baked into agencies’ baselines and can now be reshuffled into other priorities.
Even after adjusting for inflation and other cost increases, he says the Crown is still spending $15 billion more per year than it was in Labour’s first Budget in 2019.
The Coalition should “easily” be able to find another $3.8 billion in savings, as it did in the previous Budget, to free up money to add to the net operating allowance.
“That is, just because the operating allowance has been lowered, that doesn't mean the Government can’t fund big initiatives by cutting back other programmes,” he wrote.
Labour leader Chris Hipkins said this “shallow analysis” ignores structural factors driving up government spending. He points to an ageing population, rising healthcare costs, and historic underinvestment across many areas.
That said, he agrees fiscal consolidation is needed after the pandemic shock and stimulus, which contributed to inflation and pushed debt levels close to Treasury’s recommended ceiling.
“But put that into perspective: you don't always do it straight away … Nicola Willis is now trying to crash through in a way that no previous New Zealand governments tried to do.”
Saving the budget
Most agencies have been told they won’t receive any new money and will have to make do with their existing budgets, or less. This amounts to an effective 2.5% cut for anything outside health, education, justice, and defence.
Some other savings have been announced publicly. More than $1 billion will be saved over four years due to fewer people living in motels and receiving emergency housing support.
Reforming the pay equity laws has dodged a multi-billion dollar wage bill in the future. Although exact savings aren’t public, Associate Finance Minister David Seymour said the policy “saved the budget”.
More savings, cuts, and reprioritisations are sure to be announced on Budget Day. While each individual spending decision may be contentious, the broader need to balance spending and revenue is not. The only questions are how quickly to do it and whether to raise taxes.
The Green Party’s alternative budget proposed $88 billion in targeted taxes on the wealthiest New Zealanders, yet still projected deficits across the forecast period.
Labour is likely to use a capital or wealth tax to help balance the budget if elected, while the Coalition parties have ruled out major new taxes — although they support more user-pays models, which are effectively taxes by another name.
On Budget Day, Willis is likely to highlight fiscal constraints forcing hard choices, while still finding money for some of the ‘lollies’ she claims are unaffordable.
With no risk of a government debt crisis in New Zealand, Labour close in the polls, and the economic recovery still lacking momentum, the Government has little incentive to accelerate fiscal consolidation.
** The screen production rebate is estimated to have a 1.9% direct return on investment but up to 6.2% including "indirect and induced" returns. Culture and politics, rather than economics, may be the larger driving forces behind these subsidies.
12 Comments
Loving the 08 change
I always struggle with the presentation of the Govt operating balance in isolation (I also prefer the standard macro measure of net lending/borrowing by central Govt). In the real economy, the Govt fiscal balance over the course of a year is one of four interdependent measures:
- Net bank lending over that year (how much freshly printed money banks have pumped into the economy net of loan repayments)
- Offshore saving increase driven by our current account (≈trade) deficit (we export ownership of financial assets to close the gap)
- Onshore 'savings' increase.
- Govt deficit spend (spend minus revenue)
So, right now, as a % of GDP, our position is roughly:
Net bank lending (4%) + Govt deficit (4%) = 8% of GDP.... which is enabling offshore savings (6%) and onshore savings (2%). This equation has to balance. Here's a graph to illustrate.
Oh, and a reminder that we are firmly in a recession - we have negative real earnings growth, job reductions, benefits increases etc. For the economy to 'grow' (generate a surplus that enables higher profits and real wage growth), Govt deficit spending + net bank lending have to overpower the current account deficit by 3% of GDP or more over time. Our economy is fueled by this credit - it's as critical an input as oil, labour, materials etc. And, how do we get that credit flowing? We bid up the price of land and houses.
Our challenge now is that import prices shot up through the early 2020s and they haven't subsided as much as people thought they would. In addition, tourism income has not returned as strongly, and the interest and dividends that NZ pays in aggregate to offshore owners of financial assets has remained elevated. The reckonomists reckon that our trade deficit is a consequence of Govt deficit spending too much. It's the *other way round*. It is not over-consumption that is driving the current account deficit, the macro environment has changed and Govt is having to deficit spend to prevent an economic collapse.
Govt are being forced by the macro environment into deficit spending. They are also pushing RBNZ to lower interest rates and free up credit so that net bank lending can get back to loopy levels (net bank lending as % of GDP is already back to pre-covid levels). A far more sensible strategy would be to ponder on how to slow the outflow of billions of dollars to offshore rentiers. In 2024, we pumped $16bn of income into offshore ownership (net!) That's about the same as Govt deficit spending over the year.
My view is that 2025 might just be the FAFO year - the year where we pin our hopes on ever cheaper imports returning and the glorious restart of the housing ponzi, but, instead, we get a sustained period of stagnation as we bleed income and demand offshore and Govt investment ends up going on welfare instead of infrastructure.
Jfoe. Its an apt description of what we stupidly do.
"......Offshore saving increase driven by our current account (≈trade) deficit (we export ownership of financial assets to close the gap)......."
Every year another budget and every year, another year gets added before we return to surplus....
winning feels great, this will be a lost decade if we are lucky
The only way we will return to surplus in the next 5 years (given levels of private debt) is if Govt decides to reduce the net financial wealth of the domestic private sector. A significant capital gains or land tax, or an inheritance tax. There is no viable alternative. Unless milk powder becomes as valuable as gold.
All three of those taxes. I’d vote for it. Wealth tax is far too nebulous an idea.
Wealth tax is a stupid, stupid idea.
Unless capital controls are implemented.
...even more stupid
we can always ignore the declining pool of credit worthy until the whole house of cards collapses
"...if Govt decides to reduce the net financial wealth of the domestic private sector."
Zero possibility of that happening deliberately with an electoral mandate (govts frequently do it with their misguided policies). Turkeys don't vote for Christmas.
Govt has taxed more than they spent a few times, but that was only possible because banks were pumping more than enough money in to compensate.
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