Government to increase KiwiSaver contribution rates and give firms a tax break on asset purchases to support New Zealand’s faltering economic recovery

The Coalition will offer a $1.7 billion tax break to businesses that make capital investments as part of a budget package aimed at boosting growth while reining in government spending.

Finance Minister Nicola Willis set a Budget 2025 spending limit of just $1.3 billion. This is one of the tightest operating allowances since 2012 and effectively a zero budget.

However, that money has been paired with $4.8 billion in spending cuts and $600 million in new revenue, to form a $6.7 billion reshuffle of the Government’s $150 billion core spending.

These cuts include $2.7 billion saved by reforming the pay equity laws and another $2.1 billion cut from other areas. Much of this money has gone back into key services with a $1.9 billion boost for health and a little under $300 million each for law, education, and defence.

But the centerpiece of the ‘Growth Budget’ is a $1.7 billion annual tax incentive for investments in productivity-enhancing capital assets. The policy allows businesses to immediately deduct 20% off the cost from their taxable income, and still claim depreciation on the remaining 80% over time.

This effectively brings forward the tax benefit and lowers the cost of investment by shifting some of the risks and opportunity costs from firms to the Crown.

This encourages earlier and larger investment in productive assets than would otherwise occur, and Treasury estimates it will increase gross domestic product by up to 0.5% over the next five years.

Save yourself

Willis said she had received advice that most of the benefit would flow to workers in the form of higher wages and higher rates of employment.

Pushing back against this employment boost is a reform to KiwiSaver, which will lift the default contribution rate from 3% to 4% and require businesses to match the higher rate.

This policy will push New Zealanders to save more for retirement, but it has an economic function like a payroll tax.

Raising employee contributions reduces take-home pay and acts like a form of forced saving, potentially dampening consumption. Raising employer contributions increases the cost of hiring and functions like a payroll tax, which can slow wage growth or employment.

But it could boost long-term savings and contribute to the domestic capital pool, some of which may be invested in local businesses and infrastructure — helping to sell the policy as a pro-growth measure.

Willis said Treasury had advised it would “marginally” suppress wage growth, although the net effect of the budget package, with accelerated depreciation, would be positive for wages.

One of the fiscal savings came from cutting the Government’s own KiwiSaver contribution cap from $521 to $261 and removing eligibility for anyone earning over $180,000. This will save $580 million this fiscal year and up to $650 million in future years.

Unlike last year, Budget 2025 documents did not provide an easy-to-read list of exactly where the $2.1 billion in cost savings had come from.

Growth story

Despite the pro-growth budget, Treasury still forecasts a slower economic recovery relative to its half-year update in December.

The US trade war is expected to knock 0.2% off NZ’s gross domestic product over the next two years, due to slower growth of trading partners and an unwillingness for businesses to invest amid the uncertainty.

GDP is predicted to grow approximately 3% over the next three fiscal years, as the economy bounces back from recession, before paring back towards 2.5% in the longer-run.

Unemployment is now expected to peak at 5.4% and wage growth settle at 2.6%, while house prices are forecast to flare up with over 6% annual growth over the next four years.

Meanwhile, Budget 2025 sees the Crown’s surplus again at risk of slipping beyond the forecast period. Even with ACC excluded (OBEGALx), the budget only just balances in June 2029 with a statistically insignificant surplus of $214 million.

OBEGAL (operating balance before gains and losses) has been the main fiscal indicator since 2008 but Willis adopted a new measure which excludes the deficits being run by ACC.

These occur partly because its revenue earned from investment gains are excluded from the measure, but also current levy rates fall short of covering expected claim costs.

With ACC costs included, OBGEAL will be at a $3 billion deficit equal to 0.6% of GDP. However, this would still be a significant improvement on the $15 billion, 3.4% of GDP, deficit in the fiscal year covered by Budget 2025.

Net core Crown debt is expected to peak at 46% of GDP and not fall below 45% in the forecast period. Net worth, which is the broadest measure of the Crown finances, will fall from 39.9% today to 31%.