It is an old cliché that out-of-touch journalists, eager to discover what ‘real people’ think of recent political events, will simply ask a cab driver and write it up for the morning paper.
This is one such column. On the ride home from Parliament, after a post-match drink in the NZ First caucus hallway, I briefed my Uber driver on the Budget and we tried to work out if it would help him.
Initially, we struck out. He was seriously disappointed to hear the Government would halve its contribution to his KiwiSaver. As a self-employed driver, Uber doesn’t have to match his savings rate, and the $521 boost was the only real incentive for him to be in the scheme.
Almost a fifth of the workforce are contractors or self-employed, and they won’t benefit from the KiwiSaver changes, except perhaps by being nudged to save an extra percent.
But my Uber driver perked up when he heard about the 20% tax deduction on the cost of a new asset. He was driving an older-model hybrid and had been hoping to upgrade to a full EV sometime soon.
Not a Tesla, he told me — they’re too expensive — but maybe a Nissan Leaf or a BYD, which still cost upwards of $30,000 new. The upfront tax break on that might be worth over $6,000, more than offsetting the $258 lost from the halved KiwiSaver bonus.
Once purchased, the full EV should help boost his income by lowering operating costs and attracting green bonuses from Uber, hopefully making up for the KiwiSaver loss each year.
That, in a nutshell, is how the Investment Boost policy is meant to work: businesses are incentivised to bring forward investments that improve efficiency and grow output.
Losing a subsidy isn’t too painful if it’s traded for income growth.
So, the Budget passes the ‘taxi driver test’. But it would have been a different story if the journalism cliché involved asking a care worker or Plunket nurse instead.
These women (mostly) will have their employer match a 4% savings rate, but that won’t come close to offsetting the collective $12.8 billion in wage growth lost through changes to the pay equity scheme.
Not enough of a good thing
One problem with the Growth Budget is that it isn’t expected to lift wages by much. The half-year government fiscal update forecast 21.5% wage growth over five years, but that has been downgraded to 18%. That’s about 5.3% in real, inflation-adjusted terms and less than 1% a year.
Treasury said this was due to a softer labour market, restraint in public sector wages, changes to pay equity, and the higher KiwiSaver contribution rate. In other words, largely Budget 2025 policy choices.
Gross domestic product forecasts have been downgraded by a cumulative 2.1% between the half-year and Budget updates. This isn’t due to Budget 2025 decisions, which Treasury says are “broadly neutral” for economic activity. Instead, it reflects a weaker starting point and trade-related uncertainty.
Investment Boost, the Budget’s flagship accelerated depreciation policy, helps offset the weaker growth outlook and is well suited to the economic moment.
Business surveys show firms are optimistic about recovery but have yet to act on it through investment. This nudge may be exactly what they need to get moving — especially if they’re concerned the tax benefit could disappear in a future budget.
It’s a rare example of a government actually doing something about productivity, rather than just talking about it ad nauseam. Treasury forecasts it will lift productivity by 1.5% over time.
Still, Investment Boost is the only policy driving any tangible growth, and it delivers just 0.4% across the forecast period. Perhaps it should’ve been called The 0.4% Growth Budget?
Balance-boarding
If the Budget doesn’t do much to boost the economy and wages, does it at least make progress on balancing Crown revenue and expenses? Not really.
The fiscal outlook is worse than it was in December, even under the Coalition’s preferred OBEGALx measure. Current settings suggest the Crown will rack up an extra $7 billion in deficits before (barely) balancing the books in 2029, and that’s excluding losses at levy-funded ACC.
This isn’t because of Budget 2025 decisions—it’s due to the weaker economy—but little was done to stop the drift. Finance Minister Nicola Willis reduced the operating allowance by $1.1 billion, but all other savings were immediately spent elsewhere.
You have to wonder how the ACT Party really feels about all this. It will vote for a spending plan featuring the biggest deficit since 2020, when the pandemic response peaked.
David Seymour said ACT’s involvement had made the Budget tighter than it otherwise would have been, although it couldn’t have been much looser without breaching the Public Finance Act, which requires the Government to at least plan a return to surplus.
Instead of cutting spending, the Coalition is essentially holding it steady and relying on economic growth and fiscal drag to close the deficit. Treasury says the tax-to-GDP ratio will rise from 29.1% to 30.1% by June 2029.
Future budgets may cut or further constrain spending. Operating allowances remain set at $2.4 billion, even though Budget 2025 managed with just $1.3 billion.
But ditching pay equity made that lower spending limit possible, and it’s not a trick that can be repeated every year. With the next budget landing in an election year, Finance Minister Nicola Willis will need to find a different rabbit to pull from her hat.
2 Comments
My initial view is that the boost will lead to some decent increases in the flow of stimulatory credit into the economy, topping-up the steady 3.7% of GDP net flow we already have from the bumbling housing market.
But, what will businesses invest in? UTEs, EVs, lorries, tractors, technology, commercial buildings, lots of machinery? How much of that stuff do we make in NZ? I suspect that the extra investment will add billions of dollars to the current account deficit, which will drive billions of dollars of NZ financial assets into offshore ownership. This will drain demand from our economy and continue to do so as our domestic economy sweats to provide dividends to offshore investors. Remember, over a few years, increases in private debt + govt debt have to exceed our current account deficit by at least 200pts, or our economy rapidly contracts.
In addition, the flow of cash and demand offshore will obviously increase if the companies that build and invest here are owned offshore. Basically, they will invest in standing stuff up, and then extract profits from those assets. It's going to be an interesting couple of years.
If it's a commercial building/plant, then much of the cost is locally derived.
But yes, you've highlighted an issue with any of our spending, much of it has to be on imported product. Although, if there's a productivity gain derived from the new "stuff", then over time we should see a net benefit to NZ, as we produce export goods that are cheaper/better. That's a better option than imported stuff being expended on private consumption.
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