Budget 2026 is likely to be about fiscal repair, spending prioritisation and bolstering the country’s economic security “against a highly fluid global backdrop”, ASB senior economist Mark Smith says.
Smith expects the Government to "largely stick to its fiscal knitting" Thursday's budget.
“Revenue initiatives are likely to have been parked, and we do not expect any follow-ups this side of the November 7 general election,” Smith said.
As for longer-term fiscal challenges, Smith said the realities of a coalition government likely meant baby steps would be made towards addressing those.
His comments come in the lead up to this year’s budget. Interest.co.nz will be at Parliament's lock-up, and will provide coverage and analysis of the Budget from 2pm on Thursday.
It is expected that the Coalition Government’s third annual budget will support the delivery of core public services, with an emphasis on health, education, defence and law and order.
Finance Minister Nicola Willis has made it clear that “savings and reprioritisation” will be key features of Budget 2026, previously saying most agencies and Ministers will be expected to “act as households do” - as in they will need to plan to manage service pressures and other commitments with little or no additional funding.
This year’s net new spending has been set at $2.1 billion - $300 million less than the allowance of $2.4 billion previously set. This cut was due to the fuel crisis, which Willis previously said required a fiscal response.
However, the capital allowance, amounts allocated in the forecasts for net new capital investment, has increased - initially set at $3.5 billion and jumping to $5.7 billion, with Prime Minister Christopher Luxon, in a pre-budget speech, saying while the Government continues to prioritise a return to surplus, the fuel crisis has been a reminder that “significant levels of capital investment will be required in the coming years.”
‘Budget 2026 will not be easy’
Westpac NZ senior economist Darren Gibbs said before the conflict in the Middle East, Budget 2026 was set to reveal a “rare” improvement in the fiscal outlook.
That is no longer the case, Gibbs said.
“The Government has cut the operating allowance for Budget 2026, but the conflict will lift spending on items that sit outside the allowance. It will also lead to slightly lower revenue.
“The magnitude of the impact will depend on the Treasury’s assumption about the duration and implications of the conflict, which is uncertain.”
ANZ senior economist Miles Workman says the Budget will be framed largely as a crisis-response budget, with a focus on balancing support for vulnerable households with avoiding putting additional pressure on medium-term inflation.
“In a cyclical sense, if the discretionary response remains fiscally neutral, there is unlikely to be much in the Budget to materially shift the monetary policy outlook. A shift towards more contractionary fiscal settings than otherwise would alleviate some of the pressure on the Reserve Bank to hike, and vice versa," Workman said.
“Overall, Budget 2026 will not be easy,” Workman said.
“Households and businesses face significant uncertainty and balance‑sheet pressure, but the Government needs to be selective in its support if it is to avoid exacerbating the inflation pain and pushing fiscal settings further towards unsustainable territory.”
Kiwibank economists Jarrod Kerr and Alexandra Turcu don't expect an election year lolly scramble, with most talk "of cuts, cuts and more cuts.”
“But we won’t rule out the chance of some up-side surprises. It is an election year, and it will take some offsets to the proposed cuts to appeal to voters.”
What we know is in the Budget so far
Palliative care for children: This year’s Budget will invest $15.5 million over four years to establish a specialist paediatric palliative care service, delivered through specialist teams in the North Island and South Island.
Maths and literacy: $131 million will be invested in students’ reading, writing and maths as the Government invests in the next phase of its "teaching the basics brilliantly" policy.
Public service: Willis announced a public service overhaul with the aim of reducing the number of government departments, with sinking lids to be placed on budgets and an in-principle target set for the number of public servants. That workforce target would remove almost 9,000 workers from the public service by mid-2029. Willis said these changes would cut costs by $2.4 billion, with this re-deployed to health, education, infrastructure, defence and police.
Social housing: A multi-year reform to the country’s social housing system will increase rent for about 84,000 Kāinga Ora tenants, while putting the $375 million savings into pushing up the accommodation supplement for those in private rentals - this would increase by $10 to $30 a week. In addition, the maximum Temporary Additional Support rate will decrease, bringing in about $200 million. The change will increase the rent contribution which is currently 25% of a social housing tenant’s income up to 30%, which will see 84,000 households’ rent increase by an average of $31 a week.
Ambulance services: $35 million over four years will be provided for road ambulance services. This includes establishing two ambulance hubs in Auckland, the deployment of an electronic patient clinical record system, extra training for ambulance communications staff and more welfare checks for patients.
Customs: For border protection and responding to smuggling, $70.7 million over four years is being invested in upgraded equipment, strengthening security of custom facilities in ports and airports, new defensive equipment, more training, and an increased capacity to store and manage seized illicit goods. $10.8 million over four years will go towards the aim of disrupting criminal networks overseas by establishing four new international posts in the Pacific, South America, Middle East and Europe.
Defence: The Government is investing in drone systems, ship maintenance and work to replace the naval fleet. Budget 2026 provides an extra $880 million of operating funding and $700 million of new capital funding for activities and operations as well as priority projects in the Defence Capability Plan.
Wilding pines: The Government is investing an extra $79 million over the next three years to tackle the spread of wilding pines.
Fees-free scheme scrapped: The Government will be scrapping this programme. The fees-free scheme covers up to $12,000 of the last year of study for first-time tertiary students.
Gas Transition Loan Scheme: The Government is backing an initiative to help businesses move away from gas dependency. A Budget 2026 initiative, this is expected to make up to $1.2 billion of bank loans available to businesses. And $48 million has been set aside from Budget 2026 to cover potential losses from the scheme.
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