The “Growth” Budget In A Shrinking World

• Set against a challenging backdrop, Budget 2025 revealed an inevitable downgrade to the economic and fiscal outlook. A new initiative – Investment Boost – was also announced to help the Government “go for growth”.
• Heightened global uncertainty led by the unfolding tariff trade war simply means a weaker global outlook. Near-term Kiwi growth as a result has been downgraded. And weak productivity continues to hamper our long-run economic growth.
• A weaker economic outlook means a weaker fiscal outlook. No surprises. And that’s despite a reduction in operating allowances. Operating deficits are deeper in the near-term. A return to surplus is still achieved, but only just.
• The Government’s debt pile continues to grow in the near-term, hitting a peak of 46% but reached a year later. More debt means more issuance - $4bn more over the next four years to 2029.

As well-telegraphed ahead of the big day, Budget 2025 revealed an economic outlook hampered by global uncertainty, resulting in a weaker fiscal outlook with a focus on consolidation.

Heightened global uncertainty led by the unfolding tariff trade war simply means a weaker global outlook. Global growth forecasts have been cut left, right and centre. And being the heavily trade dependent country that we are, a downgrade to Kiwi growth, particularly in the near term, was inevitable. Despite the recent strength in the export sector, weaker export demand and reduced investment from tariff uncertainty are assumed to reduce New Zealand’s growth by 0.2% over the next two years. Growth later accelerates to 3% in 2027, but our persistently weak productivity constrains growth further out.

The operating surplus is still achieved, on paper, in 2029 – at the very end of the projections – but to an amount that needs a magnifying glass to see on a chart ($200mil or 0.0% of GDP). The weaker reality means more debt. The debt management office will have to issue an additional $4bn over the next four years to 2029. Net debt rises to a peak of 46% and remains above previous projections.

In terms of key policy initiatives, the new Investment Boost scheme is the cornerstone of Budget 2025 – the Growth Budget. The scheme involves a tax incentive to encourage investment in productive assets, like machines, tools, and equipment. Beginning from today, businesses can deduct 20% of a new asset’s value from that’s years taxable income, on top of normal depreciation. According to the Budget, Investment boost is expected to lift GDP by 1% and wages by 1.5% over the next 20 years – with half of these gains in the next five years. The policy is expected to cost the Government around $1.5bn per year.

The other headline-grabbing announcement centred around changes to KiwiSaver. Budget 2025 announced a staged increase in default employee and employer contributions to KiwiSaver. From 1 April 2026, the default rate will go to 3.5% and, from 1 April 2028, the rate will go to 4%. Other changes also include a reduction and means testing of the Government contribution, effective from 1 July 2025. The annual government contribution will be halved to 25cents for each dollar a member contributes, up to a maximum of $260.7. And members with an income of more than $180k will no longer receive it.

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