Underwhelming, as promised. All week, Finance Minister Nicola Willis had actively reduced public expectations by saying that her second Budget would not be filled “with rainbows and unicorns” although – somewhere over the rainbow – it would somehow deliver the twin unicorns of “hope for the future” and “genuine growth.”

Not a chance. Judging by the random array of sideways shufflings and deckchair re-arrangements that comprise Budget 2025, Willis has no coherent plan for sustainably growing the New Zealand economy. A nation where growth is struggling to reach 2% while unemployment heads above 5% is no country for young men. Or for young women either, if the government’s pay equity hit-and-run job hadn’t already made that obvious.

The Luxon government’s overall vision – if that’s the right word – has been to reduce Crown debt and shrink the size of government, on faith that the economy will then expand to fill the space. Needless to say, that’s magical thinking in a small country like New Zealand where – inevitably – government spending is always going to be the crucial driver of economic activity, especially when it comes to the building of core infrastructure.

Regardless, the coalition government has been steadily walking away from its moral and fiscal obligations to stimulate economic activity during bad times. Since being elected, it has made only tentative investments in the modern physical and digital infrastructure required to generate a sustainable level of growth, foster innovation, boost productivity and thereby create a significant number of good, well-paying jobs.

Instead, Willis is crossing her fingers and relying on (a) the Reserve Bank – keep cutting those interest rates, even if it puts your recent reductions in inflation at risk – and (b) expect the private sector to do almost all of the heavy lifting, virtually unaided.

Given the waning levels of consumer demand (household spending fell by 1.4% in the year to March) and the reluctance of the Luxon government to invest in growth (capital investment fell in the eight months to February) you might have reasonably held out hopes yesterday for a change of direction. No such luck.

Buyers remorse

True, the Luxon government was elected on a platform of austerity but is this really how its private sector fan base had expected things to turn out? Firms, big and small, have been sweating it out in the trenches for the past 18 months. Yesterday’s Budget offered next to nothing to alter their prospects.

In effect, Willis is urging the private sector to go over the top and through the barbed wire with only a limited form of tax relief in the way of extras ammunition. Firms will be permitted to write off 20% of the value of the new equipment, hardware, gadgets, tools etc that they put on the company credit card – given that they need the means to buy the stuff, and for many, the big items will be a one time and one time only form of assistance. Oh and BTW, this will be another hit on the revenue available for everything else. Now get out there, and do or die for King and country!

Footnote: Amusingly, this 20% accelerated depreciation formula was being touted yesterday as being likely to increase workers wages by 1.5 % over the course of the next 20 years. Don’t say they don’t keep the best interests of workers in mind.

Banking on inequity

There’s always a p.r. element to all of this, as Finance Ministers get their annual turn in the spotlight to prove they’re a safe pair of hands. In reality, the vast majority of Budget spending is soaked up by the pre-existing entitlements in education, health, income support law and order etc.

That’s one reason why Budget Day does come with an inbuilt sense of anti-climax. Long gone are the days when the nation would gather around the radio for the one and only revelations from on high about economic policy for the year ahead. In recent years, this declining importance has been underlined by the drip-feeding of Budget details over the preceding weeks, in order to ensure some items offering potential political gains don’t get lost in the mix. Or come as nasty surprises.

So...we were told well beforehand about the $12 billion in extra defence spending over the next four years, and about the extra funding for after hours care, and for digital diagnosis and treatment. We were also well informed about the extra funding being set aside for rail freight and commuter rail upgrades.

Oddly though, while the country is being frog-marched towards spending 2% of GDP on defence, the Luxon government has quietly binned the previous government’s goal of spending 2% of GDP on research and development, a vital step for fostering innovation and generating future wealth.

Instead and for the foreseeable, New Zealand’s spending on r&d will remain at around half the OECD average. When adjusted for inflation, we are reportedly spending less on scientific research today than we were back in 2018. So much for investing in future growth.

As widely noted,the virtual junking of measures to promote pay equity provided the fiscal breathing space for Budget 2025. Women as they used to say in the 1970s, really are holding up more than half of this world. Some $2.7 billion will be reaped from forcing women to accept that getting lower wages for doing equivalent work is just the natural and genderised order of things. How do Cabinet Ministers justify to their daughters what they’ve done?

Further cuts, more savings: as from April next year, access to Labour’s Best Start child support payment will also be phased out entirely once parental earnings exceed $97,000 annually. Those middle income battlers doing it tough are about to be doing it even tougher on the home front.

In no particular order (and to no discernible net benefit) yesterday’s other revelations included a halving of the state’s Kiwisaver contributions to 25 cents for every dollar saved, to an annual limit of $261. In tandem, a worker’s minimum contribution to the Kiwisaver scheme will rise from 3% to 4% of their wages over the next 3 years. So will the matching employer contributions although Business NZ has already signalled that this added cost will become a factor in future wage negotiations. In terms of the impact on household spending...clearly, much of any gains for low and middle income workers from last year’s tax cuts are going to be eaten into by their Kiwisaver changes.

The generational theft that this involves is startling. Basically, we’re cutting the incentive for young people to start Kiwisaver, even as we tax them to support an ageing population’s level of National Super that they themselves – in all likelihood – will never receive when they finally get to the age of 65. In addition from July, 16 and 17 year old workers will also have to contribute to Kiwisaver. Get ‘em saving earlier, even if the rules for retirement payback are likely to be very different for them.

Other entitlements to income support are being shrunk by means testing, presumably with the blessing of the Regulations Ministry. For example...in a move that will hardly endear 18 and 19 year old voters to the current government, any of them getting Jobseeker and emergency benefit support will now have their eligibility restricted by being means tested against the income of their parents.

This change - expected to generate about $163 million – happens to be the same amount that the pre-announced boost to after hours healthcare funding will cost. Peter, pay Paul. The move not only seems unfair but is potentially dangerous if – as is sometimes the case – the teenager in question is getting emergency income support because of the breakdown of their relationship with their parents. Has Social Development Minister Louise Upton commissioned any research into the possible unintended consequences of this policy change?

One could go on...and outline more of the down-ladders and occasional up-snakes scattered throughout Budget 2025. The boost to funding for classroom assistance for kids with special needs is especially welcome, even if too, has been paid for by redirecting money away from pay equity. Vote Health got a 4.8% funding boost, although this will not be enough to enable the health system to keep pace with rising costs and the increasing demands on public health from a growing and ageing population.

Though Budget 2025 was mute on this point, GP fees are at serious risk of having to rise once again – and some clinics will have to close their doors – if there is not a significant boost to the “capitation fee” contribution that the state makes annually to the delivery costs of GPs offering primary care.

Next year however, patients will be able to begin getting 12 month prescriptions for their medications. This will deliver sizable savings to those patients otherwise facing multiple script renewal charges at the pharmacy; but in some respects it merely gives back what National took away when it chose to reinstate prescription charges last year.

Presumably, the delay until next year before making the change to 12 month prescriptions is being driven in part by uncertainty as to how the Trump trade war with China might affect drug availability, given that China is such an important global source of the raw ingredients for many of the West’s key medicines.

The Big Picture

Leaving aside the raft of one step forward/and two steps backwards measures...how is the macro-economy faring? The budget surplus on whose altar so much has been sacrificed in the name of austerity, is now not due to arrive before 2029, which is right at the outer edge of Treasury’s credible forecast period. Even then, the puny projected surplus – $200 million! – is in margin-of-error territory.

Moreover, this surplus is largely an accounting fiction, given that as RNZ has noted, if the method used up until last year was still in place, the economy would still be facing a $3 billion shortfall come 2029. In the meantime, the deficit will rise over the coming year to over $12 billion, and – even by 2027, after the next election – it will still be sitting at over $8 billion. As RNZ also notes, this is considerably above recent Treasury estimates. The economy is weak, and is rapidly on the way to getting weaker.

So...in the short to medium term, expect things to get worse before they haltingly start to improve a little bit, if we’re spared any global economic shocks over the next five years. Unfortunately, there is next to nothing in this economic outlook (and in the coalition government’s policy kitbag) to stem the current outflow of 191 New Zealanders every day, as they head off in search of a better life elsewhere.

Footnote: For any first term government in our short election cycles, budgets are a three act drama. In last year’s Budget, Willis set the tone of thrift, tax cuts, and reductions in what services the public can expect to receive from the Luxon government. While wagging a stern finger about the need to reduce government debt, Willis borrowed heavily to finance her party’s unaffordable package of tax cuts. Since next year will be an election Budget, one can bet on substantial enticements being on offer to convince wavering voters to keep the faith.

This year’s in-between Budget was always going to be the difficult one, since the government’s honeymoon period was dead almost on arrival. (Any romance of change had evaporated by Christmas 2023.) Looking ahead, it should be of concern to her Cabinet colleagues that the Willis school prefect pose of implacable confidence – i.e. she alone is keeping her head while everyone else is losing theirs – is wearing thin with the public, and (perhaps) in the nation’s boardrooms as well. People quickly tired of Ruth Richardson for the same reasons.

After all, it's now 19 months down the track. With better times postponed yesterday until 2029 at the earliest, it is no longer credible to lay all the blame for this bleak tundra of under-performance solely at the door of a Labour government that is now only a distant memory.

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