Fiscal prudence prevails, but debt keeps rising
Budget 2025 delivered a careful balancing act - meeting growth commitments while holding the line on inflation.
According to ASB chief economist Nick Tuffley (pictured), the government managed to show restraint without derailing its productivity goals.
“The government managed to pull off a balancing act of ticking a box on its Going for Growth goals and still getting back into surplus when promised,” Tuffley said. “However, despite some marked reprioritisation of spending, NZ is still adding to its debt burden for some years yet.”
While the budget showed operating surpluses returning on paper, the real test lies in execution.
“It’s not prudent to run near-endless deficits,” Tuffley said. “The budgets for the next four-five years will challenge whoever controls the finances.”
Investment boost targets productivity, not inflation
The budget’s flagship policy was the “investment boost” - an accelerated depreciation scheme aimed at incentivising business investment.
“It enables businesses to claim, as an expense, 20% of a new asset’s value in the year of purchase… But it will improve upfront cashflows – with the aim of spurring greater investment,” Tuffley said.
Treasury expects the measure to lift GDP by 1.5% over 20 years and increase wages by 1%. Still, ASB cautioned it’s only a start.
“We need 20 or so similarly impactful policies to see our level of productivity close in on Australia’s,” Tuffley said.
Kiwibank economists welcomed the investment incentive, saying it was a useful nudge to help businesses lift productivity. But they warned that the rest of the budget offered little help to lift growth.
“A more decisive RBNZ would be viewed positively across the road (Terrace), given the difficulty the government had in balancing budget 2025,” Kiwibank economists said.
Voters unimpressed: “Meh” dominates post-budget mood
Despite its strategic intent, the budget didn’t make a splash with the public.
At a post-budget event with Tax Management NZ, attendees were asked to describe it in one word. “Meh” was the dominant response.
“There wasn’t a lot of ‘what’s in it for “me”’,” Tuffley said, adding the budget felt more like “a frog in the pot” of slow productivity decline than a bold leap forward.
RBNZ left in charge of the recovery
With spending restraint keeping inflation pressures contained, Tuffley said the onus now shifts to monetary policy.
“The continued fiscal restraint won’t give the RBNZ any inflation concerns,” he said. “If anything, the baton of stimulating a cyclical economic recovery has been firmly passed to the RBNZ.”
ASB expects a 25bp OCR cut this week, although higher food prices and rising inflation expectations may complicate further moves.
“Inflation looks set to lift to around 2.9% on short-lived influences such as food prices,” Tuffley said.
Westpac economists also expect the Reserve Bank to deliver a 25bp cut, but emphasised that the OCR track is more important than the initial move.
“We see the RBNZ’s OCR profile being revised down by around 20bp to around 2.9% by the end of 2025,” said Kelly Eckhold, Westpac chief economist.
Budget’s long-term risks linger
Despite near-term discipline, the government’s debt trajectory remains steep. Inflation-adjusted spending is still projected to rise over the next four years, and debt is projected to peak at 46% of GDP in 2027/28.
“The government’s approach is to look at how it can reprioritise a chunk of the large lift in spending ingrained since 2020,” Tuffley said, adding that options like tax hikes could harm growth, while productivity strategies are harder to execute.
Westpac analysts added that debt issuance forecasts have been revised upward by $4 billion to 2029, and that the Government’s appetite for aggressive fiscal consolidation remains limited.
Read the full ASB insights for more information. For additional insights, read the Kiwibank and Westpac reports.
