Finance Minister Nicola Willis says the Government will reduce the amount of new spending in the upcoming budget by $1.1 billion as it strives to deliver a surplus in a weakening economy.
In a speech to the Hutt Valley Chamber of Commerce, Willis said the Treasury had lowered its growth forecasts due to the trade war launched by the United States.
While the economy was still expected to grow it would do so more slowly than previously forecast, reducing government revenue and slowing any return to fiscal surplus.
Prior to US President Donald Trump’s “Liberation Day”, Willis had planned to add up to $2.4 billion of new spending in Budget 2025 and still achieve a small surplus in 2029.
She said that was no longer possible and now plans to trim that operating allowance to just $1.3 billion, and make further cuts to existing spending to free up money for new initiatives.
“The fiscal forecasts will not be finalised until later this week, but according to the latest numbers I have seen, this smaller operating allowance means we will continue to forecast a surplus in 2029,” she said in the speech.
New spending would only occur in health, education, law and order, defence, and a small number of critical social investments. Most government agencies would not get any increase in funding in Budget 2025, and some previously committed spending would be withdrawn.
Willis said every dollar had to be directed towards the “most pressing priorities” or be sacrificed to reduce borrowing.
Fiscal policy appears to have moved from targeting just what some call 'wasteful' spending to also cutting some ‘decent-but-not-best’ spending as well.
This received a mixed reception among the business audience gathered in a local manufacturer’s production floor. One attendee said he’d come hoping to hear some good news, and was disappointed.
His firm has developed a new kind of CNC (computer numerical control or automated cutting) machine but has yet to make any sales. Businesses liked the product but were unable or unwilling to make new capital investments right now, he said.
Chamber chairman Mark Skelly said the Hutt Valley feels the impact of changes in government spending more sharply than other regions but understood why it may be needed.
“Many of us would love a lolly scramble … but the reality is that is not where we are now,” he said.
Austerity-lite
The speech was a change in tone from Willis’ previous visit to the Hutt Valley in 2024, where she promised Budget 2024 would avoid “austerity” which was a “mistake of history”.
The Coalition’s fiscal policies are best described as fiscal consolidation after years of deficits. Austerity generally refers to much more dramatic spending cuts and/or tax increases which noticeably reduce public services and hurt household incomes.
However, opposition parties were already describing the previous fiscal settings as austerity. In a press release, Green Party co-leader Chloë Swarbrick said the additional cuts would usher in "new age of austerity”.
On the other hand, James Ross from the Taxpayers’ Union said cutting the operating allowance to $1.3 billion was a "good start" but Willis needed to balance the budget much more quickly.
“If the Government can’t set the operating allowance at zero this year, it must lock it in for Budget 2026. Anything less is just kicking the can toward a cliff,” he said in a statement
Willis told reporters she was being careful not to fall into austerity, but said the surplus target effectively slipped back a year in the half-year update.
“We are conscious that it can't keep slipping. New Zealand has been in deficit since 2019 and at a certain point, governments can get themselves in a position … that becomes extremely hard to manage,” she said.
“What history shows us, and what events around the world show us, is that it's when you let that get out of control that you actually run out of choices, and others decide your path for you”.
There will still be new investment in hospitals, schools, and infrastructure, as well as some small initiatives targeted at business growth and cost of living support, all within the reduced operating allowance, Willis said.
The Finance Minister wouldn’t commit to repeating the $1.3 billion operating allowance in the future budgets, leaving the possibility of a small lolly scramble ahead of the election next year.
27 Comments
Whilst I understand the financial prudence of not overspending, this austerity will plunge NZ back into recesdion
For those with a mortgage, keep fixing for 6 months, interest rates are going to keep dropping, and further than many "experts" believe.
With your statement "For those with a mortgage, keep fixing for 6 months, interest rates are going to keep dropping, and further than many "experts" believe". I know you have got a few calls on the OCR, etc, correct but that doesn't make you an "expert", and I don't think it that means you can make a categoric statement like that. What if inflation takes off or offshore interest rates increase dramatically?
Up to you if you take my advice or not Norm. It seems pretty obvious to me that, with 1) the NZ economy slowing and 2) the government spending less, NZ will re-enter into a recession. When people lose their jobs and have little money to spend in a recession, inflation does not rise, even if prices increase! The RBNZ will do all it can to help cushion the blow, and it will therefore reduce the OCR by more than many "experts" expect. Keep fixing for 6 months is my advice.
50 ways to kill the economy? I'm sure some one could pen some new lyrics to Art Garfunkel's tune?
Paul Simon I think you mean - he was working as a solo artist at the time that tune was written. And yes the NZ economy is going to contract significantly this year - just like it did last year.
Austerity. Recession. Stagflation. Best consider what that will do for you, especially if it involves leverage.
It will likely result in a few leave-her's,
Stress manifests like that. And it's compounded because those who were sucker enough to be levered this late in an obvious Ponzi, are likely to be the less able to negotiate stress.
Austerity. Recession. Stagflation. Best consider what that will do for you, especially if it involves leverage.
Historically the central authorities are way more generous discounting debt than they are providing direct financial support to people in times of economic downturn. I.e. the cost to service a mortgage can drop a lot more than cash injections to cover rent.
All good as long as we are speculating on gains without associated income. Oh that's right...that's the game isn't it.
If the increasingly little engine that cant pull its own weight (NZ) needs more tax, could be time for the one targeted at the tax free speculators - reintroduce a Land Tax.
All I know is that even in my 20s, getting ahead without leverage was extremely hard, and even worse now. Those that told me I was foolish becoming a debt slave, still don't have a pot to piss in and will be renters for 60 years or more, which is a far worse scenario than 20-30 years of mortgage.
Unless you're lucky or born into wealth, getting to a position of comfort is extremely difficult using a 1960s era mindset of saving yourself to prosperity. You are going to likely need to deploy some level of risk, up to the individual how far they want to stretch that.
Or, debt is baaaaaaaad
"Historically the central authorities are way more generous discounting debt than they are providing direct financial support"
Indeed, hence my advice earlier above, to fix mortgages for 6 months.
Sort out the lazy immigration policy, the burdensome regulatory environment and the treaty master race nonsense and I reckon NZ would be back on track to recovery as a great place to live.
All of the above is driving our brightest away.
Fairly negligible in the scheme of things. More likely, your own personal bugbears.
It's more than people want more than they currently have, and think that geography is the issue, and not the system itself (that's not working most other places also).
I've struggled to find a better place to live, whether broke or rich.
Man, what double speak. She must be doing it hard in her brain, some serious cognitive dissonance going on (believing 2 things that are opposites to be true at the same time). She both isn't doing austerity, but is doing all the austerity things, just not calling it austerity. It's hard to believe she can take herself seriously.
Another case for more rate cuts. It's clear the government aren't interested in the Keyensian approach.
Overnight, from the mighty Ray Dalio:
Though not yet fully realized, it is also increasingly being realized that the United States' role as the world's biggest consumer of manufactured goods and greatest producer of debt assets to finance its over-consumption is unsustainable, so assuming that one can sell and lend to the U.S. and get paid back with hard (i.e. not devalued) dollars on their U.S. debt holdings is naive thinking, so other plans have to be made.
Said more simply, enormous trade and capital imbalances are creating unsustainable conditions and major risks of being cut off, so they must come down -i.e., excessive imbalances + deglobalization = smaller trade and capital imbalances.
More broadly, what I am saying is that, based on many of my indicators, it appears that:
1) we are on the brink of the monetary order, the domestic political and the international world orders breaking down due to unsustainable, bad fundamentals that can be easily seen and measured,
2) the progression of events leading to these increasing disorders is similar to those that have progressed many times throughout history, so this one looks like a contemporary version of the old story of how monetary, domestic political and social, and international geopolitical orders change,
3) there is a growing risk that the United States, imposing these challenges to deal with, will increasingly be bypassed by a world of countries that will adapt to these separations from the United States and create new synapses that grow around it, and
4) if these circumstances are managed in the best ways, the outcomes will be much better than if they are managed in the worst ways
In my opinion, what would be best is calm, analytical, and coordinated engineering and implementation, with the imbalances and the needs for self-sufficiencies treated as shared challenges, to produce the “beautiful" deleveragings and rebalancings that need to take place. For example, as explained in my new book,
How Countries Go Broke: The Big Cycle
, there is a "3-Part, 3-Percent Solution" to dealing with the U.S. government debt problem that would lead to much better results than the path that we appear to be on. Unfortunately, thus far we haven’t seen the better ways and have instead seen disturbing fighting and volatility that are teaching lessons that are leading to irreversible bad consequences.
Like Schiff, he gets the problem, econmics and politics-wise.
But like Schiff, he totally fails the growth/depletion/stocks problem. Cyclical comments are horsepoo when everything is exponential:
https://dothemath.ucsd.edu/2022/09/death-by-hockey-sticks/
Dan, read that link, do some homework, and ask the hard (real) questions, please. She is out of her depth, as are they (mostly) all. Who but the media can hold them to account?
Sobering.
But like Schiff, he totally fails the growth/depletion/stocks problem. Cyclical comments are horsepoo when everything is exponential:
Yes Power. I'd imagine that Dalio doesn't want to talk about 90% of the world popn having to go to the gas chambers to right the balance. He knows that he will not be selected given his position as a high-ranking person in the 1%ers. He does have a heart.
Another fail from this lacklustre Gubmint. Will we watch another small city of New Zealanders take the hint and depart for more hopeful shores this year?
depart for more hopeful shores this year?
Which shores are those, it's looking pretty dire, everywhere.
At this stage it'd possibly be better if the country depopulates and returns to nature, and humans can relocate elsewhere to enjoy this dystopic hellscape.
I agree. Not only massive cuts to public services destroying valuable knowledge (and there's more when it comes to restricting knowledge .... Judith Collins), our young and talented along with those with much needed skills leaving in droves for greener pastures is just doubling down on austerity and will be the cause of a massive reduction in well-being. Given that austerity measures significantly impact social mobility and life trajectories (especially for those least affluent in society) it doesn't bode well for the future. This Govt. is doing nothing other than orchestrating the very outcome Nicola Willis says she is trying to avoid. Such outrageous double speak.
"History is full of people who out of fear, or ignorance, or lust for power has destroyed knowledge of immeasurable value which truly belongs to us all. We must not let it happen again." Carl Sagan
Perhaps whilst a politician, they along with their immediate family members must only use the public hospital system, as well their children attend state schools?
Good thing Trump came along so they could roll their fictional surplus out further and pretend it’s all to do with the tariffs.
So you believe Trump's tariffs won't have negative effects on the NZ economy?
Strangely for a convicted DGM I agree with the comment and expect it will be just a convenient excuse.
Not directly. Maybe indirectly although with what we export we could also benefit. Our exports to the US are about 10% of our total. Total exports are about 25% of GDP. So a 10% tariff assuming relatively neutral demand elasticity and a 50% cost to the consumer and the other half to the producer would probably see demand drop by about maximum 25%? So 10% of 25% of 25% is roughly a 0.6% impact on our GDP.
I was more stressing the fact that their past forecasts of expected timing in reaching surplus were completely farcical.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.