Budget 2025 was delivered amid a backdrop of rising global uncertainty, dragging broader economic expectations lower and making fiscal settings more constrained. Domestic economic activity is still set to recover, but Budget 2025 also reinforced views that the government will be less of a driving force for this recovery, as more focus is shifted to households and the private sector to rev up New Zealand’s economic engines.

We have dubbed Budget 2025 the “Switch-It” Budget, with a greater focus across the Budget on deliberate trade-offs and fiscal reprioritisation that spends money in new areas, paid for by reducing money spent in other areas. There are few large new promises or spending programmes, with various smaller initiatives more in focus.

The biggest structural change isn’t just what’s funded, but how it’s funded. The Government had limited new funding in Budget 2025, with the Minister of Finance slashing the operating allowance (new money to be spent) to $1.3b – the lowest in over a decade. With such a small pot of funds, any new spending initiatives would require savings to be found elsewhere. This outcome was achieved with savings of $5.3b identified, allowing $6.7b in new operating spending to occur.

This approach is a sharp departure from historical norms, where previous spending was simply rolled forward and new spending stacked on top. Budget 2025 instead reinforces a shift in approach towards the operating allowance being a “net” figure, with all government programmes examined to determine how to allocate the government’s scarce resources. We can no longer afford to fund everything – instead, we must fund what matters most. And to do that, the government is more willing to cut back or means-test existing support than before.

This hardline approach also saw changes to the government’s approach to pay equity led to savings of nearly $13b over four years in the weeks before the Budget. These funds were previously counted as “tagged contingencies” in the fiscal outlook – not allocated to any one Vote or functional class, but essentially sitting within the future operating allowance and waiting to be allocated. Regardless of the government of the day, the large increase in expected pay equity costs would have required nearly two-thirds of the cumulative operating allowances by 2029 ($12.8b of the $19.6b operating allowance to 2029), leaving little scope to meet rising baseline costs on various government services caused by inflation and population pressures, and severely limiting funding for new initiatives.

The fiscal outlook remains challenging. Forecast core Crown revenue has been revised down by $9.8b over the next four years, compared to the HYEFU forecast in December 2024, due to a softer economic outlook. Previously, when Crown revenue has been revised lower, spending has been revised higher. However, Budget 2025 saw a shift, with core Crown expenses also trimmed $3.1b from the last forecast. Although there’s still a gap between lower spending and much lower revenue, at least both are moving in the same direction, reflecting a desire to bring spending in line with what the government earns over time. Yet Crown spending remains elevated compared to recent history, declining to just 30.9% of GDP by 2029, and still well above pre-COVID levels.

The return to surplus continues to be expected within the forecast period – just. The OBEGALx surplus is now forecast at a razor-thin $214m in 2028/29, sharply down from $1.9b previously. With such a small buffer, any small economic fluctuations or shifts in spending could easily knock us back into deficit territory. New Zealand’s debt to GDP ratio will continue to increase, albeit at a slower pace, as spending tracks above revenue. In short: the books are on a better track, but the room to manoeuvre is minimal. This approach is a cautious consolidation, but with more money being spent that last year, it’s completely incorrect to call it austerity.

One of the most headline-grabbing announcements is Investment Boost, a 20% upfront advanced depreciation scheme for new investment in plant, machinery, and equipment. This policy is a rare example of The Treasury and Inland Revenue singing from the same song sheet as politicians, with both strongly supporting the measure as a productivity-enhancing policy.

Investment Boost is expected to lift GDP by 1% over 20 years, with half that growth occurring in the next five years. It’s not a silver bullet, but it does provide a clearer incentive to upgrade capital stock than a generic corporate tax cut. With businesses hesitant to invest amid global uncertainty, the boost could be the nudge needed to get investment flowing. At the same time, to use Investment Boost requires businesses to have the cash or borrowing facilities, and willingness, to purchase. Although investment intentions have been high, uncertainty is clouding actual investment, and Treasury has downgraded its forecasts of investment spending as the wider economic environment remains a headwind.

The KiwiSaver shake-up illustrates ongoing government spending restraint. Going forward, the maximum government contribution will be halved to $260.72 and limited to those earning under $180,000, while minimum employer and employee contribution rates are set to rise from 3% to 4% by 2028.

Infometrics’ analysis of public IRD data from 2021 (the latest readily available) suggests that around 36% of KiwiSaver members contribute at the 3% rate, and that only a small proportion earn above $120k, meaning the effect of the $180k limit won’t affect many.

These changes aim to reduce costs to government and redirect funds, but they also shift more of the retirement saving burden onto households and businesses. With employers facing higher costs, there’s a likelihood that this increase in contributions will be clawed back through slower wage growth. Treasury has assumed that “employers will offset the majority (80%) of their higher contributions via lower-than-otherwise wage increases. These lower wage increases have a negative impact on household spending.”

The cuts to the member tax credit probably won’t significantly alter savings behaviour, but the signal is clear: support will be more targeted going forward.

Similarly, changes to welfare settings include the introduction of a parental assistance test for Jobseeker Support eligibility for 18–19-year-olds, and additional means testing of the Best Start payment in its first year. Working for Families gets a boost, paid for by the changes to Best Start, and several other smaller savings and means-testing initiatives are scattered throughout Budget 2025. These changes reinforce a shift to reduce government’s role in the broader economy, or at least as the first port of call for support or assistance.

Infrastructure investment saw a further lift, with notable announcements around Nelson Hospital, upgrades to Wellington and Palmerston North facilities, and urgent work in Auckland. The PPP for Christchurch Men’s Prison is also moving forward. And there was more capital funding for school classrooms, cyclone-damaged roads, and rail.

But there remains a gap between announced funding and work proceeding on the ground. Consulting engineers and others we talk to in the infrastructure sector continue to report low workloads. The government is still planning more capital investment in later years of the forecasts, but actual delivery remains sluggish.

Ultimately, Budget 2025 is pragmatic, with a greater focus on finding savings to pay for new initiatives and continuing the difficult work of rebuilding fiscal headroom. The switch-it nature of the Budget means that while some areas are getting fresh investment, others are being pared back – often quietly.

Budget 2025 contains a tough but necessary dose of economic realism. In a world of limited options and growing risks, it shows that government is prepared to make harder calls and inch us closer to a more sustainable fiscal path. Budgets aren’t often about pleasing everyone – many will want more spending, while others will be concerned we aren’t returning to surplus immediately by slashing government spending hard and fast. Both approaches risk being unsustainable – more spending when revenue can’t even begin to keep up at the start is clearly unsustainable. But slashing spending at an already difficult time for the economy could undermine growth.

There aren’t necessarily good choices available in Budget 2025, or for future Budgets – just tough ones. The economic outlook continues to show a recovery in 2025 and into 2026, but at a more restrained pace than previously hoped for. Fiscal consolidation is occurring, at a slow pace, leaving other parts of the economy to provide the momentum for the expected pick-up in growth.