Lifting New Zealand’s productive capacity is key to unlocking the country’s potential, according to Finance Minister Nicola Willis, who released the Half-Year Economic and Fiscal Update on Tuesday.
Willis says the Crown’s financial position had deteriorated over the past six years, but New Zealand’s economy had reached a “turning point”.
“Inflation is back under control, the Reserve Bank has begun reducing interest rates, and household spending and business activity is expected to lift,” she says.
“After bottoming out in the September quarter, the economy is forecast to grow 0.5 per cent this financial year and 3.3 per cent in the following year.”
However, Willis acknowledged the financial outlook was still challenging. “Core Crown tax revenue is forecast to be $13 billion lower over the four-year forecast period, delaying our intended return to surplus under the new operating balance measure by a year.”
Willis said the decline was largely due to Treasury revising “overly optimistic assumptions” about the economy, not decisions made by the current Government.
To address long-term challenges, Willis outlined four key priorities for Budget 2025:
- Lifting economic growth by addressing productivity challenges.
- Implementing a social investment approach to improve outcomes for high-needs groups.
- Tight control over government spending while funding high-priority commitments.
- Developing a sustainable pipeline for long-term infrastructure investment.
“Progress has already been made in all these areas,” Willis says, pointing to initiatives like fast-tracking consenting processes, reducing red tape, and bringing government spending under control.
“We’ll have more to say in the Budget, but today’s release of the latest economic and fiscal data highlights both the scale of the challenge and the extent of the opportunity New Zealand faces. The Government will realise that opportunity by unlocking New Zealand’s and New Zealanders’ potential.”
New fiscal measures
The Government is also adopting a new financial indicator and updated approach to capital allowances following Budget reviews of the current fiscal measures.
Willis announced that the Operating Balance before Gains and Losses (OBEGAL) would be replaced with a new indicator, OBEGALx, which excludes ACC’s revenue and expenses.
“Since 2008, governments have used OBEGAL to communicate their short-term fiscal strategy operating targets,” Willis says. “However, in recent years, this picture has been increasingly coloured by ACC’s deficits, which reached $4.1 billion in 2023/24.”
She says the annual results of ACC, supported by a $50 billion asset base, were not relevant to near-term government tax and spending decisions.
“Ministers should not be raising taxes or reducing public spending to compensate for ACC deficits in pursuit of a short-term surplus target,” she added.
OBEGAL results will still be reported alongside OBEGALx and other fiscal indicators in Treasury’s updates.
Willis also announced the Government would discontinue the Multi-Year Capital Allowance (MYCA) framework introduced in 2019, describing it as ineffective.
“In Budget 2023, for example, the previous government topped up the MYCA by $17.6 billion and committed $17.4 billion in that Budget alone, leaving only $3.1 billion in the MYCA to cover new capital investments in the following three Budgets,” Willis says.
Instead, the Government will set capital allowances for each Budget within the forecast period, with the flexibility to adjust them based on circumstances.
“Single-Budget capital allowances will be easier to understand and communicate,” she adds.
