Budget 2025: Modest borrowing, tighter spending, capital boost ahead
New Zealand’s Budget 2025 is shaping up to be a carefully calibrated fiscal update, with only a small rise in government borrowing expected—despite tax shortfalls, a global slowdown, and $400 million in new capital investment commitments.
Finance Minister Nicola Willis will deliver her second budget on May 22 at 2pm, aiming to steer the government back toward surplus while preserving critical investments in health, education, and infrastructure.
“We expect budget 2025 to depart from that highly unfavourable trend, with the expected upward revision to the borrowing programme likely to be small compared with recent experience,” said Darren Gibbs (pictured), senior economist at Westpac NZ.
Fiscals start stronger than forecast
Recent data has provided a more encouraging fiscal base. For the nine months to March, the accrual-based OBEGALx deficit was $6.6bn, or $0.5bn better than forecast in the Half-Year Economic and Fiscal Update (HYEFU).
- Core Crown spending came in $0.6bn below forecast.
- Tax revenue was $0.2bn above forecast, driven by GST and small business payments.
- However, wage and salary tax receipts fell short by $0.5bn, highlighting labour market softness.
The residual cash deficit—most directly linked to the government’s borrowing requirement—was $1.7bn below forecast, largely due to lower-than-expected capex and advances.
Gibbs noted some of this may be due to timing, but it nonetheless gives the government a slightly more favourable starting point.
Weaker growth to dent tax revenue
While the starting position is sound, Treasury’s forecasts are expected to reflect lower real and nominal GDP growth in 2025 and 2026. These revisions stem from a deteriorating global outlook, driven in part by US tariff policy.
“A 1% decline in nominal GDP growth in year one of the forecast costs the government about $1.3bn in lost revenue each year,” Gibbs said.
Over two years, such a shift could erode $2.6bn annually, or a total of $5–6bn in lost revenue by 2028/29. This places pressure on the previously projected surplus and underscores the need for fiscal restraint.
Government cuts operating allowance to lowest in a decade
To keep the path to surplus intact, Willis announced a sharp cut to the budget’s operating allowance—from $2.4bn to just $1.3bn.
“She has decided to reduce the size of the Budget 2025 operating allowance… to just $1.3bn from the $2.4bn allowance set previously,” Gibbs said.
As reported by interest.co.nz, this is the smallest nominal allowance since 2015 and the lowest in inflation-adjusted terms since 2012. Spending will be limited to the government’s core priorities: health, education, law and order, defence, and a small number of social investments.
Savings measures under consideration include:
- Means-testing KiwiSaver contributions (currently costing $1.1bn annually)
- Changes to the Pay Equity Act, potentially reducing wage settlement provisions by over $1bn
- Reprioritisation of unspent departmental allocations
Departments, for the most part, will not receive additional baseline funding.
Capital investment gets $400m boost
Despite the operating squeeze, Prime Minister Christopher Luxon confirmed that the government will lift its net capital allowance by $400m, taking it to $4bn.
“In health, education, law and order, defence, and transport my Government is prioritising significant new investments,” Luxon said in a speech reported by RNZ.
He added that this balanced approach would help reduce debt without undermining frontline services: “Spending more on everything… would mean larger deficits, more debt, and ultimately fewer choices in future budgets.”
The budget will also retain the $500m Research and Development Tax Incentive, giving business certainty amid previous doubts.
Bond programme: Modest increases only
Westpac expects the borrowing impact of Budget 2025 to remain contained.
Gibbs forecasts a total increase of $4bn over four years, with the 2025/26 bond programme confirmed at $40bn.
“We think that additional issuance forecast by the Treasury over the coming four years is likely to be no more than $5bn above the HYEFU forecast,” he said.
Short-term borrowing (such as Treasury bills) is also likely to be revised downward, given this year’s $2.5bn in overfunding already in place.
Surplus still in sight for 2028/29
Despite the fiscal tightening, the government remains committed to achieving an OBEGALx surplus in 2028/29.
“Near-final Treasury Budget forecasts had indicated that the decline in next year’s operating allowance – in concert with other savings – would be sufficient to preserve a return to surplus in 2028/29,” Gibbs said.
“That said, we do not expect the surplus to be as large as that forecast in the HYEFU.”
Bottom line
Budget 2025 reflects a pivot toward disciplined operational spending, modest capital expansion, and measured borrowing—a strategy shaped by global uncertainty and a drive to restore fiscal credibility. With Treasury likely to downgrade revenue forecasts and elections on the horizon, the budget is expected to balance political caution with economic signalling.
Read the insights from Westpac.
