By Lucy Craymer and Stella Qiu
WELLINGTON, May 28 (Reuters) – New Zealand on Thursday unveiled a stripped-back budget with few voter incentives ahead of what is shaping up to be a tightly contested election, as policymakers focused on preserving fiscal firepower amid rising risks linked to the Iran conflict.
“This budget takes careful steps to support New Zealanders now while strengthening the economy for the years ahead,” New Zealand Finance Minister Nicola Willis said in a statement as she warned that the war in the Middle East was stoking inflation and threatening the recovery in the trade-dependent economy.
Willis vowed to boost capital spending on defence, schools and hospitals while keeping a tight grip on new operating spending, flagging deeper cuts across the public service that could put thousands of jobs on the line.
The government forecast a budget deficit of NZ$15.06 billion for the fiscal year ending June 30 2026, narrower than a deficit of NZ$16.93 billion in its half-year update in December.
Willis said policymakers were focused on getting the books back into surplus and is now forecasting a return to surplus in 2029/30.
“This is an unexpectedly positive budget, I think, from the perspective of the fiscal outlook,” said Westpac chief economist Kelly Eckhold.
“There’s probably downside risks, I think, to the assumption about just how tax rich the outlook is,” he added.
Since coming to power in late 2023, the centre-right government has tightened the purse strings, arguing it must curb waste and rein in debt but critics counter that the squeeze is choking an economy that has already spent two years struggling to find its footing.
PRESSURE GROWS ON THE ECONOMY AHEAD OF ELECTION
The challenges are stark, with the Iran war boxing policymakers into a corner. Global shocks have soured the outlook since Treasury’s last forecasts in December, fuel prices have reignited inflation above the central bank’s 1%–3% target, and growth is expected to soften, crimping tax revenues.
When the government called the election in January for November 7, it had expected the economy to be on a path of sustained growth, inflation around 2% and falling unemployment.
However, that has not panned out. Treasury now sees gross domestic product rising 2.3% in the year ending June 30 2027, well below forecast growth of 3.4% at the December update.
The Reserve Bank of New Zealand held the official cash rate at 2.25% in a tight vote on Wednesday but flagged that hikes were imminent to counter the energy shock, forecasting softer economic growth and higher-for-longer unemployment.
With Fitch and Moody’s shifting New Zealand’s sovereign outlook to negative, the government has tried to walk a narrow line of reassuring markets and ratings agencies of their discipline, while giving voters something to hold onto.
Willis said in the speech that some will suggest offering “band-aids and sugar hits,” in an election year.
“Not only does that approach ignore the real challenges New Zealand faces but in the absence of a magic money tree it’s our future selves who would have to foot the bill, with interest,” she said, adding she had decided on a “responsible and durable approach.”
THE SPENDING AND COSTING PLANS
Operating allowance for the 2027 financial year is NZ$2.1 billion on average per annum.
Treasury now expects inflation to be tracking at 4.0% in the current financial year before slowing to 1.6% next year.
It announced plans to reduce bond issuance by NZ$6 billion as it pares back debt.
Many of the new initiatives came from cuts within government departments, including the social housing sector and conservation while axing a scheme that paid for the final year of university for students.
The government also announced plans to introduce a prudential levy on banks, non-bank deposit takers insurers and other financial market participants that will recover around NZ$209 million.
(Reporting by Lucy Craymer)
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