Finance Minister Nicola Willis makes a pre-budget speech to the Hutt Valley Chamber of Commerce. Photo: RNZ / Sam Rillstone
A $1 billion cut to the government's operating allowance could be a further handbrake on the economy as it crawls towards recovery, economists are warning.
Finance Minister Nicola Willis announced at a speech to the Hutt Valley Chamber of Commerce on Tuesday morning the government would halve its operating allowance - the new money it has available to spend at the May Budget - from $2.4 billion to $1.3b.
That will result in only a small number of government departments receiving additional funding this year.
Willis described the upcoming Budget as "no lolly scramble".
Kelly Eckhold, chief economist at Westpac, said it indicated the government planned to run a "very tight ship" for the foreseeable future.
"At first glance it suggests that any deterioration in the fiscal deficit for the coming year coming from weaker growth could be substantially offset by spending cuts.
"What we don't know is the extent to which capital spending will be increased - for example in defence - as these items are not reflected in the fiscal deficit. In general though the announcement does imply government will be less of a stimulus to demand going forward than had been previously assumed."
Last year, a group of 15 independent, union and university economists sent a letter to Prime Minister Christopher Luxon and Willis, saying their cuts to government spending were contributing to the "severe and prolonged recession".
Infometrics chief forecaster Gareth Kiernan said, given the warning from Treasury that last year's Budget operating allowance of $2.4 billion was not enough to account for cost inflation or growth in demand, a reduction in the operating allowance to $1.3b suggested "continuation of the cost-cutting process throughout the last 12 months has probably been more pronounced than expected".
But he said it was probably also more nuanced, focusing on particular areas of spending, than during the government's first six months, when cuts were blunt.
"We'd already incorporated limited growth in government spending in our economic forecasts throughout the last year, although with the caveat that we saw a possibility there could be a bit less fiscal discipline and a bit more spending growth during 2026 ahead of the election, given that stronger economic growth tends to favour the incumbent government."
He agreed that capital expenditure would be an important part of the picture.
"During the first push for spending cuts in early 2024, there seemed to be little, or no, distinction made between opex and capex in terms of where the cuts occurred. More recently, the government appears to have got a better handle on the need for longer-term capex projects to continue progressing, particularly considering NZ's ongoing infrastructure deficit. It is likely that planned increases in capital expenditure provide some support for the economic recovery over the next 12 to 18 months, particularly given the government's keenness to start delivering on some of the major projects that it campaigned on. However, this capex is unlikely to completely make up for the continued restraint in operational spending."
Households should feel limited impact, apart from in Wellington where government spending was a significant part of economic activity.
"It will essentially be a continuation of the tight fiscal approach of the last year or so anyway, so I don't think it changes the economic environment significantly for the rest of the country. Perhaps the risk with relying on capex is that the timelines for these projects are often long, so any positive economic effects can take longer to flow through into the economy and boost household and consumer confidence than politicians might have been hoping for."
Eckhold agreed it was probably set to be another tough year for Wellington.
"In other parts of the country the impact might be less - and to the extent interest rates are lower there could be some benefit for some households' disposable incomes."
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