Watching Brief - Budget 2025: No fertiliser, but aimed at Growth

As signalled in pre-Budget speeches by Finance Minister Nicola Willis, Budget 2025 is the "Growth Budget". After Budget 2024's "moderate, responsible Budget", Budget 2025 represents an even more disciplined focus on driving economic growth, increasing investment in frontline services, and maintaining strict fiscal discipline (for non-fiscal "hawks") in order to return to surplus in the next four years.

Budget 2025 uses an operating allowance of $1.3 billion per annum, less than half of Budget 2024's operating allowance of $3.2 billion. This has been achieved by the Government finding a further $5.3 billion of savings, in addition to the significant spending cuts made in 2024.

The Government's flagship Budget 2025 policy, Investment Boost, is a credible demonstration of its focus on driving economic growth by encouraging private sector growth and investment in New Zealand infrastructure. Investment Boost provides tax incentives for businesses to invest in productive assets. Other such initiatives include changes to thin capitalisation rules and the creation of a new autonomous Crown entity, Invest New Zealand, to attract overseas investment.

Significantly, Budget 2025 also represents the first (though tentative) attempt by a New Zealand Government to address future increases in superannuation costs as New Zealand's population ages. It does so by making changes to the KiwiSaver regime, including increasing the default rate of employee and employer contributions to 4% over a three-year period. While this change will increase the burden of KiwiSaver payments for businesses, Hon Nicola Willis noted that it will reduce the risk of significant tax increases for business in the future to combat rising health and superannuation costs.

Below, we outline key areas that may be of interest to our Watching Brief readers.

Tax

As foreshadowed, the key economic growth initiative in Budget 2025 is "Investment Boost", a new tax deduction that provides an incentive for businesses to invest in productive assets (such as machinery, equipment and work vehicles).

This $1.7 billion initiative provides that businesses can immediately deduct 20% of a new asset’s value from that year’s taxable income. Importantly, the Investment Boost deduction is available in addition to normal depreciation deductions. The Government initially considered a higher rate but concluded this would have cost more than $8 billion a year, and that this level of depreciation might encourage investment that is not economic.

Investment Boost applies to new assets purchased from today (22 May 2025) with no cap on the value of eligible investments or the number of assets for which it is claimed. It applies to new assets purchased in New Zealand as well as new and used assets imported from overseas. Notably, the Investment Boost deduction is also available for new commercial and industrial buildings which do not allow depreciation deductions and some capital improvements. In addition, an asset may be eligible for Investment Boost if it forms part of a construction project commenced prior to 22 May 2025.

The Investment Boost deduction is not available for:

• assets that have previously been used in New Zealand;
• land (although land improvements, such as fencing, may be eligible);
• assets that will be held as trading stock;
• residential buildings (or dwellings used to provide accommodation);
• fixed-life intangible assets (such as patents); and
• assets that are fully expensed under other rules (e.g., assets valued below $1000).

Investment Boost is claimable by any business that pays tax in New Zealand. Foreign residents who invest in New Zealand resident companies can therefore benefit from Investment Boost. In practice, the Investment Boost policy is expected to reward businesses who make new investments by reducing their tax bills in the year they purchase new assets. It will be given effect by the Taxation (Budget Measures) Bill (No 2), which will be introduced to Parliament on Budget Night. The Government expects this initiative to lift GDP by 1% and wages by 1.5% over the next 20 years, with half these gains in the next 5 years.

Other tax initiatives in Budget 2025 include:

• $65 million to change thin capitalisation rules, to increase the amount of tax-deductible debt foreign investors can use to fund investment in New Zealand infrastructure. Consultation is currently underway on whether changing thin capitalisation settings will lead to more infrastructure investment in New Zealand.
• Changes to KiwiSaver, including an increase in the default employer and employee contribution rates and a reduction in government contributions (discussed further below).
• New funding of $35 million per year for Inland Revenue to carry out tax compliance and collection activities to address tax debt, expected to result in $280 million of extra tax revenue.
• $10 million to change employee share scheme tax rules by deferring the taxing point for schemes that involve the issue of shares in an unlisted company to a point at which the employee can access cash from the shares to meet their tax liability.

Infrastructure

Infrastructure remains a key priority for the Government, with funding being allocated to the following projects:

• Over $1 billion of additional funding for hospitals and other health facilities (including in Nelson, Wellington, Auckland and Palmerston North, and an operating funding increase of $5.5 billion).
• Over $700 million for new schools, school expansions and additional classrooms.
• $464 million of capital investment to upgrade New Zealand’s rail network in the Auckland and Wellington metro areas, and to replace ageing bridges, culverts and other assets.
• $167 million of capital investment to upgrade Defence infrastructure, with a total of $2.7 billion to boost capability, as part of the total $4.2 billion funding for Defence in Budget 2025.
• Funding to deliver 240 new high security beds at Christchurch Men’s Prison, delivered through a Public Private Partnership.
• $219 million in additional operating funding over three years to complete recovery works on roads damaged by 2023 North Island weather events, likely to be shared between five councils: Central Hawke's Bay District Council, Gisborne District Council, Hastings District Council, Napier City Council, and Wairoa District Council.
• $150 million for the Community Housing Funding Agency to support the delivery of additional social houses and affordable rentals, including a new contestable Flexible Fund of $41 million over 4 years (by consolidating existing programmes). There will also be reforms to the procurement system for community housing.

The Government has also indicated it will introduce a Building and Construction (Small Stand-alone Dwellings) Bill on Budget Night to promote housing growth.

Overseas Investment

Budget 2025 creates Invest New Zealand, a new autonomous Crown entity, to be a "one-stop-shop" to attract overseas investment and increase the capital available for growth. It will be established by the Invest New Zealand Bill, which will be introduced on Budget Night and pass over Budget week. Invest New Zealand will commence activity from 1 July 2025 and has been allocated funding of $85 million over 4 years.

KiwiSaver 

Budget 2025 makes a number of changes to the KiwiSaver regime. The most significant change is the increase in the default rate of employee and employer contributions. From 1 April 2026, the default contribution rate will increase from 3 to 3.5 per cent and, from 1 April 2028, it will further increase to 4 per cent. Employees will be able to temporarily opt down to the current 3% rate, if they choose, and still be matched at that rate by their employer. Additionally:

• The Government will extend the government contribution to 16 and 17-year-olds from 1 July 2025 and extend employer matching to 16- and 17-year-olds from 1 April 2026.
• The annual government contribution will be halved to 25 cents for each dollar a member contributes each year, up to a maximum of $260.72 from 1 July 2025, and members with an income of more than $180,000 will no longer receive the government contribution from 1 July 2025.

These changes will be given effect to by the Taxation (Budget Measures) Bill (No 2), which will be introduced on Budget Night.

Energy 

The Government has made two significant Budget announcements in the Energy sector, specifically:

• $200 million of contingent funding, to be provided over 4 years, has been set aside for Crown co-investment in new gas fields to address energy security. While the precise structure of investments is yet to be finalised, the funding will allow the Crown to have a cornerstone stake of up to 10-15% in new gas field developments to meet domestic energy needs.
• $6.4 million of funding to increase energy policy capability to respond and advise on actions arising out of the independent review of the electricity market performance. There is also a short-term project on how best to leverage Government procurement to achieve energy sector objectives.

Science and innovation 

Budget 2025 also includes initiatives to support innovation, technology and science, under the Government's "Going For Growth" agenda. These include:

• The Gene Technology Bill to be enacted this year to end the effective ban on gene technology outside the lab, and $23 million of funding to establish the new gene technology regulator from 2026 as well as compliance, monitoring and enforcement of the new regime.
• $20 million to support the establishment of three new public research organisations based on bio-economy, earth sciences and health and forensic sciences.
• $5.8 million to establish and operate the Prime Minister's Science, Innovation and Technology Advisory Council.
• $100 million of additional capital funding for the Elevate NZ Venture Fund, aimed at growing NZ tech startup firms.
• The Patents Amendment Bill which will provide greater certainty to businesses on what patents will be granted.

Social investment 

Budget 2025 allocates $275 million over the next four years to Vote Social Investment, including $230 million for a new Social Investment Fund. The Fund will provide $190 million in funding to purchase better outcomes for New Zealanders, designed to change lives and tackle short-term contracts, siloed funding, and a lack of focus on outcomes.

In addition, the Social Investment Agency has been allocated:

• • $20 million for initiatives that strengthen parenting in the first 2000 days of a child’s life, reducing harm and setting children up for better long-term outcomes; and
  • $25 million for initiatives to help prevent children and vulnerable adults from entering state care, as part of the Crown’s response to the Royal Commission of Inquiry into Historical Abuse in State Care.

The Fund is expected to invest in at least 20 initiatives over the next year.

Media

Budget 2025 changes the allocation of funding to the media sector, providing an additional $577 million screen production rebate to attract foreign film makers and $6.4 million for council, community and court reporting, while cutting funding to Radio New Zealand by $18 million (7% of its annual operating budget).

It also signalled a Media Reform package aimed at modernising media legislation, following public consultation in February and March 2025, and announced that further details will be released later this year. 

Other

Other initiatives in Budget 2025 that may be of interest to Watching Brief readers include:

• increased investment in health, residential care, education, law and order, and frontline public services, in line with the approach taken in Budget 2024;

• $246 million of additional funding for the court system, including to cut court case backlogs and increase access to legal aid;

• $91 million to allow 12-month prescriptions for long-term medications to be issued from 2026, reducing prescription costs for patients;

• an increased abatement threshold for Working For Families to provide increased cost of living support for low to middle income families, with the cost of this being met by income testing the first year of the Best Start tax credit; and

• $15.7 million in extra funding for independent school subsidies, and making changes to enable funding for independent school subsidies to be automatically considered annually to accommodate for roll growth (aligning the approach with other schools).