“This is a budget that should have been delivered in year one of the Coalition’s term”, according to Economist Cameron Bagrie. He says the if the fiscal discipline shown in Budget 2026 had been applied back then, the outcome would have been paying dividends in the lead up to this year’s election.
Without a doubt, election year budgets can make or break the chances of re-election for governing parties that are struggling in the polls.
And that’s the situation National now finds itself in.
It wasn’t meant to be like this, of course.
Looking back to when the Coalition was first elected, Treasury’s 2024 Budget Policy Statement revealed the extent of the economic mess they had inherited. Labour had left a mountain of debt, run-away spending, and forward funding commitments that accounted for over two‑thirds of the new Government’s operating allowance. It left the Coalition with little capacity to finance their election pledges.
With substantial funding needed to rebuild health, education, law and order, and infrastructure, New Zealand’s economic woes were further exacerbated by an on-going decline in productivity, which Treasury revealed had fallen by almost one percent during Labour’s term in office. The rapid expansion of regulation – and the public service bureaucracy – were identified as key contributors.
Of the many factors that influence productivity, a country’s regulatory burden is one of the most significant. Over their six years, Labour delivered an extraordinary number of new rules and compliance demands to further their socialist reforms. These included embedding the United Nations’ Agenda 2030 Sustainable Development Goals ‘into everything we do’, introducing mandatory climate-reporting regimes along with expansive social justice programmes that imposed the identity politics framework of Diversity, Equity and Inclusion across the public sector, as well as entrenching the He Puapua goals of tribal co-governance into State decision-making.
With regulations accelerating faster than output, it is little wonder New Zealand’s productivity fell into decline.
As regulation expanded, so too did the Wellington bureaucracy — from 46,000 officials when Labour entered office to almost 65,000 when they departed. This led to activist ideology being embedded throughout the state sector — including the judiciary, education, local government, and tertiary providers. And as a result, the institutional resistance to reform faced by the Coalition was extreme.
To tackle the economic challenges, the new Government adopted the same strategy that Finance Minister Bill English had successfully used to help the country recover from the Global Financial Crisis – and nine years of Labour. That involved keeping a tight rein on government spending while allowing an expanding economy to grow the country out of the financial mess.
Using this model, by the end of their three-year term the Coalition expected to turn the growing deficit into a surplus, to reduce Labour’s massive debt blowout to under 40 percent of GDP – with a long-term goal of 20 percent, and to bring down core Crown spending from almost 35 percent of GDP to 30 percent.
To achieve these goals, they planned to boost economic growth by lowing tax thresholds and reducing red tape – along with eliminating poor quality spending and reprioritising expenditure into areas of greatest need.
With inflation finally coming under control and interest rates falling, the new Government expected growth to increase to an average of almost three percent per year over their three-year term.
Unfortunately, things didn’t go to plan.
The economy failed to ignite because the modest tax cuts were completely overwhelmed by negative forces: rising power and fuel prices driven by extreme climate policies based on “implausible” models, a sharp downturn in construction, public sector cuts, rising unemployment, weakening Chinese demand for exports, and the fact that large numbers of households were stuck on fixed-rate mortgages and couldn’t take advantage of the lower interest rates. All of these contrived to trap the country in prolonged economic stagnation.
On top of that, the Coalition’s key objective of reducing red tape and regulation stalled, leaving businesses struggling with high costs and delays.
Then, when the outlook was finally looking brighter at the beginning of this year, events in the Middle East brought critical fuel shortages and supply chain disruptions that have impacted heavily on the economy.
In other words, National’s strategy of growing the country out of the economic decline they inherited from Labour, hasn’t worked. In hindsight, Cameron Bagrie is right to say that this latest austerity budget is the one that National should have delivered two years ago, especially as it was exactly what their voters were calling for at the time.
With all this in mind, the objective of Budget 2026 was to restore fiscal discipline, keep new spending tightly constrained, and reduce the size of government by redirecting savings to priority frontline services and infrastructure. Rather than immediately terminating many of the programmes deemed to be no longer necessary, with an election only months away and the Coalition no doubt anxious to avoid the inevitable political backlash that occurs when funding dries up, an incremental approach has been adopted, delaying many of the real cuts to future years.
A series of pre-Budget announcements revealed both the direction and the trade-offs of their approach, with the public service a key target.
Their goal is to eliminate around 8,700 core public service roles by mid-2029, merge government agencies, introduce a ‘sinking lid’ on budgets, and require a greater use of AI and digital tools. As a result, they expect $2.4 billion in savings over four years, which will be redirected into priority areas such as education (literacy and numeracy), health (disabled care, ambulance services, and mental health response), defence (fleet renewal, maritime security, and new drones), border security (enhanced drug detection and cargo scanning), and infrastructure (hospitals, schools and roads).
Budget Day announcements delivered more of the same: financial restraint across the board through funding reprioritisation, with spending focused on health, defence, transport, education, and infrastructure.
Trades training was a major winner gaining enough funding from the scrapping of the fees-free tertiary scheme, to double the number of Trades Academy places from 10,000 to 20,000 over the next four years, with extra funding available for those with no qualifications to attend trade schools. In addition, new vocational education pathways will be provided in schools to align more closely with real-world labour market demands.
A further 1,000 Youth Guarantee places will also be funded to target 16-to-24-year-olds with low or no qualifications, providing wrap-around support and a direct pathway into apprenticeships.
Other new initiatives include $450 million set aside in an “emergency savings account” to provide support should the Middle East conflict worsen; a new levy on banks to fund their regulator, the Reserve Bank; an increase from $1,000 to $10,000 in the amount not-for-profits can earn without paying tax; and a $100,000 cap on donors gifting to charities they control themselves to limit risks.
As a result of these measures, Treasury predicts the economy will grow on average by 2.7 percent over the next four years, rising to 1.2 percent this year, and peaking at 3.2 percent in 2028. Annual inflation is projected to rise to 4 percent this year, before returning to the target range of 1 to 3 percent for the rest of the forecast period. And unemployment is also expected to peak this year at 5.5 percent before falling back to 4.3 percent in 2030.
The Coalition is, of course, claiming responsible economic stewardship, as the debt will finally start tracking down towards their 40 percent goal the year after next, the long-awaited surplus will finally arrive the year after that, and core Crown expenses will fall to their 30 percent of GDP target, the year after that!
So, while the Budget has addressed many of the challenges New Zealand faces, it has failed to tackle the “elephant in the room” – the unaffordable cost of superannuation and healthcare for the rising number of retirees.
Proper reform in this area is an issue that this week’s NZCPR Guest Commentator, former Finance Minister Sir Roger Dougles, has long argued is critical for the New Zealand’s future economic wellbeing:
“New Zealand’s serious superannuation problems began in 1976 when the Muldoon Government replaced Labour’s compulsory super savings scheme with a Pay-As-You-Go (PAYGO) system. That single decision changed everything. PAYGO allowed politicians to make generous promises without having to fund them properly. It created massive unfunded liabilities — IOUs that future generations would have to pay. Today those unfunded liabilities stand at around $2 trillion. The burden falls squarely on the young.
“Successive governments have conveniently kept these liabilities off the official books, misleading the public about the true state of our finances. This is not just bad accounting — it is dishonest politics.
“The Government’s latest Budget continues the pattern of short-term political management rather than the deep structural change New Zealand now desperately needs. While some restraint is being shown in public service numbers, the hard decisions on superannuation, welfare dependency, and genuine incentives for self-reliance are once again being avoided.
“Looking ahead to the next 50 years, the problem is stark. The $2 trillion in unfunded liabilities we now face is growing by around $80 billion each year. Unsustainable welfare promises, combined with a serious lack of competition and choice in public services including education and health are locking New Zealand into long-term decline.
“We cannot keep kicking the can down the road. The unfunded liabilities are real. The demographic pressures are real. The declining productivity and growing dependency are real. It is time for honesty and courage.”
Sir Roger has long argued that the only sustainable answer to the rising cost of pensions and healthcare for an ageing population is a system built on personalised superannuation accounts, along with a universal health insurance scheme. He maintains that such a model would transform New Zealand’s long‑term outlook and allow Kiwis to retire with substantial savings, thanks to the ‘magic’ of compound interest over a working lifetime. But he also concedes the idea is unlikely to appeal to politicians, since it would shift a significant proportion of taxpayers’ money into individual accounts rather than leaving it under their control.
In Singapore — a powerhouse country with a similar population and a system built on compulsory retirement savings and universal health insurance — individual savings have built the Central Provident Fund into a vast capital base that underpins national development, allowing government spending to remain at just 18 percent of GDP, roughly half of New Zealand’s 32.6 percent.
This is a compelling illustration of the benefits of a savings-based system. Singapore has created a massive, fully funded pool of national wealth that individuals own to finance their own retirement, healthcare, education and housing. Unlike New Zealand’s Pay-As-You-Go superannuation framework – which creates large unfunded future liabilities – Singapore’s model delivers robust social outcomes with lower taxes and minimal government spending, fostering personal responsibility over state dependency.
The need to address superannuation was also highlighted by all three credit rating agencies in their measured response to Budget 2026.
Both S&P and Fitch affirmed New Zealand’s AA+ rating with stable outlooks, while Moody’s kept its Aaa rating but maintained a negative outlook. All three agencies welcomed the Government’s efforts at public service restraint and reprioritisation but expressed disappointment at the slow pace of fiscal consolidation. Notably, all three rating agencies highlighted the need for reform of New Zealand Superannuation, warning that without changes the long-term fiscal pressures from an ageing population will become increasingly unsustainable. They noted that the return to surplus has been delayed yet again, that core Crown spending remains well above pre-COVID levels as a share of GDP, and that net debt is still forecast to peak higher than previously expected.
The rating agencies made it clear that while the Budget shows prudent short-term management, it falls short of the more ambitious structural reform needed to put New Zealand’s finances on a truly sustainable long-term footing. While the direction is positive, the trajectory is tediously and unnecessarily slow.
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