Nicola Willis yesterday presented Treasury’s Pre-Election Economic and Fiscal Update as a victory lap, pointing to a promised return to surplus by 2028/29 as proof that fiscal discipline is working.
On paper, it should be enough to keep the international credit rating agencies satisfied.
But peel back the headlines, and the narrative shifts from triumph to a high-stakes gamble.
The reality behind the numbers is that the path back to surplus relies on workers and businesses paying significantly more tax, ongoing cuts across government agencies, and a series of massive, unanswered questions about how basic public services will be funded.
Far from a settled plan, this is a budget update that may be lucky to survive coalition negotiations intact—let alone make it to Christmas.
For a National-led government that is building its identity on a “no new taxes” platform, the fundamental irony of the PREFU is that the fiscal turnaround is almost entirely a tax story.
“The story about the fiscal position is largely a tax story,” said Treasury Secretary Iain Rennie.
“Tax outturns from 2025-26 are higher than Budget 26, and they’ve lifted our base for future forecasts.
“In addition, the higher nominal GDP projection that I mentioned from our economic forecasts lifts the tax forecasts higher again.”
Treasury expects core Crown tax revenue to grow by an average of 6.2 per cent a year, outpacing average nominal GDP growth of 5 per cent.
Because tax is collected as a percentage of wages and profits, persistent inflation acts as a stealth engine, driving incomes higher and pushing tax revenue up even faster.
Over the forecast period, corporate tax is expected to jump 7.6 per cent annually, while PAYE rises by 6 per cent.
Without this inflationary windfall, the ledger would look vastly different.
Even with record tax takes, Treasury’s underlying assumptions are already colliding with global market realities.
When the update was finalised on September 10, US 10-year bond rates sat at 4.95 per cent. By the time Treasury Secretary Iain Rennie presented the figures, they had already climbed to 5.27 per cent.
As global interest rates transition away from the ultra-low era of the post-GFC years, the cost of servicing public debt will rise, adding sudden urgency to slashing the deficit.
“Interest rates globally are rising significantly,” Treasury Secretary Iain Rennie said yesterday.
“We are still trying to work through the implications of that or where interest rates will ultimately settle, but it is clear that we are moving from the very low interest rate environment that we saw between the global financial crisis and COVID.
“And that has an implication for fiscal projections going forward.”
Those projections are going to run head-on into demography and the politics of making cuts.
Willis has based her surplus trajectory on holding future budget operating allowances to $2.4 billion a year.
However, demographic reality is set to consume nearly all of it.
Health NZ demands an estimated $1.4 billion to $1.55 billion in extra funding each year, consuming more than half of the entire discretionary allowance on its own.
“Increasing investment in health will form a much larger portion of our operating allowances in future,” said Willis.
“The Treasury have developed an indicative funding model which accounts for the increased number of New Zealanders, the older age of New Zealanders and the increased prices of services, and they have therefore approximated the funding that will be required for Health New Zealand in the coming years.
“Those figures show that in future years we will be increasing spending by $1.4 billion and then increasing that to $1,550,000,000.”
The PREFU sets out the challenge starkly.
“While it is uncertain how much funding the Government will approve for Health NZ cost pressures, based on past funding amounts and the indicative funding track it is likely to represent a significant portion of the Government’s current Budget operating allowances,” the document says.
Add to this the ongoing increase in costs for New Zealand Superannuation.
“By 2030, 2031, super and finance costs will account for something like 28% of the total tax take,” said Rennie.
“And that underpins again a clear message from the Treasury that fundamentally, even though the fiscal position is improving in the short to medium term, long term and unless checked, the demographics will place us in an unsustainable financial position.”
Beyond health and superannuation lies a mountain of deferred commitments competing for whatever funds remain.
The PREFU lays bare a sprawling list of unfunded or partially funded priorities, including $10 to $15 billion over 15 years for the Defence Capability Plan; hundreds of millions for Resource Management Act reforms and the Waikato Medical School.
Transport is set to consume billions over the next 10 years or so.
“The Government has signalled transport investments additional to what has already been supported through the Government Policy Statement (GPS) on land transport 2024-34,” Treasury says in the PREFU document.
“These investments are largely unfunded, and some of these may fall outside the scope of the National Land Transport Fund (NLTF) or are only expected to be partially funded by the NLTF.
“Where some funding has been provided through the NLTF, this has only been committed for the first three years that the GPS and the latest National Land Transport Programme covers (2024/25 to 2026/27), but additional investment will likely be required to complete these projects as work will extend beyond 2026/27.
“If the Government chooses to progress these investments, additional Crown funding, increases to land transport revenue or new revenue sources may be required.
“Additional investment priorities include the Roads of National Significance programme, the Auckland – Waitemata Harbour Crossing, Better Public Transport, an additional Mount Victoria tunnel and residual rail projects from the former New Zealand Upgrade Programme.
“Many of these costs fall outside the forecast period.”
Even so, some do and although transport funding is complex and difficult to define what are capital and what are operating costs, the PREFU forecasts that possible changes to the National Land Transport Fund revenue system with the end of fuel tax and its replacement by Road User Charges could come to $2 – $5 billion over the forecast period.
To make room for these competing demands, the public sector faces perpetual cost-cutting. Willis argues that $12 to $13 billion in annual reprioritisation was essential to preventing an $18 billion deficit this year. But every fresh round of cuts carries escalating political risk for a government facing a tight political landscape.
Treasury’s update paints a clear picture: long-term demographic costs are setting New Zealand on an unsustainable path unless structural changes are made.
Treasury Secretary Rennie put the need for “reprioritisation” simply.
“Reflecting the current government’s intentions, the budget allowances remain at $2.4 billion as they have through the current term, and as the Government has managed within this term of Parliament,” he said.
“To give that some context, our estimate over the last three budgets is that targeted cost pressure support, so that is support that’s been focused on highest priority agencies and entities, has amounted to about $2.25 to $3 billion per budget per year.
“So that means to make space either for meeting additional cost pressures or policy commitments is likely to require ongoing consideration of expenditure reprioritisation and/or revenue options by the incoming administration.”
Willis was more frank.
“The government’s key fiscal lever over the past three years has been tight spending control,” she said.
“In each budget, we have kept a lid on net new spending.
“That means significant investments in improving health services, delivering cancer medicines, for example, significant investments in lifting educational achievement and providing more support to those with learning needs, and reducing violent crime.
“All of these investments have been made by reprioritising from other areas of government spending.”
She said that the cumulative effect of savings over her three budgets came to around 12 to 13 billion dollars a year.
“One way to think about it is this. If we had kept spending the same in each of our three budgets, but not made the savings that we did, then all else equal there would be an OBIGAL-X deficit of over $18 billion this year, rather than $6.8 billion, as this update shows.
“And there would be no surplus whatsoever in the forecast period.
“This prescription of no savings is one that some politicians have urged upon this government. New Zealanders can be confident we were right to stay the disciplined course.”
But when it comes to coalition negotiations, how much New Zealand First would be willing to go along with that is anybody’s guess.
Probably not at all.“
While Willis insists the government has stayed a disciplined course, the numbers show a balance sheet reliant on bracket creep, high interest rates, and deep spending constraints.
Whether potential coalition partners—or the electorate—will accept those trade-offs remains the ultimate question.
