New Zealand sets lowest new spending in a decade despite global tariff war
Finmin Willis emphasizes fiscal prudence in effort to return to surplus
Critics argue tight fiscal policy undermines economy amid rising external risks
GDP growth forecast lowered as Treasury warns of 'trade shock'
Adds comments from ratings agency S&P, analyst, central bank context, market reaction
By Lucy Craymer and Praveen Menon
WELLINGTON, May 22 (Reuters) - New Zealand on Thursday set new spending for the current fiscal year at its lowest in a decade, keeping a tight rein on its fiscal purse even as it warned of softer GDP growth and a "trade shock" to the economy from the global tariff war. [https://www.reuters.com/business/tariffs/]
The South Pacific nation's economy last year and its recovery has been hobbled by tepid consumption and heightened uncertainty over sharp shifts in U.S. trade and economic policies.
“The global situation is concerning,” New Zealand Finance Minister Nicola Willis said following the release of the 2025 budget in Wellington. “We can’t control what other countries do with their tariffs, what we can control is our conditions.”
As previously flagged, the government set new operating spending for the current fiscal year ending June 30 at NZ$1.3 billion, the smallest amount in a decade as it remains focused on fiscal prudence despite the rising external headwinds to growth.
The Treasury downgraded its expectation for economic growth in the new financial year, citing U.S. President Donald Trump's [https://www.reuters.com/world/us/donald-trump/] global trade war that has raised significant challenges for policymakers worldwide.
“Actions by the United States to impose near universal tariffs and counter measures by some countries have led international agencies to lower their global growth forecasts,” the Treasury said in its budget statement. “The global trade shock is hitting a New Zealand economy that is recovering from last year’s contraction."
Ratings agency S&P said in a statement following the budget that New Zealand's elevated fiscal and current account deficits "are weaknesses that could weigh on the credit rating."
New Zealand two-year government bond yields fell 4 bps to 3.358% and the kiwi dollar was last down 0.3% at $0.5923 as the tight budget position reinforced the need for policy
The Reserve Bank of New Zealand has cut the cash rate by 200 basis points since August last year to support an economy which slipped into recession in the third quarter and is struggling to mount a solid recovery.
"A weaker macro backdrop, lower tax take and heightened global uncertainty has meant that what was already going to be a tight Budget has been crunched even tighter," Zoe Wallis, investment strategist at Forsyth Barr, said in a note.
She noted that Treasury's expectation the cash rate will be cut to around 2.5% by June 2027 and remain there through to June 2029 is a much later and longer rate-cutting cycle than the RBNZ and market participants are currently forecasting.
TIGHT SPENDING, GROWTH WOES
Since coming to power in late 2023, the centre-right government has tightened the purse strings in an effort to cut what it sees as wasteful spending but critics say the fiscal discipline is undermining an economy at a time of rising external risks.
“The government is not promising that today’s Budget will solve all New Zealanders problems. But we do promise that the decisions we are taking now will set our country up for a better future,” Willis said in her budget speech.
The finance minister pledged to boost spending in areas such as defence, foreign affairs and health and overhauled the Kiwisaver national pension fund.
The government forecast a budget deficit of NZ$14.74 billion for the current financial year, narrower than a deficit of NZ$17.32 billion its half-year fiscal update in December. It does not expect to return to surplus over the forecast five-year period if costs for its nationwide accident insurance scheme is included.
Gross domestic product growth is expected to slow to 2.9% in the 12 months ended June 30, 2026, down from forecast growth of 3.3% at the December update. For the same period, it expects inflation to track at 2.1%, unchanged from the prior forecast.
Net debt excluding advances was forecast to peak at 46% of gross domestic product (GDP) in 2027/28. In December, the government had expected it to peak at 46.5% of GDP in 2026/27.
Prime Minister Christopher Luxon said tough choices had to be made on what the government spent money on.
“We are confident we have put Kiwis hard-earned taxes where they will have the most impact,” Luxon said.
(Reporting by Lucy Craymer
Editing by Shri Navaratnam)
((Lucy.Craymer@thomsonreuters.com [Lucy.Craymer@thomsonreuters.com];))
