Since there will be no ‘backpocket boost’ in Budget 2026, National will need to explain how fiscal restraint will help voters in a perpetual cost of living crisis.
Balancing the budget is a matter of national security. That’s the sales pitch the coalition government is making to voters on the eve of Budget 2026.
It will be the last budget before the three coalition parties head into a tough election in November, where they will have to fight for the opportunity to write three more. Election years are often when governments loosen the purse strings. Finance minister Nicola Willis doesn’t have the luxury of this temptation. She has to tighten spending for the third budget in a row, or give up on the fiscal targets she has set herself.
National won the 2023 election with a promise to deliver a small surplus by June 2028 but pushed that target back a year or two after the economy dipped into recession during 2025. Weak economic growth and strong inflation are a toxic mix for Crown finances. They reduce tax revenue while increasing both the cost of benefits and demand for them. To keep a balanced budget within reach this decade, Willis halved new spending in Budget 2025 and scrapped the pay equity law. Even then, Treasury still did not quite forecast a surplus.
New Zealand’s economy was perking up in 2026. Then the United States attacked Iran, Tehran closed the Strait of Hormuz, and surging oil prices reignited inflation while dragging growth forecasts lower. And so, Willis was forced to find even more savings to defend her fiscal targets. She has chosen to reduce the next three spending allowances by $300m, providing about $900m in savings by June 2029, when the books are supposed to be balanced.
Budget 2026 will have just $2.1bn of new spending, which is not enough to meet cost pressures. Most agencies will need to manage with “little or no additional funding”. It might be a stretch to call it austerity. Spending continues to rise, just slower than inflation, while the investment budget will be boosted from $3.5bn to a very healthy $5.7bn. Willis is describing it as a “responsible” budget, while Act leader David Seymour has gone further and said some would call it “tough love”. Since there won’t be a “backpocket boost” in Budget 2026, National will need to explain how its fiscal restraint helps voters with the perpetual cost of living crisis.
It’s a matter of national security
Prime minister Christopher Luxon’s answer is that the world is getting more dangerous and the country needs better shock absorbers: a tougher defence force, more reliable energy, and public finances with room to respond to the next crisis. The closure of the Strait of Hormuz was a “timely reminder” of the need to invest in resilient infrastructure and develop a “fighting-fit” military, he said in a speech.
National’s first budget was the No Frills Budget 2.0 (unofficially), last year was the Growth Budget (nice try), and 2026 has been set up to be the Security Budget. The pre-budget announcements promised $1.6bn to strengthen the Defence Force and the underwriting of $1.2bn of bank loans for businesses trying to reduce their reliance on shrinking natural gas supplies.
They help to frame spending restraint as part of a broader national security strategy, rather than just an ideological preference.
Willis justified her own pre-budget announcement, a plan to slash the number of public sector employees 14% over three years, by arguing it would help New Zealand withstand future shocks.
“This year’s budget will continue our ongoing work to get the books back in balance and the debt curve bending down. With a global fuel crisis underway, some would have us put those plans on hold, we say no, those goals are more important now than ever before,” she said in a speech.
The economics of security
Needless to say this view will be hotly debated. Others will argue the correct response to an unstable world is to step up public spending and investment even faster.
Come to think of it, shouldn’t we urgently increase taxes if fiscal buffers are so important to our national security?
But, either way, there is a strong economic rationale for balancing the budget.
International credit rating agencies are beginning to question New Zealand’s reputation as an exceptionally safe borrower. If they lose faith in our fiscal management, investors will demand much higher returns from our bond market. That would mean higher mortgage rates, less business development, and sluggish wage growth. Just look at the United Kingdom if you want to see this in action.
Aotearoa has relatively low debt and a manageable deficit right now, but another pandemic-sized economic shock would put the country in a difficult position.
Mainstream economists, whether you love them or hate them, are broadly in favour of rebuilding fiscal buffers before the next pandemic, earthquake, or war, but warn against underinvesting in the economy. “More careful prioritisation would not go amiss and while more efforts to get better value for money are welcome, the risk is that spending cuts could hamper NZ’s growth potential (economic muscle) rather than trim fiscal fat,” ASB economists wrote in a budget commentary note.
Voters will get the gritty details of Budget 2026 on Thursday afternoon and cast judgement in November, but it may take decades to know whether it was the right response to all this global instability.
