Operating allowances
There are two levers to achieve fiscal consolidation - controlling expenses and raising revenue. Of these two levers, the Government's focus is squarely on expenses, although it will also maintain an active tax policy programme to ensure the tax system remains fit for purpose (see the revenue strategy section below).
The Government's strategy for managing expenditure is to embed a culture of responsible spending, restore fiscal discipline, right-size the government's footprint, and improve the efficiency and productivity of spending.
Managing within Budget operating allowances is key to realising this strategy. The operating allowance is the amount of operating funding - on average, per annum - the Government intends to spend on new, discretionary policy initiatives in the forthcoming Budget, in accordance with its fiscal strategy. Operating allowances are a net concept. Spending increases and revenue reductions are offset by savings and revenue raising initiatives within a single envelope. Revisions to forecasts of tax, benefits, NZ Superannuation and other transfers are managed outside the allowance framework.
In the Budget Policy Statement 2025 (BPS), the Government set the operating allowance for Budget 2025 at $2.4 billion. The actual new operating package in Budget 2025 is $1.3 billion. The difference is a net saving that goes straight to the operating balance - the OBEGALx deficit is $1.1 billion smaller each year, on average, than it otherwise would have been. This has been achieved by a combination of spending restraint and savings (Figure 5).
Figure 5 - Funding of the Budget 2025 operating package
Source: The Treasury
Operating allowances for Budgets 2026, 2027 and 2028 have been maintained at $2.4 billion. These are tight allowances, particularly compared to those for Budgets 2018 to 2023 (Figure 6).[3] The Government has made savings and reprioritisation a business-as-usual activity but managing within these allowances will be challenging.
Figure 6 - Operating allowances
Source: The Treasury
Note
- [3] The allowances are presented in nominal dollar terms so are impacted by inflation over time - a $1 billion allowance in 2014/15 would be around $1.3 billion today if it tracked consumer price inflation.