2026 Budget & Economic Update

The Government’s 2026 Budget, together with Treasury and Reserve Bank forecasts, gives us a useful snapshot of New Zealand’s economic outlook, and the key pressures likely to shape the next few years.

While there are still challenges ahead, particularly around inflation, fuel prices and interest rates, there are also several encouraging signs emerging. Strong export performance, improving Government finances and continued infrastructure investment all point toward gradual economic improvement.

Below are some of the key themes we believe are most relevant for businesses

NZ Debt Levels

One of the Government’s major focuses in this year’s Budget was improving New Zealand’s financial position and slowing the growth in Government debt.

Over recent years, New Zealand’s debt levels have increased significantly following Covid-related spending, higher interest costs and weaker economic growth. Treasury expects net Government debt to peak at around 46% of GDP over the next few years. This is well above pre-Covid levels, which were below 20%.

This matters because international credit rating agencies are watching New Zealand closely. Two major rating agencies have already placed New Zealand on negative watch, meaning they are monitoring whether the country’s debt position continues to deteriorate, particularly as we are susceptible to New Zealand natural disasters or agricultural risks.

The Government’s cautious Budget appears designed to reassure those agencies that New Zealand remains fiscally responsible. By limiting major new spending and aiming to return the books to surplus sooner, the Government is trying to protect New Zealand’s international reputation and avoid higher borrowing costs in the future.

For businesses and households, this disciplined approach may feel conservative in the short term, but it is likely positive for long-term economic stability and investor confidence.

Treasury’s Forecast and Inflation Outlook

Treasury’s latest forecasts suggest the economy is expected to improve gradually over the next two to three years, although the recovery is likely to remain uneven.

Economic growth is forecast to be relatively soft this year before strengthening through 2027 and 2028. Treasury remains optimistic about New Zealand’s export sector, particularly dairy, meat and kiwifruit, which continue to perform strongly internationally.

Fonterra’s latest milk price forecast is a good example of this resilience. The opening forecast midpoint of $9.75kg/MS for the 2026/27 season reflects strong global dairy demand and should provide welcome support for the Waikato economy and farming businesses.

Infometrics Chief Executive Brad Olsen noted that Treasury’s more optimistic outlook was not necessarily misplaced. However, he also cautioned that the forecast surplus was far from certain, with only a 50% to 60% chance of being achieved. In his view, Treasury’s forecast may be reasonable if fuel prices continue to ease, but the risks remain tilted to the downside.

Fuel Prices and the Impact on Inflation

One of the biggest uncertainties facing the global economy currently is the ongoing conflict in the Middle East and its impact on oil supply and shipping costs.

Treasury expects fuel prices to remain elevated in the near term, and this is one of the main reasons inflation forecasts have increased again this year. Higher transport, freight and energy costs tend to flow through into many parts of the economy, affecting both businesses and consumers.

Recognising this risk, the Government has set aside a $450 million contingency fund in case additional support measures are needed if fuel prices rise further.

While higher fuel costs create short-term pressure, Treasury’s forecasts assume petrol prices will reduce to $2.70 by the end of the year, and supply disruptions will ease rather than become permanent. If global conditions stabilise, inflation pressures should gradually reduce over time.

For businesses, this remains a good reminder to continue monitoring operating costs closely, particularly around transport, logistics and supply chain pricing.

OCR and Interest Rate Forecasts

Interest rates remain one of the biggest concerns for many businesses and households.

The Reserve Bank kept the OCR at 2.5% in this week’s announcement. However, the core message was that it was a matter of when not if interest rates would rise.

In fact, the Reserve Bank’s forecast track indicates the first OCR increases could come relatively soon, perhaps either in July or September, with two quicker rises after that. The OCR is then forecast to gradually peak at around 3.25% in late 2028.

That said, there is still a high level of uncertainty. Fuel prices, global conflict, shipping disruption and domestic inflation all make the outlook difficult to predict with confidence. Rates could move higher than currently forecast if inflation proves more persistent.

For borrowers, this means it is important to plan conservatively. Businesses with debt should review cashflow, interest cover and upcoming refinancing dates. Fixing lending for a longer term, such as three years, may be worth considering where it helps provide certainty and protects against the steady increases expected over the next couple of years.

Every situation will be different, so borrowers should weigh up flexibility, repayment plans and risk tolerance before making decisions. The key message is that interest rates are likely to go up before they stabilise, so planning ahead remains important.

Tax Changes

While this Budget did not contain major tax reform, there were several targeted tax changes that businesses, investors and individuals should be aware of.

A new levy will apply to banks, insurers and other financial institutions to help fund financial regulation.

Inland Revenue will also receive more funding to continue improving tax debt collection and compliance activity. This is further evident by IRD’s enforcement statistics provided at a recent CAANZ Tax Conference that Chui and Kirstyn attended earlier this month.

From 1 April 2027, a new donation rebate threshold will be introduced. Donation rebates will be capped at $100,000 of donations per year, resulting in the maximum donation rebate available being $33,333.33 per year.

There was also a change relating to shareholder loans. If shareholders borrow money from a company and the company is later liquidated or removed from the Companies Register without the loan being repaid, the unpaid balance may become taxable.

Some positive changes were announced for investors, including adjustments to the Foreign Investment Fund rules and an increase in the threshold before those rules apply. This will simplify compliance for some investors with offshore share portfolios.

Overall, the Budget’s tax measures were relatively targeted rather than broad-based. The focus appears to be on strengthening compliance, improving fairness and collecting revenue without introducing major new taxes across the wider economy.

Final Thoughts

Overall, this year’s Budget and the latest economic forecasts reflect an economy still facing challenges, but one that is gradually moving in a more positive direction.

The Government is focused on improving New Zealand’s financial position, export sectors are performing strongly, and inflation pressures are expected to ease over time, even if progress is slower than initially hoped.

A clear message from the Budget is that there are no free handouts coming. The Government is trying to strengthen its own balance sheet, reduce debt pressure and prepare for future uncertainty.

Businesses should take a similar approach. Strong balance sheets, careful cashflow management, tidy debt structures and disciplined spending will help businesses weather any uncertainty ahead. At the same time, those who remain well prepared may be in a stronger position to take advantage of opportunities as conditions improve.

For now, the outlook is cautiously optimistic. There are risks, but there are also signs of resilience and gradual recovery. Practical planning remains the best way to move through this period with confidence.

As always, if you would like to discuss how these developments may affect your business, investments or future planning, please feel free to get in touch with our team.