New Zealand's budget cuts punish public sector, business and workers

Reuters

20-05-2025

WELLINGTON, May 21 (Reuters) - At a trendy cafe in downtown Wellington, job seekers gather to share tips on how to find work in New Zealand's capital, where deep government spending cuts have led to thousands of public sector job losses and squeezed the city's economy.
Rebecca Thomson, a communications specialist who started the informal support group after she couldn't find work as a government contractor during the cuts, says competition for positions is fierce.
"We were told survive until 2025 and it will get better. Well, we're now in May 2025 and it doesn't feel better," said Thomson, who is currently doing paid freelance work.
New Zealand's conservative coalition government releases its annual budget on Thursday and is expected to continue to push fiscal discipline with many ministries not expected to see budget increases.
Spending cuts since December 2023 have been felt across the wider economy but perhaps most acutely in Wellington, a city of nearly 210,000 where the government has historically been a major employer.
House prices in Wellington have plunged 6.8% over the past year, far exceeding the national decline of 1.1%. Population growth stagnated in 2024, contrasting with a 1.7% increase nationwide. Consumer and economic sentiment in the city remains lower than in many other regions, with businesses and residents expressing concern over the city's prospects.
Prime Minister Christopher Luxon was elected in 2023, promising to cut "wasteful spending". His campaign for fiscal discipline preceded a significantly more high profile push by U.S. President Donald Trump and tech billionaire Elon Musk to make Washington more efficient, which has led to the loss of thousands of U.S. public sector jobs.
"It's pretty clear that the impact on Wellington, from the government baseline spending cuts, and also the reduction in spending on contractors, has been quite negative," said Westpac New Zealand Chief Economist Kelly Eckhold.
"You can see that in pretty much any indicator of activity or house prices going on in Wellington right now."
According to data from the Public Service Commission, public sector employment fell 4.2% in the year leading up to December 2024.
Additionally, the government slashed NZ$300 million ($177.63 million) or about a third of the budget allocated to hiring contractors in the year to June 30, 2024, further tightening the purse strings. Several infrastructure projects were cancelled, including much of Wellington's flagship public transport project.
Baseline spending at the upcoming 2025 budget is expected to be smallest in a decade. While the government has foreshadowed an increase in infrastructure spending, the overall fiscal strategy remains tight and is unlikely to help Wellington's economy.
Finance Minister Nicola Willis said in a speech earlier this month that a tight fiscal strategy was necessary to keep interest rates low and ensure New Zealand continues to be seen as a good place to invest.
That fiscal prudence combined with New Zealand's relatively low government debt is seen as safeguarding the country's economic stability and keeping a favourable sovereign credit rating.
However, opposition leader Chris Hipkins said the cuts have led to increased spending on unemployment benefits.
"Now is exactly the time for government to make the investments we need in infrastructure, housing, health, and our environment so we are creating jobs and get New Zealand moving again," Hipkins argued in a pre-Budget speech.
But while the cuts have led to public sector strikes, the latest polls indicate that the current coalition of the National Party, New Zealand First and ACT would retain power in an election.
Economists say fiscal tightening is creating ripple effects across the economy.
Ganesh Nana, former commissioner of the now-defunct Productivity Commission, and 14 other economists, wrote to the prime minister and finance minister in November, warning their approach risked "a long-lasting hollowing-out" of business.
"When redundancies occur, affected individuals don't simply wait for the private sector to step in," Nana told Reuters. "They often seek opportunities abroad, leading to an immediate loss of capacity for the New Zealand economy."
Shay Peters, chief executive for recruiter Robert Walters in New Zealand and Australia, said there was general nervousness in the contractor community for the next financial year, which starts July 1.
"In Wellington, we're seeing institutionalised hospitality organisations shutting down," he said. "It's just pretty dire."
Emily Turner, who has been working in various public service jobs for 25 years, finished her contract as a strategic communications manager at the Workforce Development Council in Wellington last June and thought she'd have work by Christmas.
She is now living off her savings and has been unable to add anything to her retirement fund. Turner said she'd be keen to leave Wellington but with a mortgage and lower house prices, such a move is not an option.
"I'm in a financial trap," she said.
($1 = 1.6889 New Zealand dollars)