At the heart of Budget 2025, dubbed “The Growth Budget,” lies a bold fiscal bet: the newly unveiled Investment Boost tax incentive. Positioned as the flagship policy to revive sluggish economic growth, the initiative offers businesses a 20% upfront tax deduction on eligible capital investments, promising to ignite a wave of business spending, enhance productivity, and eventually lift wages. But with a $1.7 billion annual price tag and layered trade-offs, the question lingers—will it deliver long-term gains?
An Uncapped Push for Productivity
The mechanics of Investment Boost are straightforward yet potent. From yesterday, 22 May 2025, businesses can immediately deduct 20% of the value of newly acquired productive assets, such as machinery, tools, vehicles, and commercial buildings, from their taxable income. This deduction applies in addition to standard depreciation and carries no cap on either the value of assets or the number of claims a firm can make.
Eligible assets must be new or second-hand if sourced from overseas. The policy excludes previously used domestic assets, land, trading stock, and residential property, though hotels, hospitals, and rest homes are exceptions. Companies may opt out if standard depreciation better suits their financial situation, such as for start-ups operating at a loss.
The government argues this tax shift improves investment cashflow and lowers risk, thus making more capital projects viable. “[It] delivers more bang for buck than a company tax cut,” said Finance Minister Nicola Willis, “because it only applies to new investments, not those made in the past”.
The Case for Capital-Led Growth
Treasury and Inland Revenue forecast a 1.6% increase in New Zealand’s capital stock over two decades, half of which is expected in the first five years. This is projected to translate into a 1% uplift in GDP and a 1.5% rise in average wages during the same period.
The rationale is classical: more capital leads to higher productivity, which enhances worker output and supports higher wages. By giving businesses greater tax benefits upfront, the government hopes to accelerate this productivity-wage pipeline.
An example provided by officials illustrates the appeal. An advanced manufacturing firm that invests $200,000 in an environmental test chamber would see its tax bill reduced by over $10,000 in the first year, thanks to the combined 20% deduction and depreciation on the remainder.
Enthusiasm from Business Leaders
Business groups and tax experts have welcomed the measure. Deloitte’s Robyn Walker called it “a really positive change for businesses,” noting that while it was not as generous as full expensing, it exceeded most expectations. BDO Tax Partner Iain Craig highlighted the added benefit to the construction sector, as commercial buildings, previously excluded from depreciation, can now qualify for the upfront deduction.
Critically, the policy applies to businesses of all sizes. From capital-intensive manufacturers to SMEs investing in productivity-enhancing equipment, the incentive is seen as a strategic lever to unlock dormant investment amid global uncertainty.
Balancing Growth with Fiscal Prudence
But not everyone is celebrating. The $1.7 billion annual cost, funded amid a tight $1.3 billion new spending cap, raises questions about opportunity costs. Public services like education, welfare, and housing received modest increases, and some programmes faced cutbacks to offset the investment incentive.
Moreover, changes to KiwiSaver threaten to blunt wage gains. While the government expects most of the productivity uplift to flow through to workers, it has also increased the minimum employer and employee contributions from 3% to 4% by 2028. Economists warn that this functions like a payroll tax, reducing take-home pay and raising the cost of employment.
Finance Minister Willis acknowledged this tension, noting that KiwiSaver changes might “marginally” suppress wage growth, though she maintained the net impact of the budget would still be positive for workers.
Eyes on the Future
Experts caution that for Investment Boost to yield lasting returns, the investment must not merely expand capital stock but also enhance innovation.
There are also distributional concerns. While large, profitable firms stand to benefit the most, start-ups and loss-making enterprises may be less equipped to utilise the deduction effectively. Additionally, sectoral gains could be uneven, favouring capital-heavy industries like logistics and manufacturing over service-oriented businesses.
Despite these caveats, the policy has succeeded in sending a clear message: New Zealand is open for business. The creation of Invest New Zealand, an autonomous Crown entity to attract foreign investment, and additional funding for research, screen production, and start-up support complement the government’s broader pro-growth posture.