Targeted incentives for growth: Assessing Budget 2025’s Investment Boost

It’s no secret that New Zealand’s economy has experienced a period of sluggish performance, especially over the last few years. With the New Zealand Government unveiling Investment Boost as the centrepiece of Budget 2025, it has put investment and business front and centre to address our economic challenges. What’s the outlook from here, and will this targeted tax relief nudge businesses to invest more and sooner? We’ve explored some key areas below.

A step towards higher productivity?

New Zealand has experienced weak productivity growth over several decades. While this aligns with a global trend of slowing productivity, the decline in New Zealand has continued into this century and has been especially pronounced over the past ten years. Capital shallowness is often cited as a key driver of our slow productivity growth. Budget 2025 was billed as the Government’s opportunity to signal a shift toward long-term economic improvement.

In the lead-up to Budget 2025, the Government emphasised its growth agenda, even prompting Treasury to upgrade GDP forecasts in response to new policies, an uncommon and telling signal. Central to this was Investment Boost - a flagship initiative designed to stimulate capital investment across the economy.

As outlined in Deloitte Access Economics’ report Productivity Propelled, the fundamental hurdle and the single biggest challenge to New Zealand’s sustained prosperity is low productivity. So, did the Budget deliver bold action on productivity?

How Investment Boost works

Investment Boost allows businesses to deduct 20% of the cost of new assets from that year’s tax bill. It nudges businesses to invest in productivity boosting assets such as computers, advanced machinery, vehicles, and commercial buildings, with very few assets excluded in the criteria. This nudge is not purely economic. The Government is signalling that the time to invest is now, which means for businesses that were previously on the fence about investing in new assets, Investment Boost may be the catalyst for them to take the next step and invest.

By lowering the effective cost of capital, Investment Boost is projected to raise GDP by about 1 percent and average wages by about 1.5 percent over 20 years (with roughly half these gains front-loaded in the first five years). Improved cashflow from the tax deduction makes investment more viable for businesses, accelerating capital deepening and productivity across the economy. Inland Revenue Department (IRD) modelling indicates that the capital stock will grow by around 1.6 percent above the baseline, fuelling higher output and wages.

Targeted intervention

Investment Boost directly rewards new investment decisions by reducing the effective tax rate for investing firms and delivers more growth per dollar of foregone tax revenue. Investment Boost is likely to incentivise firms to renew assets and use more modern, cutting-edge technology in their operations. From a fiscal efficiency perspective, it’s a targeted approach to lift productive capacity and ensures the fiscal trade-off is worthwhile from an economic perspective.

Accounting for the wider economic impacts

The economy is complex, and pinning down the economic and fiscal impacts of a policy such as Investment Boost is a difficult modelling task. According to Inland Revenue, a “static long-run constant elasticity of substitution model” was used to estimate the impacts of Investment Boost. This model allowed for consideration of how changes to the ‘cost of capital’ (in this case, reduced cost of purchasing assets) impacts the national capital stock, and how this in turn impacts GDP and wages.

While caution always needs to be exercised not to overestimate the economic and fiscal impacts of such policies, we view Treasury and IRD considering not only the direct cost of lost tax revenue, but also trading this off against the economic growth impacts, as the right step forward. We hope they continue to adopt such an approach, and leverage more general equilibrium (economy-wide) style models to better understand the broader benefits (and costs) of policies.

Moreover, although spill‑over effects such as innovation diffusion, increased consumer spending and other demand-side multipliers are inherently challenging to quantify, considering these wider gains is crucial for a comprehensive evaluation of the policy’s impact.

Key assumptions and uncertainties

The policy’s success depends on how businesses actually respond. Projections rest on historical patterns of investment realisation. Real-world deviations in business sentiment or global economic conditions could materially affect outcomes. This could particularly affect the ability of smaller enterprises with restricted cash flows, limited borrowing capacity or modest taxable profits to take full advantage of the deduction.

Additionally, the elasticity of substitution between capital and labour used in the models is based on median overseas estimates of the user cost of capital elasticity, which may not fully capture New Zealand’s unique economic dynamics. Moreover, the extent to which workers benefit depends on capital-labour complementarity in each sector.

The outlook from here

Investment Boost reflects a pragmatic blend of targeted stimulus and fiscal discipline. Its focus on productive investment aligns well with New Zealand’s long-term growth goals.

Careful consideration of its assumptions and broader economic impacts is essential to ensure its effectiveness and equity. If implemented with ongoing monitoring and flexibility, this incentive has the potential to make a meaningful contribution to lifting New Zealand’s productivity trajectory.

Get in touch with our experts for more information.