How the government’s savings exercise will work

Source: Radio New Zealand

One week from now, the government will open the books on its third Budget, the last of this term.

So far, there has been a great deal of focus not on where the money might go, but where the money to pay for it is coming from.

On Tuesday, the Finance Minister revealed plans to find $2.4 billion in savings, and reduce the public service headcount to 55,000 full time equivalent employees by 2029 – or around 1 percent of the population.

Where are the savings being found?

The centrepiece of pre-Budget announcements has been the Finance Minister’s plan to find $2.4b in savings from the public service.

This, Nicola Willis said, would come from reducing departments’ operating budgets by 2 percent in the coming year, and then by 5 percent in each of the following two years.

And while that lid sinks, agencies would be asked to find other ways to cut costs, including exploring mergers, or integrating AI and digital tools.

“We are open to proposals that involve you investing something upfront in order to release those savings. We’re open to you rearranging the way that you do things currently, coming up with mergers, coming up with IT solutions to replace existing functions,” Willis said.

“Come to us with the ideas, but here’s what’s not changing: we are going to be releasing funds from your administrative budgets. Because that money, that $2.4 billion, can now be used to invest in new hospitals, and more nurses, and better resources for our schools, and a better equipped defence force, and resources for our police.”

Departments would also be asked to “get our core public servant numbers back to the historic norm”.

In other words, job losses.

Those headcount reductions would come from a mixture of redundancies, normal attrition, and department amalgamation.

Some departments are excluded from the baseline savings exercise, including the likes of Corrections, Education, and Police.

They are not, however, excluded from the job cuts, meaning the 8700 job cuts Willis is demanding would come from a wide pool.

What about MFAT?

There were questions, prompted by a prediction from Winston Peters that the Budget would depend on the election, over whether the Ministry of Foreign Affairs (MFAT) would also have to find savings.

Peters has in the past managed to exclude MFAT from savings exercises, such as in 2024 when departments were asked to find savings of 6.5 or 7.5 percent.

This time, however, MFAT was not on the list of agencies excluded from the reduction in operating budgets.

It turned out he had managed to secure a deal to exempt the 2 percent reduction, but MFAT would still have to face the 5 percent reductions in the subsequent two years.

Willis said she would not be surprised if Peters campaigned against any “efficiency dividends” at MFAT, but she would differ as National’s finance spokesperson.

“My view is that the Ministry of Foreign Affairs and its global network of diplomats does a very important job. But just like every other organisation under the sun it should always be asked, are you getting maximum bang for buck? It’s had significant budget increases, are you doing things as efficiently as we’re asking everyone else to do them? I think they should be subject to the same discipline.”

How much is there to spend?

Nicola Willis has again reduced the operating allowance, whittling it down from $2.4b to $2.1b.

The operating allowance is the money available for ‘new’ initiatives and revenue reductions, offset by savings and reprioritisations.

At the same time, the government has increased capital expenditure from $3.5b to $5.7b.

This is the spending on capital projects, such as investment in defence or school assets.

What’s already been announced?

Governments always make a series of pre-Budget announcements in the buildup to the main day.

So far, that has included $131 million for new education investments, such as money for more hands-on resources, digital tools, and workbooks, as well as intervention programmes for children falling behind.

A further $212.4m would go towards keeping the Healthy School Lunches programme going through 2027.

In health, $15.5m over four years would be spent on setting up a nationwide paediatric palliative care service.

There will be more announcements in the coming days, before attention turns to the state of the books next Thursday.

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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand

Original source: https://nz.mil-osi.com/2026/05/21/how-the-governments-savings-exercise-will-work/