Budget day is always a bit of a blur – an overload of media releases, jargon, and numbers. Rather than get caught up in the noise of it all, I learnt long ago that it is best to leave the general fiscal commentating to someone else and instead go to the Budget with a single purpose. As has become my tradition, my key goal today was to see “what’s in Budget 2025 for the regions?” and more specifically this year I was trying to see any evidence in the Government’s books of space being created to implement regional deals. The short answer is that the Government has committed bugger all to resourcing regional deals, but there are some scraps to be found.
What is a regional deal?
Before I get into the details of what I found, I would like to take a moment to introduce what a regional deal is to readers.
Regional Deals is the Government’s initiative for establishing long-term agreements between central and local government. The programme proposes to unlock funding and resource opportunities to support councils to make improvements in their region, for example improving roads, infrastructure, and the supply of quality housing. Internationally such deals have also involved innovative regional models of delivery of some services, such as health and education. Regional deals are essentially about renegotiating the relationship between a local area and government, and devolving some responsibility and funding tools to deliver some services and infrastructure locally.
The Government recently asked regions to put up their hands with expressions of interest to enter regional deal negotiations, with the Government committing to selecting one region to finalise the first regional deal over the year ahead. A wide range of places have put up their hands, including larger places such as the Waikato, and smaller, fast growing regions like Central Lakes (Queenstown Lakes and Central Otago) where it is likely to prove easier for the Government to test and refine innovative regional deal models that can then be used elsewhere.
More information on what a regional deal is can be found here.
Funding for regional deal negotiations
Negotiating regional deals will be a complex and resource intensive affair. Not only will regional deals involve a range of government portfolios, but negotiating teams will span policy, economics, accountancy, and legal skills to name a few.
Given the potential for regional deals to transformational change things for regions, and with the first deal expected to be signed off before the end of 2025, I was surprised to see very little funding in the Budget to make this happen. The Department of Internal Affairs (DIA) will be the Government Department that houses the Regional Deals Programme Secretariat and funding for this Secretariat was the only money specifically tied to regional deals in the Budget.
The Government has provided DIA with $11.8 million over four years for regional deals implementation and support – just shy of $3.0 million per year. This will barely scratch the surface of the resources needed to properly support and resource the Regional Deals Programme. As such, the successful negotiation of regional deals will ultimately require a large amount of additional resourcing to be seconded or redirected from elsewhere.
To put in perspective just how little the Government has invested into resourcing regional deals negotiations, it’s worth making comparisons against international trade agreement negotiation funding. Budget 2025 shows that the Government is giving the Ministry of Foreign Affairs and Trade (MFAT) an $84 million funding boost over four years ($21 million per year) on top of existing funding for the purpose of negotiating international trade agreements in Asia alone.
The Government is prioritising its secretariat support of international deals at 7 times the level of its secretariat support for regional deals.
Budget initiatives that align to regional deal priorities
As part of each region’s expression of interest for a regional deal, the region was expected to put forward its key priorities. These priorities were wide ranging, but generally included infrastructure and housing at the core, while there were also often priorities related to lifting productivity and economic growth within certain industries.
I looked through Budget 2025 to see whether there was evidence of government departments getting themselves ready for the prospect of a regional deal negotiation leading to more localised delivery of some of their departmental functions. Clearly as negotiations are yet to kick off, I was jumping the gun, nevertheless, there were a few things that pegged my interest for regional priorities. I have sorted these under the headings of infrastructure, housing, and investment.
Infrastructure
There was no big change in direction for infrastructure investment in the regions, but there was some funding confirmed for big ticket infrastructure items that will directly support some regions. These included a $219 million road recovery package for the Hawke’s Bay and $1 billion for investment in hospitals in Nelson and Palmerston North, alongside Auckland and Wellington.
The education sector received a boost for developing new classrooms in unspecified areas. This boost included $295 million to deliver additional classrooms at existing schools experiencing capacity constraints. There is also $169m of new capital being made available for additional school land purchases for new schools. These two sources of funds will be hotly contested in high growth parts of New Zealand, including many areas where the Ministry of Education consistently fails to properly plan for growth because the Ministry’s demographic modelling is driven by overly conservative Statistics New Zealand projections. There are high growth places in the South Island, such as Selwyn and Queenstown Lakes which have both consistently averaged 5%pa population growth for well over a decade, while even high scenarios for Statistics New Zealand forecast future growth at less than half these levels in these places.
Housing
There was some movement in the Government’s approach to housing investment. Several existing government housing funds have been collapsed into a single $250 million contestable Flexible Fund over a 10-year period. The new Flexible Fund will use a variety of providers to deliver different housing types, including social houses and affordable rentals built by community housing providers, Kāinga Ora and Māori providers.
In addition, the Government is also establishing Crown lending facilities of up to a total of $150 million for the Community Housing Funding Agency. The Government expects this fund to help lower the cost of borrowing for community housing providers by passing on savings available from the government’s lower interest rate on debt.
Investment
From a macroeconomic perspective, the Government’s key investment policy was the new Investment Boost tax initiative, which essentially allows businesses to accelerate the depreciation on assets. The policy allows for 20% of the cost of new assets to be deducted immediately from taxable income (on top of normal depreciation). This policy is a broad brushstroke, and so while it will enable some highly productive investment in new equipment, it is also likely to lead to a fair few tax efficient ute upgrades!
From a regional perspective, an allocation of $85 million funding over four years ($21 million a year) to establish Invest New Zealand was probably the most interesting development. To date, Invest New Zealand has merely been a rebadging and branding of NZTE’s Capital Team, so it is hoped that this significant tranche of funding will afford the establishment of a truly independent entity with a more evolved focus. The Capital Team has done a great job of warming up investors offshore to New Zealand investment opportunities, but Invest New Zealand needs to evolve into something that also markets New Zealand investments to international travellers already demonstrating an interest in New Zealand.
Research I have previously been involved in has shown that 1 in 5 visitors to New Zealand are interested in learning about the long-term opportunities we have to offer, but we fail to ever show these opportunities to these visitors while they are here. Given the millions of international visitors that come to our shores each year, it makes sense for Invest New Zealand to also have a prominent domestic presence to market our investment opportunities to these travellers. For example, imagine an Invest New Zealand deals shop in Queenstown where 1 in 3 international travellers to New Zealand pass through – including a fair few high net worths given the 500 private jet movements a year that occur at Queenstown Airport.
New funding and financing tools for regions
Sadly, for local government in the regions holding out for new funding and financing tools to be announced, whether that be to fund BAU or implement a regional deal, these were not forthcoming. There was nothing exciting like returning GST on rates, but there was one small scrap that I could find related to funding from the International Visitor Conservation and Tourism Levy.
The Government has announced that $35 million per annum of funding from the International Visitor Conservation and Tourism Levy will be allocated to MBIE to administer to fund tourism-related infrastructure and systems.
My discussions with officials today have suggested that this tourism infrastructure funding has not been tagged, and that the criteria for what constitutes tourism infrastructure is still under development as an Investment Plan needs to be made.
For regions with a very high visitor burden, relative to ratepayers, such as Queenstown, Mackenzie, and Westland, this might provide an opportunity to help fund specific infrastructure investments that are needed to improve the visitor experience, but can’t be funded locally. For example, in the Queenstown context where 1 in 3 of New Zealand’s international travellers pass through, a $10 million allocation could comfortably amortise more than $100 million of debt on a major infrastructure investment that benefited the tourism experience (e.g. the proposed public transport gondola into Queenstown).
To be continued…
The overarching takeaway for regional deals from Budget 2025 is that they do not come with a money pot. But we knew that much already. Regions will instead need to be creative about how they seek to evolve existing government funding streams in a manner that delivers results locally in an efficient and high-quality manner.