Budget 2026: Transforming New Zealand’s Public Service for a More Affordable Future

Good afternoon everyone. It’s my pleasure to join Business North Harbour once again and to speak with you about this year’s Government Budget.

Let me acknowledge my colleague, Paul Goldsmith, the Minister for the Public Service and Digitising Government.

Most importantly, let me acknowledge the business leaders, employers, entrepreneurs and Kiwi battlers represented in this room today. I know you work hard for a living, that you take seriously the people who depend on you for their jobs, and that many of you have been through a hard slog these past few years.

First there was Covid, then there was out-of-control inflation and spiralling interest rates, then there was the inevitable economic downturn and the massive efforts you’ve taken to leave it behind. That’s before we mention the actions of the current occupant of the White House or the fuel crisis the world is now facing.

Doing what we can to make economic conditions easier for you is front and centre for me every time I put together a Budget. When you do well, New Zealand does well. Jobs are created, pay rises can be paid and life can be more affordable for every Kiwi. Thank you for what you do.

As the Prime Minister highlighted last week, this year’s Budget takes place in challenging times. The world is more volatile than ever and things we once took for granted – like secure fuel supply or a rules-based trading system – are no longer a given. Across the globe, countries are struggling to deliver the improving living standards and basic affordability citizens rightly expect.

As a small, trading nation, already carrying high levels of debt, New Zealand is heavily exposed to these global trends. We’re still carrying a deficit from the Covid spend-up and international credit rating agencies are watching us closely. The interest bill on our debt has soared to about $9 billion a year, unemployment has only just started falling, and Kiwis are, fairly, focussed on what it will take to make life more affordable in this country.

I have to say, with an election around the corner, it’s tempting to proffer another spending band-aid in response. To suggest a superficial solution that sounds good today, even if it doesn’t deliver tomorrow. You know the genre – the kind of announcement that comes with a catchy slogan, typically about something free, or promising a cash hand-out we can’t really afford. Well, we’ve seen that movie before, and we didn’t like the ending.

Consider the last government’s cost-of-living payment, a $350 band aid that ended-up being paid out to French backpackers and dead people and only added more fuel to the underlying inflation fire. It was a band-aid on a bullet wound. The wound was still in need of treatment long after the band-aid had worn off.

Tempting as it is, our Government is not going to repeat those mistakes.

Instead, we’re doing the substantive reform work to address the underlying drivers of today’s affordability challenges, so that New Zealand can be a more affordable place now and in the years ahead.

Making consumer prices more affordable by keeping underlying inflation in check, with clear accountabilities for the Reserve Bank supported by a sensible spending approach by Government.

Making the business of government more affordable by driving value-for-money in all we do - from service delivery through to infrastructure planning.

Making housing more affordable - to rent and to buy - by fast-tracking new housing developments, planning reform, ending the war on landlords and with interest rates having tracked lower on our watch.

Making household rates more affordable by legislating for rates caps, supported by work to simplify and re-focus local government.

Making electricity more affordable by consenting and incentivising the generation investments needed to ensure abundant, affordable and resilient energy supply.

Making childcare more affordable by providing the FamilyBoost tax rebate to families who are working hard for their kids.

Making insurance more affordable by pausing hikes in the Natural Hazard Levy while we get to the bottom of what’s really driving insurance costs.

Making groceries more affordable by carefully doing the overdue and complex work needed to enhance competition between supermarkets.

Making work, investment and savings affordable, by stopping Labour’s constant march towards more taxes and instead reducing them where we can.

Making hard work and entrepreneurialism affordable by continuing the growth reforms needed to make this a better place to establish and grow a business, whether that’s by signing new free trade agreements, lifting education standards, or delivering growth-enhancing public infrastructure.

A larger envelope of capital spending, to support the building of major new job-rich public infrastructure projects that support economic growth and resilience.

A major lift in funding for our health system to support better primary healthcare, along with specialist, elective and emergency services.

Targeted investments in frontline services including those delivered by our schools, police and corrections services.

A continued enhancement of the capability of the New Zealand Defence Force so it can properly contribute to the defence relationships on which our national security depends.

More progress towards our goals of balanced books and lower debt.

Let’s be clear, none of this work delivers overnight and I’m with every Kiwi who wants it done as fast as possible. But I believe our government’s approach - of addressing our country’s underlying challenges with durable reform - is the only honest and responsible response to today’s affordability concerns.

Put simply, in an uncertain and fast-changing world, New Zealand simply can’t afford another failed spend-up.

Now, more than ever, you need your government to hold a steady hand on the tiller, ensuring the country’s finances are in fit condition to withstand whatever comes our way. That the public services you depend on are delivered well and can be sustained. That we are putting in place the building blocks for a more affordable tomorrow.

That’s why this year’s Budget will continue our ongoing work to get the books back in balance and the debt curve bending down. With a global fuel crisis underway, some would have us put those plans on hold, we say no, those goals are more important now than ever before.

In this year’s Budget, we’ve reduced the amount of new money we’re giving ourselves for day-to-day spending and we’ve carefully prioritised your precious taxpayer dollars towards the things that really matter.

With careful budgeting and ongoing reprioritisation we have been able to achieve a lot. On Budget day we will announce a series of investments needed to make this a stronger, more resilient, and more affordable country now and in the years ahead.

Let me pick out some highlights of what Budget 2026 delivers.

You’ll hear more from me on all of these fronts just under two weeks from now.

For today, I want to share with you the details of one important initiative in this year’s Budget: the next phase in our plans to transform the public service.

Phase Two of Public Sector Reform A driving goal for our Government is to deliver better public services for New Zealanders, not by just blithely spending more, but by driving better results from the spending we already do.

Our perspective is simple: a Government’s compassion shouldn’t be judged by the size of the cheques it writes on your behalf, but rather it should be judged for the results it gets for that spending.

Ensuring value for taxpayer money shouldn’t be a radical position, but the need to re-state it is evidenced by recent history.

Cast your mind back to 2023: Labour tripled government debt in dollar terms, lifted spending by 73 per cent, and left behind a structural deficit.

What’s worse, there was almost nothing to show for this historic spend-up. Educational achievement went backwards, health waiting lists grew, immunisation rates fell, violent crime increased and social housing waiting lists ballooned. Grand visions for light rail across Auckland resulted in little but a canned cycle-bridge and a massive consultancy bill.

So what did New Zealand have to show for the structural deficit bequeathed to us? In part we had the wage bill of a truly historic hiring spree, with the number of public servants having exploded from 47,250 to 65,700.

To put that into context, that growth in public sector roles outpaced job creation in the private sector at a ratio of almost three to one. Worse, most of the growth occurred in the back-office, with ballooning costs for policy analysts and consultancy invoices, rather than for frontline positions.

The country was on a completely unsustainable course, with the books in tatters and public services in decline.

Since being elected, this Government has been on a mission to reverse those trends. Our belief is that you don’t need to break the bank to get better results.

That belief may be poo-poohed by my Opposition colleagues but I know the people in this room get it.

Your mission for increased productivity isn’t a debating point, it’s essential for staying in business.

You think carefully about every extra dollar you spend and seek to constantly squeeze more bang out of every buck.

You relish the opportunity to use new technologies and tools, to deliver better for your customers and to get greater returns for the work you put in.

You should expect the same focus from your Government. After all, it’s your money we’re spending.

The good news is we’ve already made significant progress.

When we came to office the Prime Minister set clear targets for the outcomes we want to achieve from the public service. We are rigorous in measuring our progress against them, and in prioritising our resources to achieve them.

We’ve had an ongoing focus on stopping poorly targeted spending and have put every new idea to the affordability test.

A tougher stance on law and order, accompanied by more visible policing, has driven a considerable decline in violent crime. Our targets have been met well ahead of schedule with 49,000 fewer victims of violent crime since we were elected, and a 25 per cent reduction in the number of children and young people with serious and persistent violent behaviour.

Hospital wait times have stabilised and are now improving. People are waiting for less time in the emergency department and for elective surgery. Last year our Elective Boost policy saw us partner with the private sector to deliver an additional 16,000 life-changing medical procedures.

In education, we’re driving reforms to bring back a structured approach to teaching reading, writing and maths. The early results are exciting. Attendance levels are up, maths students are making faster progress and new entrants are reaching literacy benchmarks in far greater numbers. Through modern delivery we’ve significantly reduced the cost of building new classrooms.

Another example is housing. The last Government left us with a heavily indebted state housing agency Kainga Ora, record waiting lists for social housing, soaring rents in the private sector and thousands of children living in emergency motel rooms. We’ve turned that around: Kainga Ora’s debt is down $9.5 billion even while the number of social houses has increased by more than 7000, waiting lists have reduced by more than 5000 people, rents have stabilised and 2000 children have been moved out of motels.

All of these performance improvements have come alongside a period of cost restraint and fiscal consolidation, as we chart a path back to balanced books and debt reduction.

Our first two Budgets included $44 billion of redirected spending. We’ve driven hard to reduce back-office costs: spending on consultants is down $915 million, clerical and administrative positions are down 15 per cent, managers are down 6 per cent and policy analysts are down 10 per cent.

What this shows you is that, even with more limited resources, our public service can achieve a lot. I can tell you honestly that some of New Zealand’s best, brightest and most publicly-spirited individuals are employed in our government agencies. With good leadership at the top, they are capable of extraordinary things.

But, if you’re listening to this record of progress and quietly thinking - there’s still so much to do - then let me say, we agree.

Yes, progress to date has been promising, we’ve fixed up the basics, but so much more is needed to achieve the modern, efficient and productive public services Kiwis expect.

Our Government is as frustrated as you are by the fragmentation and silos, the complexity, the status-quo thinking and the dangerously slow take up of digital and AI technologies.

In too many parts, the back-office of Government still looks like an eighties relic, run on old-fashioned systems, with slow bureaucratic processes that are too often about box-ticking rather than improving outcomes.

In truth, we are reaching the limits of the current public service operating model.

The current system is failing to meet the expectations Kiwis have in 2026, let alone what they‘ll expect in 2036 and beyond.

So today I’m announcing that as part of this year’s Budget our government is embarking on a fundamental overhaul of the public service, to drive better services, more productivity, and better value for taxpayer resources.

We’ve set three key goals and set a sinking lid on agencies’ operating budgets in order to guarantee progress.

Goal Number one. We are going to streamline the number of government agencies and entities.

Comparisons are not exact, but New Zealand has, by latest count, 39 departments and ministries administering Budget lines. That compares with 16 in Australia, 24 in the UK and around 12 in Finland.

More departments equal more managers, more HR departments, more comms teams and more administrators. More departments also equals more statutory compliance requirements, more silos, more inter-departmental consultation and more costs for the citizens and businesses forced to multiply their interactions with government.

So, over the next three to five years, we are going to significantly reduce the number of public service agencies.

Following today’s announcement, public service agencies will be asked to come up with proposals to logically merge their existing activities around citizen-facing functions, using common technology platforms. We expect to announce more detail in the coming months.

The creation of the new Ministry of Cities, Environment, Regions Transport is an example of what is possible.

Merging the Ministry of Housing and Urban Development, the Ministry of Transport and the Ministry for the Environment will reduce duplication and ensure a faster, more integrated approach to issues like housing affordability and climate adaptation. It will also create significant savings along the way.

Goal number two. We’re going to ensure government is fully on board the digitisation and AI revolutions sweeping the world.

While New Zealanders are increasingly conducting more of their business digitally, the public sector hasn’t been keeping pace. For too long, the public service has been scared of AI, slow to move to the cloud, and has procured a complex and fragmented set of overlapping IT solutions.

We need to digitise both customer-facing services and back-office systems to make it easier and more affordable for people to interact with government agencies.

We have a Government Chief Digital Officer with responsibility for overseeing digital investments. His mission: to improve services and drive down cost.

The Chief Digital Officer will oversee investment in digital systems to move human resources, payroll, case management and other systems to the cloud and to embed AI deployment as a basic expectation for all public entities.

An example of what is possible is the recent trial of an AI scribe tool in hospital emergency rooms which has reduced the amount of time clinicians have to spend on file notes and increased the time they spend with patients. Feedback from doctors and nurses has been overwhelmingly positive.

Goal number three. We’re going to get public servant numbers back in step with historic norms with a focus on hiring and retaining talent.

Every business leader here today knows it’s not how many people you employ, it’s the talents of those people that counts.

We are going to going to bring renewed focus to the essential task of attracting, retaining and developing public service talent.

The Public Service Commission is already working to identify and develop future public service leaders, is actively tracking our 100 highest potential leaders, and will soon launch a public service academy to professionalise its talent-development efforts.

At the same time, we’re going to pull the brakes on the increase in overall public servant numbers.

Historically, New Zealand’s core public service has equated to about 1 per cent of the population. After a period of largesse under the last Government it now hovers around 1.2%.

One of Labour’s first moves was to remove the cap National had previously put on the number of people employed in government administration. Unsurprisingly, that spurred a huge hiring spree, with the number of workers in service support roles rocketing up by 46 per cent.

That’s unsustainable, it’s unaffordable and it’s out of step with international trends.

In Canada, Mark Carney’s government is reducing the size of the federal public service workforce by 10 per cent over the next few years. In Singapore, growth in the public service is pegged to not exceed overall growth in the labour force. The UK is systematically shrinking administrative budgets.

Our Government has therefore set a goal to get our core public servant numbers back to the historic norm at 1 per cent of the population, roughly equivalent to what it was before Labour took office.

We will be tracking progress towards a numerical target of no more than 55,000 full time equivalent public service employees by July 2029. That’s 8700 fewer than were employed in December last year.

Let me stress that these targets apply to the core public service and do not include teachers, nurses, doctors, police or people employed by Crown entities. We fully expect that with good budgeting we will be hiring more nurses, police officers and others in critical frontline roles.

How will we achieve this reduction in numbers? By doing the things your business considers routine: allowing for natural attrition, stopping duplication, streamlining back-office functions, accelerating uptake of digital tech and requiring government agencies to report every quarter on their progress towards the targets.

The result?

A modern, high-performing public service that is more connected, productive and efficient, and that ensures more resources are directed toward better outcomes for New Zealanders.

We’ll also deliver some big savings. To reflect and drive the efficiencies expected from these reforms, this year’s Budget reduces most agencies’ operating budgets by 2 per cent in the coming year, followed by a further 5 per cent in each of the following two years.

Those savings add up, and have created significant headroom for higher-priority investments, a total of $2.4 billion over the forecast period, averaging $597 million a year. These savings will now be deployed to better purposes – to delivering more services in our health system, to increasing educational resources for our schools, to building infrastructure and strengthening our defence force and police.

I look forward to detailing these investments on Budget day.

Some like to pretend we can have all that investment without saving a dollar elsewhere. They’re wrong. Their promises don’t add up, and the future they invite is bleak: a future of increasing taxes, heavier borrowing, shaky finances and unaffordable debt.

Sensible political leaders owe it to Kiwis to face seriously into the increasing volatility of a changing world. We simply must ensure our own house is in order and that our government books are under control. We must do the work now to ensure we can face the future with confidence.

In closing, let me say once again, thank you for listening and for your continued work to realise the great potential of this country.

Despite our many challenges, there’s no place I’d rather help lead than New Zealand: a country free from armed conflict with undisputed borders and access to abundant natural resources, a history of tenacity and innovation, strong community spirit, smart people, savvy business leaders and – may the voters agree in November - a country that had the wisdom to elect a government with the drive and common sense to secure a better and more affordable future for us all.

Budget 2026 will help secure New Zealand’s future, your future and your children’s future. Thank you.