Willis revealed the latest information from Treasury at a briefing on Tuesday morning, warning New Zealand would be hit by what she called a “historically significant global economic event”.
While New Zealand is not itself threatened by especially high tariffs, many countries that New Zealand trades with, including China, face very high tariffs. This will hurt their economies and ultimately make people in those countries less able to buy New Zealand exports. That means that while the tariffs on New Zealand may not harm the economy too much, tariffs placed on other countries would likely have a big impact.
Willis said the Asia region, including Australia, accounted for 70% of new Zealand’s trade. She said there was “a risk of slower growth in the region because many economies there have significant exposures to the new US tariff regime”.
“Should retaliatory tariffs be imposed and the situation escalate, there will be further impacts on growth in these countries,” Willis said.
Willis said the Government was also keeping an eye on “trade diversion”. This would mean exports that may have been destined for the United States being dumped into another market, potentially a market in which New Zealand has a presence. This would reduce prices for New Zealand exports.
Willis said there may be some positive impacts, including import prices falling for some products including oil. She said New Zealand’s floating exchange rate may mitigate some of the worst effects of the tariffs. The New Zealand dollar has weakened, making New Zealand exports more competitive.
“All of these factors create risk for the New Zealand economy, just as we have been gathering positive momentum and recovering from a period of high inflation and interest rates... put simply, the past week’s global developments make our recovery harder,” Willis said.
Willis said trading partner growth at the half-year economic and fiscal update (HYEFU) in December had been forecast at 2.5%. Treasury’s “initial assessment’” of this figure would be reduced to 2%.
She said Treasury forecast global inflation to be 2.5% in the year to June 2026. Treasury now thinks this will be 0.5 points higher.
She said these figures will feed through to Treasury’s forecasts for the Budget.
Impact on the books - Government sticking to fiscal strategy
Willis said all of this would have an impact on the Government’s books.
She said the Government would stick to its fiscal strategy, which was to achieve a surplus under the new OBEGALx measure, by 2027/28. This is despite risks of falling revenue as a result of lower growth. How the Government plans to make up for that is unclear. The Budget, which will be delivered on May 22, is in its final stages before going to Cabinet.
Willis said the Government did “not intend” to expand the operating allowances (the amount of net new spending) in this year’s Budget, which a little over a month away.
“We will continue to provide responsible economic management that supports job creation, rising incomes and a more affordable cost of living for New Zealanders,” Willis said.
She said the operating allowance was a “ceiling not a floor”, implying that some of her tight $2.4b allowance might go unspent - helping the Government achieve its surplus goal.
There is just $707m in spending uncommitted from the 2025 operating allowance - a figure Treasury thinks will not be enough to cover cost pressures in public services.
On Tuesday, Willis noted that the legacy of the 2024 Budget showed that these cost pressures could be funded through reprioritising funding from elsewhere in the public service: cutting one line of spending in order to pay for another.
The Government has already said it is looking at this sort of reprioritisation for Budget 2024. Willis’ remarks today hinted that the scale of those reprioritisations may be large.
“That approach meant that in last year’s Budget we delivered $23b of additional savings [over four years] that we were able to reproiritise... There will be teh same approach in this Budget. It’s where we were able to reprioritize funding to support things that we think are priorities for New Zealanders,” Willis said.
She said that there would likely be an impact on the Government’s debt servicing costs.
The secondary bond market was “volatile”, but there was “strong demand” for New Zealand debt this year.
Luxon briefed on trade impacts
Luxon said there are no plans to change the Budget at this stage. A social media post suggested the Government’s response will be, in the first instance, to advocate for the rules-based order on the world stage.
Prime Minister Christopher Luxon, speaking on his way into National’s weekly caucus meeting, said this past week had seen “a profound shift in the global economic landscape and the way that countries respond to these events has the potential to have significant impacts on New Zealand”.
The impact of the slump, which the Wall Street Journal called a “US stock meltown” is being felt in New Zealand, with KiwiSaver balances tanking and local stocks falling too. Two billion dollars was wiped off the value of New Zealand’s share market between last week and the end of Monday as the rout of global financial markets caused by the US tariff policy finally caught up with the local market.
The NZX 50 benchmark fell 3.68% to 11,775.88 points on Monday, taking year-to-date losses to 9.89%.
Luxon said that while New Zealand had got off relatively lightly from the tariffs, receiving just 10%, the lowest rate applied to most countries (with some exceptions), overall the tariff war would harm global growth prospects which would be bad for New Zealand.
Prime Minister Christopher Luxon speaking to media about the Government's tariff response. Photo / Mark Mitchell
“Yes, we’re not as badly affected as many other countries that face up to 50% extra tariffs on exports into the United States, but what actually is concerning me is the shift away from agreed rules and the risks of actually backsliding into a global trade war.
“A trade war is frankly in nobody’s interests. It will slow global growth, it will hurt jobs, and it will reduce the amount of money we have in our wallets,” Luxon said.
Luxon said New Zealand has a “strong history of advocating for an open, rules-based trading system. I will work with like-minded countries to promote free trade as a path to prosperity for New Zealanders and for those that we trade with.”
Willis spoke to Ryan Bridge on Heather du Plessis-Allan Drive on Monday night, saying she had been receiving briefings from officials on the impact of the tariffs.
“I have been getting ongoing updates from officials - situation updates from officials because obviously this is a significant global economic event. It has uncertain implications but undoubtedly profound implications for New Zealand.”
These implications are probably bad news for the Budget. Low global growth forecasts will very likely hurt New Zealand’s growth outlook. This will reduce tax revenue, putting pressure on the Government come Budget time.
“We will finalise our economic forecasts which then feed into the Budget in the next few days - I expect to be briefed on them soon,” Willis said.
“The estimate that global growth is going to be lower than had been predicted - that has a run-on effect for New Zealand’s growth projections and so you will expect that to be reflected in our Budget updates,” Willis said.
“I intend to keep New Zealanders updated on the significant material developments for the economy,” she said.
Willis said officials were telling her that it is “likely that the tariffs are going to reduce overall estimates of global growth and that will therefore reduce our forecast growth in the economy, which as you can work out means potentially less revenue for New Zealand which is a significant economic effect that we need to be prepared for”.
She said it was important to back exporters.
Willis said she had not seen advice suggesting the slump would tip New Zealand back into recession.
Labour leader Chris Hipkins said stimulus may be justified
Labour leader Chris Hipkins said there may need to be more spending in the Budget to stimulate the economy.
“I think there’d certainly be a justified case for that,” Hipkins said.
“I think it will very much depend on where you did that extra spending, so if it’s investment spending, rather than short term spending, there is absolutely a case for that at the moment, because investment spending is something that we have underdone as a country for the last three or four decades and as a result, we’ve got a lot of catch up to do,” he said.
Hipkins noted that Willis had criticised Labour for breaking pre-election spending promises during the last Government. Labour at the time blamed those broken promises on the changing economic climate.
He said the pre-election spending promise of Willis was “a stupid promise for her to make”.
He said Labour would “highlight the hypocrisy”.
Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
