Reflections on Investment Boost

Dr Paul Dalziel

Research Economist

The Government has presented its Growth Budget to Parliament. The centrepiece of the Budget is a new tax incentive for business called Investment Boost.

This policy will let businesses deduct from their tax bill 20 per cent of the cost of any new assets (such as a new commercial building or new machinery, tools, equipment, vehicles or technology). This will reduce tax revenue by around $1.7 billion per year.

It is an expensive programme. To put it into perspective, the total spending by Government on heritage, culture and recreation is about $1.5 billion each year. This programme will reduce tax revenue by ten percent more than that whole category of spending.

Further, total business investment in New Zealand (including in the public sector) is around $14 billion each year. Thus, the lion’s share of investment eligible for the new incentive would happen anyway. For those businesses that would have bought new assets without the policy, the 20 per cent deduction is a pure gift. For taxpayers, it is a pure waste.

This issue is well understood in social security programmes. This follows a long debate about the merits of universal payments to everyone (such as national superannuation) versus targeted payments to those with the most need (such as housing assistance). 

It is now standard practice in New Zealand to shift everything towards targeted programmes, except for national superannuation. The aim is to reduce wasted expenditure. This Budget, for example, has moved cost-of-living support to a more targeted regime.

In contrast, Investment Boost is a universal programme available to all business investment in new assets. Hence, a large amount of the lost revenue is wasted because most incentive payments will be redundant – the firms would have made the investments anyway.

Nevertheless, the programme will stimulate greater investment in physical capital in future years, for the reasons described by the Minister in her speech. Hence, we can expect the policy will increase the country’s capital stock. 

It is important to say that economists have known since 1956 that such an increase will not increase an economy’s growth rate but will produce a one-off increase in the level of output per person. This is a key result of what is called the Solow neoclassical growth model.

That result is confirmed by the analysis of Investment Boost by the Treasury and Inland Revenue. After 20 years of the new policy, the level (not the growth rate) of New Zealand’s gross domestic product might be 1 per cent higher than otherwise. 

The New Zealand economy typically grows by about 3 per cent in a normal year, so we could achieve the same result by waiting 4 months. Thus, the impact is small. Over the 20 years, lost revenue of $1.7 billion per year amounts to $34 billion in total, which we are sacrificing to save just 4 months.

Economists since 1956 have explored what other factors can increase the rate of economic growth. The maths is straightforward. As I explained in a Treasury Guest Lecture, the only factor that can support higher growth in living standards is the ongoing discovery and use of new knowledge.

This insight comes from a mathematical model known as endogenous growth theory. Its creator, Paul Romer, shared the Nobel Prize in Economics in 2018. His theory explains the unique role of investment in science and technology for sustaining productivity growth.

Despite its name, the Growth Budget does not reflect the priority role of knowledge. The Government is reforming elements in our science and technology system, but it is also reducing public investment in science projects.

Thus, the programme of eleven National Science Challenges established by Steven Joyce ended in 2024 and was not replaced. Our largest public science investment, the Endeavour Fund, is not inviting applications for 2026.

These reductions must damage our nation’s long-term prosperity and wellbeing. We are underinvesting in our knowledge infrastructure at a time when global challenges such as geopolitical uncertainty and the climate crisis make new knowledge as vital as ever.