Tonga’s Budget Meets Global Headwinds: Can Local Optimism Withstand a Global Slowdown?
Tonga has just unveiled its FY2025/26 budget, a confident and forward-leaning document grounded in themes of national resilience, infrastructure renewal, and economic opportunity. But while the domestic narrative is one of refocusing public spending on “impactful projects” to build a more viable and sustainable economy, the international context into which this budget is being launched is growing more turbulent by the day.
This week, the World Bank issued a stark warning: global GDP growth is projected to fall to just 2.3% in 2025, its weakest non-recessionary pace in nearly two decades. The slowdown, the Bank says, is largely a consequence of prolonged trade tensions, particularly involving the United States, combined with a wider retreat from globalisation, falling investment, and political uncertainty. For small economies like Tonga—highly open, heavily import-reliant, and closely tied to external capital and donor support—this subdued global outlook poses a significant challenge to the local optimism that underpins the government’s fiscal plans.
Tonga’s economic strategy, as laid out in the budget, relies on a modest recovery of 2.5% growth in FY2025, rising to an average of 2.8% over the medium term. This is a respectable target for a post-COVID, post-disaster economy, and it reflects renewed activity in construction, planned upgrades to national infrastructure, and an expected rebound in the tourism and agriculture sectors. However, the World Bank’s revised forecast casts a shadow over these assumptions.
Slowing global growth means softer demand for exports and services. It may also constrain the flow of remittances from overseas workers, which remains a vital lifeline for many Tongan households. If the economies of Australia, New Zealand, and the United States slow more sharply than expected, the ripple effects could reach Tonga in the form of fewer tourists, reduced remittances, and weaker job markets for seasonal labourers. These are all factors that fall outside the scope of local policy control, yet they will directly impact domestic revenues and household incomes.
Another point of concern lies in the financing of Tonga’s development ambitions. The FY2025/26 budget is heavily supported by external aid, with more than $243 million in in-kind support pledged by development partners, including Australia, China, the World Bank, and the Asian Development Bank. While these contributions are indispensable to delivering major capital projects—from hospital upgrades to the new Fanga‘uta Bridge—they are now at risk of delay or dilution, especially if donor countries begin tightening their own fiscal belts in response to the global slowdown. The World Bank notes that foreign direct investment into emerging and developing economies has already dropped to less than half of its 2008 peak. If this trend continues, Tonga may face difficulties securing the full extent of its pipeline projects.
There is also the question of inflation, which remains a threat despite easing price levels in more advanced economies. Tonga imports the majority of its food, fuel, and construction materials. Any resurgence in global commodity prices—whether from conflict, supply chain disruption, or climate-related shocks—would feed directly into the local cost of living. This in turn could put pressure on the government to provide further subsidies or social protection, which may stretch the limits of the budget’s already tight fiscal space.
On a structural level, Tonga’s choice to fund its $29.1 million deficit through domestic bond issuance, rather than external borrowing, is a prudent one. It reduces exposure to foreign exchange risk and demonstrates a commitment to financial self-reliance. However, the capacity of the domestic market to absorb government debt remains limited. If interest rates begin to rise globally—as they are expected to do in response to persistent inflationary risks—the cost of domestic borrowing could also increase, potentially crowding out future investments.
Still, Tonga’s budget is not without foresight. Its provisions for climate resilience, including increased contributions to catastrophe insurance, show a government attempting to manage long-term risks as well as short-term needs. The renewed emphasis on health, education, and digitisation is commendable. The establishment of the Public Training Institute, alongside funding for microfinance initiatives for women, signals a genuine interest in inclusive growth.
But good intentions must now contend with a world that is more unpredictable than ever. The budget, though credible on paper, may require adjustment in the months ahead. Growth assumptions may need to be revised, spending plans rephased, and buffers strengthened.
The reality for Tonga—and for many small island states—is that their fiscal fate is not determined solely by their own policies, but by the actions of larger, wealthier nations and the unpredictable forces of a shifting global economy. The World Bank’s report should serve as both warning and call to action: Tonga must remain nimble, tighten its coordination with development partners, and ensure that its ambitious plans do not outpace its capacity to deliver in a world where headwinds are growing stronger.
As global uncertainty persists, the greatest risk to Tonga’s budget may not be miscalculation, but external disruption. Managing that reality will require not just technical soundness, but political discipline and economic resilience.
