Grant Robertson has announced funding for the Government's one-year fees-free policy will be reallocated due to it not meeting initial forecasts.
Robertson, the Finance Minister, made the announcement during his pre-Budget speech to the Wellington Chamber of Commerce on Tuesday.
He said while the focus during the Budget process is usually on where new spending will be allocated, the Government has also looked at whether existing spending is delivering value for money and aligns with current priorities.
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Robertson said he asked all ministers to identify 1 percent of their baseline spending that was the "lowest priority" in their area. It was then assessed based on its "effectiveness" and "alignment with the Government's priorities".
He told the Chamber of Commerce: "I can announce today that one example of this was under-spending on the fees-free programme due to enrolments not meeting initial forecasts."
"This funding, some $197 million, is now to be redirected to the implementation of the Reform of Vocational Education, which Education Minister Chris Hipkins is working through."
The Government announced its intention to reform the vocational education industry in February, with Hipkins proposing merging all 16 of the country's polytechnics as the New Zealand Institute of Skills & Technology.
He first proposed the idea in August last year, telling Newshub Nation polytechnics across the country would likely have to merge or shut down due to low enrolment numbers. West Coast Polytechnic Tai Poutini had to receive a $33m bailout.
The industry had been hit by a significant drop in tertiary provider enrolments of about 5000 during 2017, leaving polytechnics and technology institutes struggling financially.
Robertson said: "I know from conversations over many years with this Chamber that this is an area where you want reform, and so do we. Put at its most simple, we need to value apprenticeships, trades and workplace training more."
The Government had planned to expand the fees-free policy to two years free by 2021 and three free years by 2024 - but Robertson did not mention if this was still the case.
National's spokesperson for tertiary education, skills and employment, Dr Shane Reti, said the fees-free policy had been a failure from the start.
"The Government has poorly allocated money in education and now it's in a situation where teachers are engaging in the largest ever industrial action in New Zealand, and one of its key policies has fallen over."
He said using the underspent $197 million from the fees-free policy - which came into force in January last year - to address reforms in the polytechnic sector, is "simply one bad policy propping up another".
"The Education Minister needs to urgently re-evaluate fees-free and at least delay the rushed reforms of the polytechnic sector."
Robertson said vocational education needs to be "higher quality, more accessible, more coordinated, and more relevant to businesses and regions".