By Grant Duncan*
If you live in New Zealand and you’re feeling poorer, you’re not imagining it. Stats NZ has revealed the economy was in recession over the second half of last year. GDP fell in the September and December quarters by –0.3% and –0.1% respectively.
Taking into account the record high levels of immigration, Westpac’s most recent economic bulletin estimated this may equate to GDP per person having fallen almost 4% from its peak in mid-2022.
What does this mean politically, then, and what can the coalition do about it? Because the statistics are retrospective, the new government can blame the old one – but that won’t satisfy many people for much longer.
The National-led government hasn’t enjoyed a post-election honeymoon. According to an IPSOS poll in late February, New Zealanders rated the coalition’s performance at 4.6 out of ten – on par with the Labour government (4.7) just before the general election in October 2023.
NZ GDP data for Dec-23 confirmed what we knew for over a year - NZ is in recession. The economy is about making more people better off. We're doing the more people bit, not the better off bit. GDP per capita has been falling since a peak in Sep-22. pic.twitter.com/nHEVgsyXLQ
— Shamubeel Eaqub (@SEaqub) March 21, 2024
Internal contradictions
The recession also means reduced tax revenues. Logically, something will have to give when Finance Minister Nicola Willis puts the final touches on her first budget, to be delivered on May 30.
Tax cuts – which National has promised – could exacerbate inflation or delay its decline. Although inflation has been coming down, it’s still some way from the target 1–3% range. The December figure was 4.7%.
If income is weaker than expected, tax cuts would be paid for by deeper spending cuts, revenues raised elsewhere, or borrowing. The last option lacks credibility, given the way proposed unfunded tax cuts hastened the political demise of the then UK prime minister, Liz Truss, in 2022.
Luxon and Willis have some difficult fiscal decisions to make. And there’s pressure, especially from NZ First leader Winston Peters, to honour the coalition agreements. Peters has already made life difficult for Willis by repeating one published estimate of a potential NZ$5.6 billion “gap” between National’s election promises and “current forecasts”.
Missing innovation and skills policies
In the meantime, people are struggling to make ends meet and appear to lack confidence in the new government.
According to the IPSOS poll, the National Party has often been seen as more competent than other parties to deal with the economic problems. But National is in coalition with two other partners, both of which expect to see their own policies implemented.
There are incentives for all three parties, however, to convince at least most people they can achieve three closely related aims:
- deliver a prudent budget
- improve economic efficiency and productivity
- stimulate innovation and skills.
Judgment on the first point should be reserved until we see the budget.
On the second point, the government is passing a law that will allow fast-track consenting for approved projects. The government will also argue that reintroducing 90-day employment trials, for businesses with more than 20 staff, and repealing pay-equity law will help improve investment and hiring.
But the fast-track law is attracting criticism from environmental groups and legal experts for giving extraordinary powers to ministers. Trade unions strongly oppose the employment law changes.
On the final point, the government seems to have few ideas – least of all how to prepare for the coming wave of AI-driven change. Tertiary education and research and development would be priorities here, but there are no new policy initiatives around trades training and advanced research.
A lot riding on Budget 2024
In the meantime, the reinstatement of tax deductibility of interest payments on rental properties does nothing at all to contribute to fiscal prudence, productivity or innovation.
It simply benefits the owners of things that have already been built and sold. And it’s very unlikely to lead to lower rents, contrary to Christopher Luxon’s suggestion it would apply “downward pressure” for which renters would be grateful.
No government can literally “grow the economy” – regardless of the National Party’s pre-election hype. Economies grow as people produce more efficiently more of the things others are keen to pay for. A government’s actions and policies may either help or hinder the productivity of individuals, firms and the economy as a whole.
The present government’s economic credibility, and hence its political viability, are more seriously in question than would normally be the case so early in its first term.
There are things Luxon and his team can do to turn that around. But people want and need policies that will noticeably boost their material standard of living – sooner rather than later. A lot will depend on Budget 2024.
*Grant Duncan, Visiting Scholar in Politics, City, University of London.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
46 Comments
Well its ok to state the problems but actually some policy solutions would have made the article more useful -how about
Budget could fund 10,000 housing units - would be a good reason for a deficit
and sell later to a pension or super fund
Accelerate depreciation or tax write off for climate change investment - and all research
Super deferral for those who apply - increased rate later on
sell 49% of Kiwibank and kick the proceeds in as capital
etc
"Accelerate depreciation or tax write off for climate change investment - and all research"
That's the best one by a country mile.
Alas, it doesn't give the sugar rush we need at this time. But. Wait ... OCR cuts? Too late. November 2023 is when they should have started.
Isn't it possible for Kiwibank to just reduce their profit margins? They could easily just return less to their shareholder, and undercut the other banks. Even reducing the amount they make per customer to align with comparable OECD countries would help. I'm genuinely curious about why Kiwiabnk has tried to be more disruptive, is there some kind of competition law that would get us in trouble? Rather than being focused on rorting the customer to return a profit to the government, how about they instead genuinely shake up the system.
Kiwibank capital can easily be increased by the government using its currency issuing powers.
Alternatively, setting up something akin to State Advances to provide low rate long term mortgages could seriously disrupt the funding of property speculation by the big four banks.
National's tax package will give a person on the median wage ($61k) $1300 a year in tax relief.
Meanwhile, $2.9 billion is being targeted towards the wealthiest segment of society. If split evenly between 120,000 landlords - they'll be benefiting to the tune of $24,000 per person in tax relief. I know that in reality, some landlords will be super leveraged, and others less so.
I've never seen those two numbers compared side by side in the media. There is very rarely ever any fact checking, or analysis (this website is the exception). Instead, outlets have a tendency to uncritically parrot statements provided by media advisers with no evidence behind them (e.g. Luxon says renters will benefit from his tax changes). This along with the rise of armchair experts on public policy, who are convinced some of the most persistent and deeply entrenched problems facing us as a society can be easily fixed by 'common sense' approaches. You also tend to hear from some groups more than others, particularly those with deep advertising pockets.
https://www.stuff.co.nz/money/350220152/investors-have-top-rent-payment… - I saw this article and thought, so, homeowners are also having to pay hundreds of dollars extra a week, except they have no way of offsetting that cost. If we want to increase home ownership we need to start developing a long-term plan to transition away from this long-term rental trap. If anything, the government should consider what support they can offer owners and renters to give them an advantage in the market. I think the US allows home owners to deduct a certain % of their interest costs from their overall tax bill. Instead we get one sided coverage focused on the plight of the investor.
There's very little journalistic analysis (present company exempted) of the numbers that get put out by any number of organisations because most journalists have never done much except academic work and journalism and are often very young because news organisations can't, or don't want to, pay for experience - and real numeracy is very rare.
I think it was one of Dick Chaney's press secretaries that said they loved young journalistic graduates because they actually believed what you told them.
Given the loud assertion, often masquerading as statistics, shovelled out by so many agencies, I've always thought a course in basic statistical theory should be part of journalism courses - not to be numerate, but to know enough to know when the truth is being used economically - or you're simply being lied to.
If you want something interesting, take a look at "More or Less" from the BBC, where real subject matter experts get asked to examine the numbers and statistics used in politics, the news and everyday life. Try getting some numerical slight of hand past someone with a mathematics degree and 20 years of experience in the subject area, and see what happens.
Have you not noticed Peter's and Semour trying to say more offensive quips than each other to hog the news time, while throwing underhanded slights at Luxon? They had to share the deputy PM role, because neither wanted the other to have the position, for what that does to their ego.
And these numbers look ominous. I guess the question is how quickly will those made redundant or accepting voluntary redundancy re-enter the workforce? The quicker the better, of course.
https://www.stuff.co.nz/politics/350220974/public-service-cuts-hundreds…
Remember they froze the pay of the public service which lead to all sorts of pressures and workarounds, some of which showed up as additional headcount. When Covid came I think there was so much other stuff going on that they took their eye off the ball there.
Presumably Covid itself also lead to an extensive headcount increase like thousands of vaccinators and PCR swabbers borrowed out of retirement etc. I don't think the 16000 thing holds water out of context.
If there really are 16000 additional people there that are still there and are all a waste of space this government wouldn't hesitate to purge the lot. The fact they're aiming for a measly 7% proves they're going for a performative purge rather than a real one.
We're about to have a large cohort of professionals suddenly all unemployed. While some of them will find work, the reality is a bunch of them will probably be unemployed for some time. There has almost been some kind of collective schadenfreude about these job losses, I noticed similar comments when TVNZ and newshub announced job cuts. Public servants & msm journalists = bad. I find it hard to get excited over someone losing their job, regardless of where they work.
Not sure whether the corporate titans at the National party realise, but running a country is very different to running an airline. Making 10k plus people redundant is going to increase transfer payments and reduce demand - ie very bad for GDP. The assumption is all of these people are going to redeploy more efficient industry and GDP grows. However there can be short-term shocks from this that could make the coalition strained.
"... but running a country is very different to running an [insert any NZ business]."
100% correct.
This is a major gap in Kiwi's collective understanding of how an economy (which issues & borrows it's own sovereign currency) works.
Kiwis are so friggin' arrogant that they think because they run a 'business' - or understand how one works - they think the country works on the same basis.
Wise up kiwis - it doesn't! But the swing voters have just delivered a government that thinks this way.
Why we let people vote who don't understand this basic fact is beyond me ... ;-)
The government own 95% of the land in Singapore, which along with significant land value capture taxes make for a significantly different economic environment to ours. If our government attempted to do half the stuff that Singapore had to do to get to where they are the cries of socialism and authoritarianism would be endless.
Governing is not the same as running a business. If anything, being a ruthless corporate raider who is uncompromising in their drive for efficiency and cost savings makes you ill-suited for governing. Christopher Luxon and John Key are two such examples. I never thought I'd say this, but I long for the days of the Key/English government. Bill English was the best of the bunch, he meant well at least - I do think he wanted to help those at the bottom of the heap, as reflected in his social investment approach. We differ in terms of our views on the best way to achieve that, but at least he cared.
I always felt like John Key, and Luxon behind him, became PM as part of some warped ego driven aspiration to be the best, number 1 (the Flag referendum being the ultimate ego project). He continued his service to the country in his capacity as ANZ NZ Chairman (former now), doing god's work, such as when he lobbied against proposals for the RBNZ to increase the capital they hold - a change designed to increase bank resilience and longer-term financial stability. Quick to throw us under the bus if it serves his corporate overlord's interest.
Like Key, Luxon also tries to present himself as a relatable, ordinary bloke. Ignore the fact that he's a social conservative and evangelical Christian (something that no one wants to advertise in NZ), and that he owns 7 houses mortgage-free worth over $20 million. The cheek of him trying to claim that $52k allowance, and his response "It's my entitlement" demonstrated such a surprising lack of political judgement (given all the cuts he has asked the public sector to make). It's obvious, that is how he really, truly feels - entitled. Ironically, the same rationale applies to those on a benefit, after all as unemployed New Zealanders they are entitled to a benefit to. He decided to pay back the allowance, to avoid it continuing to be a "distraction". Now radio silence. Looking forward to the line-by-line review on parliamentary perks and privileges - including whether they're still fit for purpose and being used as intended. But I suppose, that's why he's rich.
https://www.nzherald.co.nz/business/anz-chairman-sir-john-key-wants-cap…
The worst thing is, there is no credible alternative. Labour's almost just as disappointing. No vision, no leadership, just the status quo and a smattering of bland incrementalism. They lost the election because they were unable to map out a future for New Zealand that resonated with people, and reflected the things that were important to them. Instead of leading, they followed. When Ardern was asked how she was going to vote in the Cannabis and Euthanasia referendums, she said she would be voting yes for euthanasia and declined to share how she intended to vote on Cannabis - only telling the public after the referendum that she voted yes. Given how close the referendum was, I was fuming. Perhaps she was worried about being associated with undesirable stoner deadbeats. I don't smoke, but I know many professional people that are functioning members of society, with very expensive vaporisers that enjoy smoking the way someone would enjoy a glass of wine on the weekend.When the referendum was announced, polls had the yes vote passing easily at 68%, and that was slowly wheedled away by a well executed, well founded No campaign. When the referendums were announced I thought Euthanasia was by far and away the more controversial of the two. It was a master class in swinging public opinion to protect certain industries. For every vote yes message I received, there were like ten no messages.
In 2017, she ran on a campaign centred around transformation - shifting the balance of power back towards regular people. COVID was a missed opportunity to do things differently. Instead, they gave billions of dollars to banks through things the Funding for Lending Programme, and then acted surprise when house prices went through the roof. Kiwibuild, when it was announced I thought woah awesome, finally the government's going to start doing something - they're going to build some houses! Oh actually no, they're going to underwrite developers to build houses they would have already built, in places we didn't need, risk free. Kiwibank, a similar story. Both parties are so hamstrung by economic orthodoxy. Labour in particular, lives in the shadow of the dreaded 'Taxcinda''. Tax = bad. No party has been able to the shift the narrative around tax being something negative, that takes your money. It's the easiest way to shut down a conversation. There's no convincing value proposition to make people think otherwise. Not all tax is bad, I don't hate it - but I used to hate it. But the more I read, and the more I engaged critically questioning events around me, the more I developed a more nuanced view. National/Act, in theory if not realty, also provide a useful perspective. Tax needs to be targeted and spent on things that improve people's lives, but accountability, efficiency, and transparency are also important.
"When Ardern was asked how she was going to vote in the Cannabis and Euthanasia referendums, she said she would be voting yes for euthanasia and declined to share how she intended to vote on Cannabis - only telling the public after the referendum that she voted yes."
That's the way that I would have played it too if I was in Ardern's shoes. After all it was a free vote. Politics were discussed in our home but our parents never used to tell us how they each voted ..... and I have carried that on with my own family.
But why say how you will vote on euthanasia (signalled yes) and refuse to answer for cannabis? Afterwards she said she voted yes because she knows legalisation minimises harm to individuals and society. It is evidence based. Saying that before the referendum could have tipped the result.
Recession pops up in the PM's face, and unlike a strong and stable sibling, he blames little sibling for the problem, instead of saying" totally saw ir coming and now we are going to......."
I have a sinking feeling that with some very inexperienced politicians in high places NZ is going to have tricky old time for a while. Who mentioned Liz Truss in the same breath as tax cuts?. There's a damn fine case study for anyone to have a look over. Just saying.
And he didn't mention there is no relief on the way for local government infrastructure (3 waters) issues.
I watched the John Campbell series of short investigations into it on 1News. The Minister said the approach would be threefold:
- Local authorities would join-forces (joint venture) in the delivery of these services
- Council controlled organisations would be formed to borrow and deliver the services
- There would be no central government assistance.
And I thought to myself, that Wellington Water is just that - and it too is saying their problems are insurmountable in the absence of central government assistance.
Sure, and I was fairly supportive of the previous government's approach of not giving the local bodies the golden goose of continued ownership and leverage that comes with their pipes while taking the burden of financing away.
But if you're going to make it the councils' problem again of course you can expect them to come sobbing to government for help with money and legislation to get them out of fiscal prudence handcuffs. They've planned for the last few years for this not to be their problem, now suddenly it is again.
The new government's approach of mandating something's done without helping is a very cruel kind of tough love. Even more so when it's still clear the previous outcome of a small number of mega entities is still what they aim to get out of it, which vindicates the original plan. They just don't want it at their expense.
I think we have arrived at the point of no return. There is now only one right direction, with all the others leading to big swells & rocky headlands. Mr Luxon will need all his smarts if he is to steer the good ship New Zealand safely into richer waters. It'd be great if everyone pulled their weight.
Te Kooti right with you on the downward spiral of our Finance Minister. Only read this morning Matthew Hooten in NZ Herald Friday "Willis promised to resign if the tax cuts don't go ahead. It should be the other way around. She should resign if Luxon continues to insist they do/"
Tell you who scares me like no other - B v Velden. On radio she comes over like a cheap robot.
Maybe this government is actually smarter and more progressive than we realise.
By dumping infrastructure problems back on local councils they will force massive rates increases. And boom! Instant wealth tax as rates go up 50 % but still able to deliver promised tax cuts to the groups that paid their way into power.
Nah, who am I kidding.
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