Statistics NZ’s final data release for the year revealed the economy has been shrinking at its fastest rate in three decades. While this may not be a very Merry Christmas, there is still hope for a Happy New Year.
Treasury, the Reserve Bank, and most economists expect growth to resume in 2025 as interest rates fall. Consumer spending should pick back up and cheaper credit should make business investments more worthwhile.
But while private New Zealanders open up their wallets, the Government will continue to tighten its belt. Core Crown expenses are predicted to fall from almost 34% of GDP in 2025 to 31.5% by the end of the decade.
This would be enough to balance the books—if you ignore annual losses at the supposedly self-funded Accident Compensation Corporation—and halt net core Crown debt at 45%.
But Finance Minister Nicola Willis told Interest.co.nz this wasn’t her top priority.
“Our view is you can never ignore sensible fiscal policy, and it's irresponsible to indebt future generations to an extent that they won't be able to have the services that we have today,” she said in an interview.
“But at the same time, you also need to make sure that you're maintaining today's services, that you're keeping the foundations for productivity, and that you are ensuring that your measures make sense, not just in the short term for colouring the books and making them look pretty, but will actually generate a sustainable basis for growth in the medium term”.
Many left-leaning critics of the Finance Minster would like to see greater Government investment to support the growth forecasts next year. They worry a withdrawal in spending will hamstring the recovery and leave the economy less productive in the future.
It may surprise you to hear that Willis agrees with them. She says it is “factually incorrect” to accuse her of austerity, as the Coalition’s fiscal policies are still stimulating demand.
“We have a government that is actually continuing to increase its overall levels of spending, both in absolute terms, but also as a proportion of the economy. And actually, the fiscal impulse will be positive.”
“But the point that we are making is this does need to unwind over time, and so we've set out a path of gradual fiscal consolidation, which we think is the responsible way to go”.
She says policies which deregulate the economy, open New Zealand up to more foreign investment, and crack down on uncompetitive industries will be more important to future growth than fiscal stimulus.
Banking is one of these uncompetitive sectors in which she wants reform. She's already told Kiwibank to raise $500 million and the Reserve Bank to put more weight on competition when setting regulation policies, and is more than willing to go further.
“When I read through the Commerce Commission report on our banking sector, it couldn't have been any clearer to me that we have a major problem,” she said.
“I have put the banks on notice and made it clear that if they want to do more of their nice talk about how they're going to be really good … that won't wash with us. They need to be acting or we will take further action, and there are a lot of options for what we can do there”.
She’s open to charging banks a special levy or tax, like in the United Kingdom and Australia, which recognises they benefit from an implied Crown guarantee and earn very high risk-adjusted returns as a result. Big banks beware!
77 Comments
Treasury, the Reserve Bank, and most economists expect growth to resume in 2025 as interest rates fall. Consumer spending should pick back up and cheaper credit should make business investments more worthwhile.
Most people know that this is a core premise of their economic forecasting and assumptions. Still would be great to see an 'open source' govt where you could access all the data and analysis of how they come to their conclusions. Perhaps they're right. But who knows? AFAIK, their conclusions are based on broad metrics and modeling completely unrelated to behavioral analysis under different economic scenarios. And I know that this is well beyond their available resources and doesn't fit within the institutional mindset.
I have long dreamed of being a benevolent technocrat dictator overseeing a republic-style government where all meetings are made public via real-time video, and all data available publicly available read-only in real time too.
Never gonna happen.
(Also the republic representatives would be a house of randomly chosen citizens, with the longest serving 10% replaced each year).
I was not talking about 'data'. I was talking about modelling frameworks and how assumptions are formulated. Entirely different things.
A reasonably competent student can create basic regression models based on cost of credit and economic growth. Making the bureaucracy 'open source' would enable the public to be able to test and challenge their work - a constructive path for education.
J.C.: "I was talking about modelling frameworks and how assumptions are formulated. Entirely different things."
They are very, very, very different things.
But let's get real, J.C.
Who would understand them? You? You've got the compute power to run them?
Perhaps you're among the 0.01% of the population capable of taking these models and making sense of them?
Fess up. Are you?
Perhaps you're among the 0.01% of the population capable of taking these models and making sense of them?
Will that depends. Some theoretical frameworks are typically based on advanced econometric models. Others are not. Some modelling and research are available to the public (https://www.treasury.govt.nz/information-and-services/financial-managem…).
How the bureaucrats determine economic growth from parameters such as debt cost servicing is quite possibly available and would need to be understood by someone like Nicola Willis who will likely parrot what she's told by her advisors. Doesn't mean she understands the modelling. And I doubt she has any experience with R.
Willis, as you'd expect, has become an expert, at using a lot of words, basically platitudes, to say absolutely nothing of any consequence.
(platitude, noun, a remark or statement, especially one with a moral content, that has been used too often to be interesting or thoughtful.)
We need a new Finance Minister that speaks simply and plainly, with logical statements, based on foresight and wisdom.
You can't lead with platitudes - they only fool the foolish.
We need much better than this. Perhaps Luxon should stand up - show his mettle - and lead us forwards? After all - he claims he's good at this. Isn't it time he lived up to his claims?
At this point - and I shudder as I write this - I think Willis would be a better leader than Luxon. He got where he is on the back of cronyism, and it shows. Not saying Willis is any different, but she at least seems to have spine.
Edit: not that I'd vote for either!
There needs to be pushback on her ridiculous comments - look at the very first two in this article:
“Our view is you can never ignore sensible fiscal policy, and it's irresponsible to indebt future generations to an extent that they won't be able to have the services that we have today,”
They are not doing that, they increased borrowing in this budget to offset the landlords tax cuts.
“But at the same time, you also need to make sure that you're maintaining today's services, that you're keeping the foundations for productivity, and that you are ensuring that your measures make sense—not just in the short term for coloring the books and making them look pretty—but will actually generate a sustainable basis for growth in the medium term”
They are not doing that either, see cuts in health services and hospitals, cuts to the public service (including biosecuity, food safety, fisheries, what could go wrong), social housing, reductions in planned capacity for ferries and general impending disaster there, and general all round 'austerity' budgets.
The spin level of this government is spectacular. The only thing more spectacular is the media's ability to print or broadcast it without any form of fact checking or push back.
“They fought an election on that tax package, it was a tax buy for being excessively inflationary and unfunded, and yet, you’d have to say... they won.”
Unlike Labour, who had not announced any policy to remove decades of interest deductibility convention in business tax treatment against the advice of Treasur, MBIE & IRD & had no election mandate to do so in 2020.
https://www.nzherald.co.nz/nz/politics/on-the-tiles-recaps-the-year-in-…
They could have run less policy than labour rolled out and probably still won. I doubt all the repealing was even necessary to promise, most just voted a change because they decided their bills were to high and think a change of govt is how you fix that kind of stuff
Speaking of fact checking..."cuts to the public service"
In 6 years Labour increased the public service staff by ~18000 / ~40% with no significant improvement in services.
Now: "the EFT staff total in the public service at September 2024 is only 296 less than in June 2023."
While: "The Government set the public service a target of eliminating $400 million in operating expenditure on contractors and consultants by 2024/25.
...This year the public service is on track, after the first quarter, to achieve savings of about $500 million... savings over the two-year period could total more than $800 million,.."
https://www.kiwiblog.co.nz/2024/12/huge_savings_on_consultants.html
Public vs private sector labour costs:
https://www.kiwiblog.co.nz/2024/08/no_wonder_we_are_in_deficit.html
Willis: "“We have a government that is actually continuing to increase its overall levels of spending, both in absolute terms, but also as a proportion of the economy. And actually, the fiscal impulse will be positive.”
Um. No. Sorry Nicola. You are only 'paying the bills'. Like a household trying to stay warm and keep the lights on, while making no inroads on a their mortgage.
Time for Luxon to step up. This government's performance has become so underwhelming it's becoming nothing short of a train wreck.
The problem we have is that we are always out of sync. We should have had National holding their wallet closed in the good times (when Labour were in power), and Labour spending up large in the bad times (like now).
This would be a great time for government to borrow and invest - if we hadn't spent the last 6 years borrowing and investing.
I have no problem with fiscal discipline but austerity does not create prosperity. You need an economic plan that puts a pound in the ground in high growth areas of the economy. Balancing books by careful budgeting will not create the kind of growth in per capita productivity New Zealand needs.
New Zealand is in great danger of heading down the other the UK has been on since the financial crisis.
Where can they invest?
- Most roads / transport projects barely make a return (benefit cost ratio).
- Education? But it is a very long game
- Housing? But rents and house prices are already heading down
- Technology? What can the government do other than handouts?
- Farming? What can the government do?
- Mining? Do we have anything decent to sell?
- CO2 reduction - this seems the most plausible to me but hard to know what the return will be
- Electricity? How do they not destroy private investment?
- Health? The opposite of an investment IMO
- Tax cuts so we invest - but we will "invest" it in houses / Bitcoin / etc.
They can't do much more than "reduce red tape" can they?
Electricity is a obvious candidate to replace FF and greatly improve our balance of payments. I'm not sure it's governments job to guarantee private returns.
Actually just thought having mentioned electricity, if you were to trawl through the covid era ranting you'd find all the great ideas we had for labour to spend up large improving our collective futures. None of which they did any more than these Bozo's will . Unforgiven. Looks like the biggest "investment" will immigration.
I typed a very long reply but it just cacked out. Borrow long via 50 year infrastructure bonds and
1 - build SH1 length of the country as a 4 lane each side 120kmh straight freeway. Model on German autobahn.
2 - high speed rail. Again length of country. Connect ports. Hubs in Auckland Hamilton Wellington Christchurch with spokes out to whangarei, Napier, tauranga, New Plymouth Dunedin etc.
3 - roll on roll of freight ferries.
4 - fix water pipes and sewage treatment. It’s 3rd world.
5 - another Auckland harbour crossing. Preferably a tunnel which bypasses the central city completely
Aaaaaagh! You can't look at Govt spending in isolation of the other big macro variables. Nor, does core crown expenses tell you much about stimulus. Let's break this down. Rant incoming....
First, forget all the partial measure silliness. Cut to the chase and look at the 'residual cash' measure. This tells you how much money Govt are spending into the economy net of taxes (the true 'borrowing' requirement). Now, let's look at that 'residual cash' measure (% of GDP) from 2009 to 2013:
English: (4.6%) (4.6%) (6.5%)* (4.9%) (2.6%).
Now compare to the HYEFU figures for 2025 to 2029:
Willis: (3.9%) (2.2%) (3.6%) (1.6%) (1.1%).
So, we're in the worse recession since 1991 and Willis is planning fiscal stimulus over the next few years of around half the amount that English pushed out in 2009 and 2010?
Now, I'm just getting warmed up. In 2009, there was a global recession. What did that mean? Yes, import prices dropped sharply and we spent less overseas (on fuel in particular - oil dropped to $40 a barrel). That meant that our current account balance got all the way down to 1.7% of GDP in 2009/10 and more of our spending was directed into the domestic economy. So, guess what? That was stimulatory! Domestic demand started to create jobs and growth. Lord knows we needed it.
Now, let's work out the net of the Govt deficit stimulus spend (+ve) and current account deficit (-ve). This gives you a rough indicator of the overall fiscal stimulus. Here's 2009 to 2013 (year ending June, so the 2009 figure includes the back half of 2008):
English: (0.5%) 2.9% 3.6% 1.4% (1.0%)
Now, sadly, we are going it pretty much alone on this whole recession thing so we have not seen a crash in import prices. In fact, our current account deficit is forecast to stay high for the foreseeable future. So, here's the same deficit spend (residual cash) net of our current account deficit for 2025 to 2029 from the HYEFU forecasts...
Willis: (1.2%) (2.0%) (0.3%) (2.1%) (2.3%)
What can you see? Yep, the net fiscal stimulus from 2009 to 2013 was very clearly positive. The forecast for 2025 - 2029 is resoundingly negative (4.9% of GDP apart when comparing 2010 to 2026 forecast!)
So, even this very simple analysis demonstrates we're in trouble on the fiscal front. What macro variable am I missing here though? Yep - monetary stimulus, aka net bank credit creation.
Now, 2009 - 2013 was stone cold on credit. Net bank credit creation as % of GDP is shown below (note 2009 figure includes back end of 2008):
English: 5.5% 0.7% 2.1% 5.6% 6.6%
So, a crude calculation of net fiscal and monetary stimulus as % of GDP for 2009 - 2013 (deficit spend + net bank credit creation - current account deficit) looks like this...
English: 5.0% 3.6% 5.7% 7.0% 5.6%
To achieve this level of stimulus (given Willis spending plans and current account balance forecasts), we would need net bank lending 2025 - 2029 to be something like this:
Willis: 6.2% 5.6% 6.0% 9.1% 7.9%
The current forecast for the 2025 year is 3.5% to 4%! And, lest we forget, the recovery from the GFC was painfully slow. It was 2013 before we got jobs back up to 2008 levels.
Now, forgive all the stats, but hopefully they make the point clearer for those that prefer numbers to words (I hear you).
The final thing to say about these macro variables is that if you ignore them, they take over. Govt will set out to spend X and tax Y, but if they're not realistic about the conditions, their spending, deficit and borrowing requirements will be determined by the economy not the Minister for Finance. If households don't pile into debt quickly enough to buy houses, or PPP deals take 2 years to sign, or oil / food prices climb again, Govt deficit spending will blow out because the whole country's books have to balance.
There... I feel better, thanks if you managed to get this far.
Oh, we are right out in front. Look at change in unemployment compared to pre-covid era (never mind the lows reached during Covid). We are up the top of the league with the right wing austerity loons. Show me any stats where we are not giving a master class in self-flagellation.
There are many economies self flagellating only the method is different. Neither scenario you outline will remedy our (or anyones) problem as the cause and effects are global in nature....the growth model is broke. We can move the economic activity more towards the public purse which will alleviate some of the problems in the short term or we can continue to inflate asset prices to the point of collapse but neither will protect us from the fact that we are incapable of operating our economy (as it it exists) without the 'largesse' of international finance and when (not if) that is withdrawn we will discover what we can and cannot do....that is the same problem all economies (with the exception of the US, currently) face.
Meanwhile the best we can do is attempt to prepare and redistribute some of our remaining wealth to where it best serves our community , without triggering a premature abandonment.
One hell of balancing act, and one this Gov are clearly incapable of performing.
I hear you! I was on my exercise bike shouting - how do you get this 'growth', Nicola... where does it come from? The answer of course in modern day NZ is that growth is the surplus cash gathered up by private enterprises before they pass it on to shareholders. Where does that surplus cash come from? It is created either by Govt deficit spending or net bank lending. When we celebrate 'growth' we are almost certainly celebrating a simple expansion of the private or govt balance sheet. Woohoo. Go us.
So, if Govt is reigning in spending, where is the surplus cash going to come from to enable growth? A mortgage boom. Go us.
Don't even get me started on productivity. This is basically growth divided by hours worked. So, again, where does that growth come from? Yep... round we go again.
Times are tough...ok if your sitting on the front bench clipping the taxpayers ticket...but not so for those waiting for the trickle down....
"More people in financial hardship have been declined government food grants this year, and foodbanks warn that this is putting even more pressure on their struggling services.
Data released to RNZ under the Official Information Act shows six percent of special needs grants were declined in the first nine months of this year, compared to just 3.5 percent for the same period in 2023."
"The government's turning down people for food, they're sending them to foodbanks. "Now they're not funding foodbanks". Foodbanks around the country are either overstretched like ourselves or they're starting to close down." https://www.sunlive.co.nz/news/357235-declined-food-grants-puts-pressur…
"She says it is “factually incorrect” to accuse her of austerity".....
Well, thats what you get as a result of the last ever Labour Government having spent around 70,000,000,000 of money that it simply did not have so that people could sit on their bums doing nothing. Now that money needs to be paid back. Now we're spending aroung $500,000,000 each month just in interest payments servicing the $120b in govt debt. Many of those folk who were paid to do nothing after having came back to NZ are now heading back overseas because they can get better pay overseas.
It takes longer than a couple of years to fix that sort of massive financial blunder by a Socialist political party
And lets not forget the fact that Labour made several financial commitments in its last year in office without seting aside money in the budget to pay for those commitments.
I think they cynically knew they wouldn't be in power after the election and they made those commitments anyway with the intention of blaming the new government for the consequences.
New Zealand would be making a very foolish mistake if we ever voted Labour back into power ever again.
Govt's net interest costs are about $2bn a year, David. Remember Govt own a load of private sector debt that they get paid interest on. Always quoting the net rather than the gross.
Now, who is getting that $2bn a year? Mostly wealthy individuals in NZ and offshore.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.