Willis celebrates, for now, while bell tolls for Hipkins
Matthew Hooton works in political and corporate communications and clients have included the National and Act parties and the mayor of Auckland.
if the Reserve Bank is right, New Zealand is now in its third recession in two years. At the end of next month, the economy will be 1.2% smaller than two years ago.
But that doesn’t begin to describe how bad things have been, and remain.
Over the same two years, despite record numbers of New Zealanders leaving permanently, net immigration of working-age people has been at unprecedented highs, over three times the average since 2008.
As a result, the Reserve Bank now picks per-capita gross domestic product (GDP), which Finance Minister Nicola Willis rightly says we should use to judge our economic performance, is now 6% lower than at its peak two years ago.
Through the Reserve Bank’s fouryear forecast period, per-capita GDP never fully recovers to its September 2022 high. Even in September 2027, it thinks the average New Zealander will be 1.6% poorer than five years earlier.
Presumably something worse happened during the Great Depression of the 1930s, but nothing quite like it shows up in the available data.
It’s important to emphasise all this has happened after the Covid crisis. When Dame Jacinda Ardern finally released Auckland from the second long lockdown in late 2021, the economy was still 4% bigger than two years earlier.
When historians look at the economic numbers, they won’t be able to say Ardern got much wrong during the Covid crisis. It was the disastrous decision to borrow and spend even more once the crisis abated that did us in, along with her and Chris Hip kins’ prime minister ships.
It takes a special talent to damage an economy more after a pandemic than during one.
The Reserve Bank’s data suggests, except for a brief period in the mid2010s, mass immigration correlates with New Zealanders, including recent immigrants, becoming poorer on average, at least in the short term.
In contrast, its data suggests GDP per person tends to rise when net immigration falls. The good news is the bank projects those are the directions both will head in through to the election.
Unless there’s a nasty surprise in September-quarter inflation data, due on October 16, the official cash rate and home-mortgage rates will fall right through to the election, so house prices will recover.
This month’s tax cuts mean inflation will be a little higher than it would have been but, in the current environment, they can be rebranded as a perfectly timed stimulatory measure.
Willis is entitled to something of an “I told you so”. But she does not and cannot claim all the credit. It was the Reserve Bank that belatedly took the fight to inflation in late 2021, and householders and businesses who paid the higher interest rates and reduced their spending.
For its part, National would have been better off not betting on a postelection economic boom following street parties celebrating Christopher Luxon’s assumption to the Beehive’s ninth floor. Willis’ spending cuts wouldn’t have been as great without Act.
But Willis held her nerve against her critics, and to the incumbent finance minister always goes the glory when interest rates fall, sharemarkets boom, house prices rise, economies recover.
All economic projections now point to National, Act and NZ First being comfortably re-elected. It is Hipkins who now ought “therefore never send to know for whom the bell tolls”.
Labour’s Plan A of doing nothing but hoping inflation, high interest rates and falling house prices would defeat National is inoperative.
Its transition to Plan B involves Labour MPs making increasingly more frequent visits to Wairarapa and Manurewa.
Willis’ attention now turns to measures she thinks will raise investment, capital per worker and productivity, and to implementing social investment, which will cost taxpayers more in the short term.
She must do both in the context of her now wafer-thin operational allowances over the next three Budgets and the projected post-2030 permanent debt-spiral Treasury has been warning about since 2006, to which all indicators since have pointed ever-more strongly.
Current controversies over health funding are the daintiest appetiser. The whole hog will be served up next year when Treasury updates its longterm fiscal projections.
If Willis is true to her word, again opening the border to mass immigration to make short-term nominal GDP look better at the cost of lower average living standards is off the table.
But new taxes, higher user charges and deeper spending cuts are necessarily on it, most likely all three.
One way finance ministers since 2008 have tried to cheat the fiscal-responsibility rules is by backing projects which require higher capital expenditure but defer operational costs, even if the alleged benefits then come much later.
If Willis builds a new medical school at the University of Waikato, for example, she need not draw on her operational allowances, with the extra operational costs not kicking in until after the four-year forecast period.
While any new doctors would also be another four or five years further away were Willis to fund the existing medical schools from next year, her short-term operating deficit would look a wee bit better. But the bond market doesn’t care whether it is funding new buildings or more doctors. Net debt and sovereign risk rise just the same.
The bond market, ratings agencies, the media and voters are now on the lookout for that type of jiggerypokery. With Treasury’s forecasts indicating by 2028 we’ll have run 18 cash deficits over the previous 20 years — just before we enter the era of permanent deficits — artificially fiddling with the nation’s accounts to make the operating deficit look a bit better no longer fools anyone.
The importance of this week’s good economic news — along with disarray in Labour, the Greens and Te Pā ti Mā ori — is that it gives Willis and her associate ministers from Act and NZ First the political space to take the bolder action necessary to address the long-term productivity and underclass crises, and hopefully do something to mitigate the post-2030 debt blowout.
The odds remain against them. At this point, annual growth is expected to average only 2% in the Reserve Bank’s forecast period, compared with the 4% it averaged in the decade after the reform era of 1993 to 2003.
MMP means NZ First cannot be associated with bold economic change, and the National Party establishment much prefers the status, connections and revenue opportunities of office over politically difficult reform.
Sadly, the rule under MMP probably remains true: if a focus group or major donor doesn’t like it, it won’t happen.
Willis is entitled to something of an “I told you so”.