The state of play
The economy has exceeded expectations, buoyed by sugar candy economics, but there is a price to pay.
Inflation is rampant and we cannot just blame global factors. The cost of living is households' largest concern according to the IPSOS Issue Monitor, and with that comes demands to either spend more or provide tax relief. Inflation is boosting tax revenue, but expense demands are ballooning too.
Infrastructure project estimates are surging, and if more funding is not made available, higher inflation means fewer projects.
There are genuine concerns a recession is around the corner, the bitter medicine to contain inflation. House prices are falling and remain very extended on numerous valuation metrics.
Consumer confidence according to Westpac McDermott Millar has dropped to the lowest read ever, at a time we have the lowest unemployment rate for decades.
At the same time, the fiscal cost of an ageing population is starting to bite with New Zealand Superannuation expenditure rising by around $1.5 billion per year. We are now spending more on superannuation (gross) than education.
You do not have to look far to see failing infrastructure and the Three Waters solution looks like a debacle. However, whatever the politics, the current investment in water infrastructure for productive use and community wellbeing is failing and in desperate need of an injection.
Productivity growth across the market (think business) sector has averaged 0.6 per cent for the past five years and has never been above one per cent over that period.
The current account deficit (our chequebook with the rest of the world) has blown out to $23 billion, or 6.5 per cent of gross domestic product.
Closed borders, and an inability to source non-resident labour, have exposed dependence on labour inputs and under-investment locally in people. Law and order are becoming a major problem whilst unemployment are low, and unemployment will move higher in 2023.
Accentuate the positive
New Zealand remains in a good position on many levels.
Night follows day just as day follows night. The economy moves in cycles. Let's keep Chicken Little in at the coop. Unemployment is low though rising benefit dependency is concerning. The financial system is sound and institutions are resilient.
Government debt levels are reasonably low. Very low compared to the United States and the United Kingdom but a fairer comparison is against small open trading nations. We compare well, not super well.
Corporates have low levels of debt (arguably they are under-leveraged) and the dairy sector has paid off $5b of debt in the past four years.
In many sectors, we have an under-investment problem rather than excesses.
Lots of change ahead
People will have different views on the path ahead but there should be some things we should be able to agree on.
We need to pivot, sharply.
You are not going to improve well-being or lift living standards without a strong economic base and this means we need to have a more ruthless obsession with improving education outcomes, a key influence on the economy 30 years out.
It beggars belief that we are now spending more on superannuation than education, or that more is not made of education's importance and the entire sector is shaken up.
We have a long-term fiscal sustainability problem if changes are not made. All political parties need to stop kicking the ageing population can down the road.
You are not going to dampen inflation by pumping up non-Covid expenditure by 13.9 per cent in a year (and the likelihood the 2023 Budget will do the same) or the main opposition party's proposal of tax cuts.
Any government needs to stick to the Budget initiatives allocations for 2023-2025 of $3-4b. This will be difficult but is required.
New Zealand is rich in renewable resources but there's not much of a plan to maximise it.
A rising interest rate world represents a profound change in the environment for risk.
The central bank backstop is disappearing. Now you need to take a real risk and manage it to make real money. This needs to be embedded into the public sector too.
The era of cheap and abundant money is ending.
The consequences will extend far and wide.
In a world of disruption, innovation is key. The public sector is not immune. Get some disruptors into key positions.
The economic and social ledgers remain disconnected. A lot needs to be done. However, one reconnection variable is simply putting people back to the epicentre of what we do in the business world. People first because they look after the customer and if the customer is looked after, the shareholder makes money.
The shareholder should not be on top of the pile. Stamp out short-termism. Embed that, and a major step forward to realigning the two ledgers will be made. Labour market reform is not needed.
The low-risk asset (housing) is now high risk. We do not get wealthy selling more expensive houses to each other anyway. With the market starting to correct, now is the time to be accelerating a deepening of the investment landscape and capital markets.
Infrastructure deficits need to be addressed and a firm 10-year capital budget cemented.
Fiscal projections are taking on a level of ridiculousness the way assumptions change in the interest of making fiscal numbers look good in the medium term.
Bring in the Independent Fiscal Institution and let's start planning properly with reasonable assumptions.
Both of the major political parties need to park the fiscal policy big spending or tax cut rhetoric. Switch from the macro stuff to microeconomics and get the small stuff right.
Sacrifice big spending or tax cut temptation for capital investment and better risk management of assets.
I'm not a politician though, just an economist.
- Cameron Bagrie is the founder of Bagrie Economics, a boutique research firm that specialises in the independent, authoritative analysis of the New Zealand economy and economic issues generally.
