If luck keeps running Willis’ way, Christopher Luxon’s controversial tax cuts might turn out to provide some old-fashioned Keynesian stimulus at the right time.
That’s a big “if” of course. The Reserve Bank’s midpoint inflation target is not 3% but 2%. Willis’ most important move was legislating for the bank to again focus solely on price stability, defined as 2% inflation.
That means Adrian Orr’s monetary policy committee should no longer worry about things like unemployment, struggling businesses or short-run gross domestic product (GDP). Radical cuts to the official cash rate (OCR) are again allowed only if inflation risks falling below the 1% floor.
It sounds brutal, but those rules served New Zealand well keeping inflation low for over 30 years, disrupted only when Grant Robertson decided the Reserve Bank should try to do other things and that he could spend whatever he liked without consequence.
The major unknown is still the impact of Willis having to borrow for Luxon’s tax cuts. Most likely, that means the Reserve Bank will still wait until after Stats NZ releases September-quarter inflation data on October 16 before cutting the OCR on November 27.
Under the restored rules, what Stats NZ reports about June-quarter unemployment on August 7 and June-quarter GDP on September 19 doesn’t really count.
The bank should, however, fret that domestic inflation remains at 5.3% compared with imported inflation below the 1% floor, at 0.3%. It will also worry that Australian inflation, which tracked down since January 2023, popped back up to 4% in May.
It’s not my habit to advocate more money for the Wellington bureaucracy but there’s a good argument the inflation team at Stats NZ needs their budget tripled so they start reporting inflation monthly rather than quarterly. That would probably have seen the Reserve Bank start raising the OCR earlier than November 2021 and likewise to begin cutting it earlier.
If the bank has kept rates too high for too long, then Luxon’s tax cuts might ironically end up being just the ticket to keep inflation, GDP and house prices falling too much.
Before facing voters in 2026, the three coalition parties need mortgage rates to roughly halve, house prices to recover or at least stabilise, and real per-capita GDP and real gross national disposable income per capita to grow strongly through 2025.
Ideally, unemployment would also peak in 2025 rather than election year.
The Government might then avoid feeling forced to further massively increase immigration from India, the Philippines and China to prop up the headline GDP numbers and provide buyers for cheap new houses.
Combined, this would be enough for Willis and Luxon to claim they kept their promise to get New Zealand back on track, whatever that meant. More importantly, it would allow Willis, Chris Bishop, Simeon Brown, Erica Stanford, Paul Goldsmith and even Luxon, Winston Peters and David Seymour to start thinking beyond the election cycle.
Finally recovering from Robertson’s recession doesn’t change the medium-term economic and fiscal outlook – or the social, educational, law and order and productivity outlooks – all of which remain cataclysmic after 16 years of cynical do-nothing government and fiscal vandalism.
Donald Trump’s now near-certain re-election as US President adds to the challenges.
Trump dramatically withdrew the US from the Trans-Pacific Partnership on his first day as President in 2017, despite it being a US foreign-policy objective for most of the century.
Earlier that day, his “America First” inauguration speech was described as “some weird sh*t” by his Republican predecessor George W Bush.
Trump then undermined the World Trade Organisation’s (WTO’s) rules-based system, by astutely – given his goal – attacking its disputes-resolution process by blocking judges from being appointed to its appellant body.
Whether he was cognisant of why, Joe Biden continued Trump’s policy despite it trashing a system sometimes criticised for being too aligned to America and its friends.
The Asia-Pacific Economic Cooperation (Apec) process launched by Bill Clinton and Paul Keating in Seattle in 1993 has also failed because of American and Chinese rivalry, becoming just another pointless diplomatic talkfest.
The US’s preferred replacement, the China-free Indo-Pacific Economic Framework, will go the same way after Trump’s re-election.
China’s preferred replacement, the US-free Regional Comprehensive Economic Partnership, is just as weak.
That means the rules-based trading system so valuable to small economies like New Zealand has essentially collapsed.
The second Trump presidency will be worse.
Relatively sane Trump advisers like New Zealander Chris Liddell, even if deserving opprobrium for being associated with Trump at all, won’t be around. Trump’s Make America Great Again movement is set to be even more radical this time round.
Trump now promises a new 10% tariff on all US imports and 60% on those from China, costing American consumers an estimated NZ$800 billion a year but distorting world trade flows by much more.
That risks taking world trade rules not just back to pre-WTO days but to before the General Agreement on Trade and Tariffs (Gatt), signed after the Second World War.
Trump also threatens US withdrawal from the North Atlantic Treaty Organisation (Nato), another American-led institution established after the Second World War to assure peace and prosperity.
To secure New Zealand’s security against China, Jacinda Ardern, Chris Hipkins and Luxon have all boldly aligned us with Nato over the last three years, along with Japan, South Korea and Australia.
China wasn’t happy, attacking Ardern for being the first New Zealand prime minister to attend a Nato summit as “misguided, wrong, regrettable and not helpful for deepening mutual trust”.
It earlier warned Ardern and other Five Eyes leaders to “be careful or their eyes will be plucked out”.
Similar comments have been made against the Hipkins and Luxon Governments for continuing Ardern’s pro-Nato tilt.
Their historic moves made sense if the US planned to maintain the post-Second World War order, including its security guarantees and rules-based trading system. But does it still?
Willis, Bishop, Seymour, Peters and others in the Government capable of thoughtful analysis may have enough on their plate worrying about New Zealand’s dire productivity, calamitous medium-term economic and fiscal outlook, social disintegration, law and order crisis, failing schools and brain-drain now less kitchen-sink than Huka Falls.
But they now can’t avoid adding to the list whether further aligning with the US will make sense if it is no longer Ronald Reagan’s shining city on a hill but one occupied by the lunatics currently gathered in Milwaukee.
