At the end of a difficult winter, that’s not cataclysmic.
Moreover, like TPM, National can now hope for an overhang, where it wins more electorate seats than its party vote entitles it to.
Most importantly, Christopher Luxon is convinced that, this time, the economy really has hit rock bottom and the numbers will now revert to their long-term averages, just in time for the election.
He and Finance Minister Nicola Willis held a triumphal media stand-up after the Reserve Bank’s Monetary Policy Committee (MPC) cut the Official Cash Rate (OCR) by 0.25% to 3%, with its forecasts indicating two more 0.25% cuts, in November and February.
That would take the OCR to 2.5%, where it reached in April 2009 and March 2011 after the Global Financial Crisis and big Christchurch earthquake respectively.
A third of the MPC even voted an immediate 0.5% cut on Wednesday, a double banger more commonly associated with crises like those.
There was something incongruous about Luxon and Willis celebrating new OCR forecasts based on the economy being in worse shape right now than the Reserve Bank previously expected, but they were right that the bank now expects most numbers to improve.
Luxon and Willis were also right when pointing to the MPC’s decision being based partly on this year’s Budget Economic and Fiscal Update that forecast government spending as a percentage of GDP – although not in dollar terms – will decline in the medium term, reducing inflationary pressures from what they would be otherwise.
It is crucial they stick to those numbers, and demand ministers find savings of the magnitude of this year’s pay-equity decision.
Savings will most likely involve cutting accommodation assistance and income-related rents, which have exploded from a combined $3 billion in 2019/20 to a forecast $4.2b this financial year.
The supported living payment has also increased nearly 50%, to $2.8b this year.
If the economy does improve, tax revenue should rise automatically.
Westpac’s latest quarterly economic overview assumes Willis will collect around $15b in extra tax over the four years to 2028/29 and assumes two-thirds will be used for more government spending to be announced in next year’s Budget and beyond.
But Westpac also suggests some of the rest could be used for Luxon to promise post-election tax cuts, in contrast to Labour’s likely new capital gains tax.
Fiscal conservatives might hope the whole $15b would be used to eliminate the deficit but the Government seems less afraid than ever of borrowing, and not just for so-called capital investments.
Responding to Taxpayers’ Union attacks that she is borrowing $75 million more every day, Willis was sanguine.
“We are borrowing to maintain public services,” she said. “We go out to the world and we say, ‘Can you lend us some money so we can keep paying for our teachers and our nurses and our roads?’.”
This attitude over 17 years is why, as Willis concedes, debt servicing is forecast to be $9.5b this year, an amount she says “would roughly fund the annual operating costs of the Defence Force, the Police, Corrections, the Ministry of Justice and Customs service, put together”.
A better option would be for Willis to genuinely cut spending, raise taxes or both and stop borrowing immediately.
More positively, yields on New Zealand’s 10-year government bonds have fallen marginally, to 4.4%.
While still among the highest in the developed world, they are getting closer to the 4.3% on which the Treasury’s $9.5b interest-bill forecast is based.
Willis may yet get lucky and keep debt servicing under $10b for one more year.
The Government now believes the strength of the economic recovery and thus its re-election depends on businesses investing and households spending, motivating Luxon’s and Willis’ talking up the Reserve Bank’s forecasts on Wednesday.
Businesses and households should not listen to what Willis called “the merchants of misery”, she said, but instead trust the bank’s forecasts.
She went so far as to say talking negatively about the economy was “unpatriotic”.
In pushing more investment and consumption, Willis and Luxon spoke positively about the Budget’s “Investment Boost” which allowed businesses to claim 20% of the cost of new assets as an expense, then claim depreciation as usual on the remaining 80%.
For households, Willis calculated that, as OCR cuts are passed on, “repayments on a 25-year $500,000 floating mortgage are about $330 less a fortnight today than a year ago”.
Of those with fixed-term mortgages, 40% come off them in the next six months, allowing most to lock in lower rates.
While Willis and Luxon were both careful to say each household would decide whether to use the extra money to pay off debt faster or spend it, the implication was clearly that they hoped for a lot of the latter, which would promote consumption-led growth in our supermarkets, hardware stores, malls and main highways.
If Jacinda Ardern told us to stay on the couch to save our country during Covid, Luxon and Willis are telling us to head to the shops to save our economy. There are worse deals.
Still, Luxon in particular is cutting it fine. While the Reserve Bank has signalled the worst is behind us, it still doesn’t see a return to respectable growth until the December quarter, perhaps as we spend our interest-rate cut on Christmas presents and holidays, but that won’t be reported until late March.
The bank then thinks growth will fall back a bit until the election.
Nor does the bank forecast unemployment to be reported below 5% before the election.
If its forecasts are correct, the labour cost index would remain just a bit under the consumer price index through to 2028, implying real wages would be stagnant at best, not just in election year but for the following two.
The bank continues to forecast that productivity growth will remain anaemic.
Taken as a whole, the forecasts suggest the political situation will remain too close to call.
Tragically, the Herald’s Richard Prebble is probably right that the best way for Chris Hipkins to become Prime Minister again is to do nothing, and just hope the Reserve Bank is too optimistic.
