The economy shrank 0.9% in the June quarter, tipping New Zealand into recession. Photo / NZME
New Zealand’s economy shrank by 0.9% in the June quarter. That is not a blip – it is a serious contraction.
The Reserve Bank printed $50 billion. Labour borrowed and spent like there was no tomorrow. Since 2017, the bureaucracy has swollen by more than 16,000. The result was predictable: inflation.
The cure for inflation is to raise the price of money until demand falls. It is painful, but there is no alternative. Politicians and bankers may talk of a “soft landing”. History shows that is almost impossible. Attempts to finesse a correction only prolong the pain.
There has been massive mismanagement – by the Reserve Bank’s money printing and then by the bank over-tightening. Massey University’s world-leading live data tracker, GDPlive, was signalling that the bank was too slow to cut interest rates. Nicola Willis made a serious mistake in not immediately changing the bank’s leadership.
The Ardern/Hipkins Government mismanaged by reckless spending. The International Monetary Fund (IMF) has warned that monetary policy needs a fiscal partner.
National condemned Labour’s borrow-and-hope spending but in Government has borrowed and spent more. The Government’s loose fiscal policy has resulted in higher interest rates for longer delaying the correction.
Willis thinks Donald Trump’s tariffs are the reason GDP fell. Christopher Luxon believes Willis is “the best Finance Minister New Zealand could ever have”. Heaven help us.
The Prime Minister and his Finance Minister give the impression they have never heard of the Rahn/Armey curve.
The curve? Too little government and the economy stalls; too much and it strangles growth. The sweet spot is government spending of around 25-30% of GDP.
Before Covid, core Crown spending was about 29%. Today it is 33%. Add local government and Crown entities and the state consumes 43% of GDP.
Inland Revenue’s own commissioned studies – Caragata, Scully and Lovell – suggested the New Zealand economy would grow strongest when Government takes around 25%.
The state is hoovering up capital, skilled labour and office space. Our bloated bureaucracy has poor productivity while adding red tape.
There is a long list of measures to improve growth, headed by lower interest rates. Even if the Government implements all its pro-growth policies, the private sector is so squeezed by the size of the state that the economy will struggle to grow.
Willis is correct about one thing: government spending is popular. Every day there is another demand for more government spending. Her political response to just nibble at spending was never going to work.
The OECD warns that the problems are structural. Zero productivity improvement. Demographic change.
Our Prime Minister seems to believe that growth can be conjured up by chanting the word three times.
National used to believe that the best politics is good Government. As Sir Keith Holyoake used to say: “Tell the people. Trust the people.”
The truth is that much government spending produces little benefit. We have 28 ministers, each with their own fiefdom. There are 41 government departments and 27 Crown agencies, each one maintaining its own back office. Ministries and quangos overlap and engage in endless turf wars.
Reduce the number of ministers to 12 and the incentive is to cut duplication, use shared platforms, reduce the headcount and save cost.
The only proven way to reduce spending is to stop doing things. If the Government walked away from half the issues it now meddles in, the market would find much better solutions.
Some of our GDP decline is due to external shocks. But most is structural. Mismanagement going back decades.
Labour ignored the structural issues. The National-led coalition is just nibbling. The left’s alternative of higher taxes would smash any recovery. No country has ever taxed its way to prosperity.
The demand for “free” services is infinite. The real alternative is savings-based policies that promote personal responsibility. Personal responsibility combined with assistance for the truly vulnerable is the only policy that is proven to work.
Both Act and New Zealand First have advocated savings for retirement. The two parties should adopt the same approach to all social services.
This approach would promote personal responsibility, and improve social services, but also improve productivity and economic growth.
The rise in the third-party polling indicates the electorate wants more than a choice between Labour’s borrow, spend and hope and National’s.
By voting strategically, we can create a coalition with a different mandate.
The scary option is the Greens’ and Te Pāti Māori “tax the rich” fantasy.
The opportunity is a coalition that promises a lean Cabinet, fewer ministries, fewer quangos and a savings-based welfare state.
That is how to restore growth. That is how we give our children a future.
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