Prime Minister Christopher Luxon and Deputy Prime Minister Winston Peters. Photo / Mark Mitchell
OPINION
If you live in New Zealand and you’re feeling poorer, you’re not imagining it.
Stats NZ has revealed the economy was in recession over the second half of last year. GDP fell in the September and December quarters by –0.3 per cent and –0.1 per cent respectively.
Taking into account the record high levels of immigration, Westpac’s most recent economic bulletin estimated this may equate to GDP per person having fallen almost 4 per cent from its peak in mid-2022.
What does this mean politically, then, and what can the coalition do about it? Because the statistics are retrospective, the Government can blame the old one – but that won’t satisfy many people for much longer.
The National-led Government hasn’t enjoyed a post-election honeymoon. According to an IPSOS poll in late February, New Zealanders rated the coalition’s performance at 4.6 out of 10 – on par with the Labour government (4.7) just before the general election last October.
NZ GDP data for Dec-23 confirmed what we knew for over a year - NZ is in recession. The economy is about making more people better off. We're doing the more people bit, not the better off bit. GDP per capita has been falling since a peak in Sep-22. pic.twitter.com/nHEVgsyXLQ
— Shamubeel Eaqub (@SEaqub) March 21, 2024
The recession also means reduced tax revenues. Logically, something will have to give when Finance Minister Nicola Willis puts the final touches on her first Budget, to be delivered on May 30.
Tax cuts – which National has promised – could exacerbate inflation or delay its decline. Although inflation has been coming down, it’s still some way from the target 1–3 per cent range. The December figure was 4.7 per cent.
If income is weaker than expected, tax cuts would be paid for by deeper spending cuts, revenues raised elsewhere, or borrowing. The last option lacks credibility, given the way proposed unfunded tax cuts hastened the political demise of the then UK Prime Minister, Liz Truss, in 2022.
Prime Minister Christopher Luxon and Willis have some difficult financial decisions to make. And there’s pressure, especially from NZ First leader Winston Peters, to honour the coalition agreements. Peters has already made life difficult for Willis by repeating one published estimate of a potential $5.6 billion “gap” between National’s election promises and “current forecasts”.
In the meantime, people are struggling to make ends meet and appear to lack confidence in the Government.
According to the IPSOS poll, the National Party has often been seen as more competent than other parties to deal with economic problems. But National is in coalition with two other partners, both of which expect to see their own policies implemented.
There are incentives for all three parties, however, to convince at least most people they can achieve three closely related aims:
Judgment on the first point should be reserved until we see the Budget.
On the second point, the Government is passing a law that will allow fast-track consenting for approved projects. The Government will also argue that reintroducing 90-day employment trials, for businesses with more than 20 staff, and repealing pay-equity law will help improve investment and hiring.
But the fast-track law is attracting criticism from environmental groups and legal experts for giving extraordinary powers to ministers. Trade unions strongly oppose the employment law changes.
On the final point, the Government seems to have few ideas – least of all how to prepare for the coming wave of AI-driven change. Tertiary education and research and development would be priorities here, but there are no new policy initiatives around trades training and advanced research.
In the meantime, the reinstatement of tax deductibility of interest payments on rental properties does nothing at all to contribute to financial prudence, productivity or innovation.
It simply benefits the owners of things that have already been built and sold. And it’s very unlikely to lead to lower rents, contrary to Luxon’s suggestion it would apply “downward pressure” for which renters would be grateful.
No government can literally “grow the economy” – regardless of the National Party’s pre-election hype. Economies grow as people produce more efficiently more of the things others are keen to pay for. A government’s actions and policies may either help or hinder the productivity of individuals, firms and the economy as a whole.
The present government’s economic credibility, and hence its political viability, are more seriously in question than would normally be the case so early in its first term.
There are things Luxon and his team can do to turn that around. But people want and need policies that will noticeably boost their material standard of living – sooner rather than later. A lot will depend on Budget 2024.