Presiding over a shrinking economy, Christopher Luxon decides it’s a good idea to grow it again

Prime Minister Christopher Luxon has taken aim at a “culture of saying no” in his State of the Nation address. Photo / NZME

ANALYSIS

When Mahatma Gandhi was asked by a reporter what he thought of Western civilisation, he was said to have replied, “I think it would be a good idea.”

New Zealanders might have had the same reaction if asked to comment on Prime Minister Christopher Luxon’s heavily teased plan to grow the economy - a plan he finally unveiled today at his State of the Nation speech in Auckland.

It would not be unfair to ask Luxon, who campaigned on “fix[ing] the economy,” what he and his ministers have been doing since December 2023.

If by “fix the economy,” Luxon meant shrinking it, the Government has done an awfully good job. Indeed, if Luxon were to use his State of the Nation address to appraise the state of the nation’s accounts, released just prior to Christmas, he would find their state rather reduced.

According to Treasury’s most recent forecasts, New Zealanders were 2.7% poorer in the year to June 2024, measured by GDP per capita. From that low base, per capita GDP is expected to fall a further 0.6% in the year to June 2025. Growth looks like a very good idea indeed.

Labour leader Chris Hipkins plans to spend 2025 asking New Zealanders whether they feel “better off” - a good question, and one to which Treasury’s GDP per capita numbers from December answer emphatically in the negative.

It’s easy to feel a bit sorry for Luxon.

Most of the humiliation wrecked upon his Government by the national accounts isn’t his fault. Blame really rests with the Reserve Bank Governor Adrian Orr and his monetary policy committee, whose strategy for tackling inflation comes with the unhelpful side effect of a deep recession and rising unemployment. Of course, that was also true in October 2023 when Luxon laid these very same problems at the door of Hipkins, then Prime Minister.

That mantle now rests with Luxon, who is very quickly discovering what happens to politicians who campaign by the sword.

Labour leader Chris Hipkins in a Tuscan-inspired courtyard in Palmerston North. Photo / Mark Mitchell

Further south, a chipper Labour caucus was gathering in Palmerston North, bathing in the Manawatū sun and a balmy poll result showing Labour just ahead of National for the first time since April 2023 (the poll, a Taxpayers’ Union-Curia poll, still showed a right-wing Government, although the margin narrowed from the prior poll).

Local MP Tangi Utikere was handing out gift bags with a guide to Palmy, its restaurants, bars, cafes, and family-friendly attractions. In the hotel courtyard, billed as “Tuscan,” (and not unfairly – it was home to the most lush courgette plant to be seen south of Waipawa), finance spokeswoman Barbara Edmonds could be found freshly returned from Samoa, where her mother’s village gifted her a new Matai, Pesetatamalelagi (a chiefly title - an honour given to very few, including the captain of Samoa’s rugby league team).

She was dispensing tax advice, which colleague Rachel Brooking politely pretended to understand (Brooking didn’t have a tax issue and said she avails herself of an accountant to avoid the burden, but, this being a Labour Party gathering, was listening out of interest - the tax question had actually been posed by a member of the media).

Labour should not get comfortable. Unhelpfully for the Opposition, growth will return to the economy this year, not as a result of any plan of Baldrickian cunning, but rather bad economic times riding out on the horse they rode in on: high interest rates. Low borrowing costs, rising house prices, and a growing economy tend to bode well for an incumbent - and the Government will be sure to claim any upswing as its own.

Labour has other challenges too. Over beef noodles, finger sandwiches, and mini pavlovas, MPs spoke about crises in their portfolios: there was the grim trajectory of public housing construction following last year’s shake-up of Kāinga Ora, the challenge of getting adequate disability support, problems in Working for Families, and, of course, the troubling state of the health system, following the Government’s decision to find about $1.4 billion in savings to plug the deficit (a deficit that persists, despite a big uplift in the 2024, 2025, and 2026 budgets).

These are all important spending demands, but the problem Labour faced in government remains: paying for them.

The operating allowance for a future Labour Government’s first budget (2027) is just $2.4b, half of which is likely to be absorbed by health, and even that dollop of new spending, meagre by Labour standards, will still leave the Government with a $4.3b deficit. Labour’s winning strategy from 2017, cancelling tax cuts and swallowing some extra spending with greater allowances, worked when the books were in surplus - but that strategy is a tough sell to the markets after seven years of deficits, with many more forecast.

A capital gains tax (CGT) remains one idea for the party. MPs practically turned purple at the question - doing their best to maintain discipline by not disgorging their thoughts on the topic. The problem with the CGT, of course, is it doesn’t raise much revenue in the short term - 0.1% of GDP in its first year, according to the model proposed by the Sir Michael Cullen tax working group in 2019.

That’s $495 million in a future Labour Government’s first budget. Not to be sniffed at, but a repeat of 2017’s lavish families package is probably off the cards. What can the Labour Party campaign on if not generous spending on social welfare? A wealth tax is an option, raising far more revenue in the short-term, but Labour seems inclined to play it safe with a CGT.

Things get more challenging when you factor in the Greens and Te Pāti Māori, both of which have spent the last year hinting at big spending, which Labour will struggle to fund. The bloc is collaborating and co-operating, but a repeat of 2017’s Budget Responsibility Rules, which wedded Labour and the Greens to the same fiscal targets, seems off the cards - the idea didn’t even neutralise fiscal attacks on Labour (fiscal hole, anyone), and it nearly broke the Greens.

For Labour, the best hope that their two partners will modify their spending demands into something more realistic will probably be the new Independent Fiscal Institution (an office to assess party costings). Hipkins left the door open to a kind of fiscal compact, but said any conversations on that would be closer to the election (he didn’t seem overly keen or hopeful of one).

Hipkins was measured in his criticism of aspects of the Government’s growth plan - though not before noting the irony of betting New Zealand’s growth prospects on science a year after disestablishing hundreds of science jobs. Growth, if you can find it, is the easiest source of new revenue. If the Government can find an additional one percentage point of nominal GDP growth this year (unlikely), Treasury reckons it would boost government revenue by $1.2b, nearly enough to plug the Health NZ deficit - that’s nothing to be sniffed at, and proves Luxon’s point that the growing costs of the country’s social services could be underpinned by a faster-growing economy.

Hipkins didn’t immediately criticise greater commercial incentives for scientists or greater support for mining and resource extraction (provided it wasn’t fossil fuels). He wants to see more domestic investment from KiwiSavers, but he isn’t totally against the Irish-style concierge approach to foreign investment, shifting from the fence-sitting approach New Zealand currently takes, to an attempt to more actively attract foreign capital, and only turning it away if there is a very good reason.

This idea has had a long gestation and was initially mooted as a model for New Zealand by the free market think tank, the New Zealand Initiative, in a report published in 2023 - the report was accompanied by the Initiative leading a business delegation to Ireland that year.

The policy itself, “Invest New Zealand,” seems little more than a lick of fresh paint applied to NZTE, but paired with reforms announced by Associate Finance Minister David Seymour in October, could help to attract foreign capital to New Zealand’s soon-to-be more accommodating foreign investment regime. Hipkins seemed open to the change in approach, but it could be a tough sell to Labour’s caucus which erred on the side of tightening investment rules in government (although the reforms were fairly modest).

It’s a worthy idea, and New Zealand’s languishing at the bottom of the OECD table on foreign investment rates suggests it’s a worthy one - and better late than never.

Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the Press Gallery since 2018.