The economy isn’t riding to the Government’s rescue – Thomas Coughlan

Finance Minister Nicola Willis and Prime Minister Christopher Luxon speaking about this week's OCR announcement. Photo / Mark Mitchell

THE FACTS

• The Reserve Bank published its Monetary Policy Statement this week as it cut the Official Cash Rate by 25 basis points.
• Forecasts released with the decision showed higher unemployment in the short term before a slow recovery.
• Parliament is embarking on a two-week recess.

The political world is limping into a parliamentary recess after another difficult sitting block for all.

The economy has hit the skids. The Government’s hope is that the forecasters have got it right this time and the current situation is as bad as it gets – the Reserve Bank’s Monetary Policy Statement, published this week, includes forecasts that mostly concur with this.

The trouble with the theory is that while this might be nearly as bad as it gets (unemployment might still rise a bit), the upswing, while technically better than right now, is not much to write home about. Like the old Beatles hit, whenever a minister bleats it’s “[getting] a little better all the time”, many voters cannot help but mumble John Lennon’s unforgettable response: “it can’t get no worse”.

Unemployment falls, but not by much – and the Government probably won’t have a data release showing an unemployment rate below the symbolic 5% threshold by polling day.

Inflation is under control and the economy will grow, but again, not by much, and the serious economic growth isn’t forecast until after the election, and these forecasts become more uncertain the further into the future you go.

The Government is pulling every lever it can to encourage a supply-side solution to the housing crisis, but the Reserve Bank revised down its projections for residential investment – money flowing into building new homes. In the most recent forecast revisions, about a quarter of the investment forecasters were expecting at the end of last year has vanished.

Revisions to residential investment forecasts. Graph / RBNZ

At the beginning of the bank’s easing cycle, forecasts suggested a clear path to the coalition’s re-election on the back of a reviving economy. The economy, it seems, had other ideas.

There’s an explanation: uncertainty injected into the economy after “Liberation Day”, according to Reserve Bank Governor Christian Hawkesby, but voters are as likely to accept that as an excuse as they were to accept Labour’s blaming of Vladimir Putin for the 2022 inflation spike.

Heading into Christmas, the Government will try – again – to change the narrative around the economy, juicing the vibe, though not the economy itself. Fiscal stimulus isn’t coming, but get used to its off-brand cousin, vibe stimulus. Get ready for announcements that try to encourage you to feel as optimistic as the Government.

This Government, much like the last, is proud of its regulatory record: Chris Penk’s changes to the liability rules for new building consents this week was a can that many ministers had kicked down the road; if successful, it could be transformational. Likewise, the Government has picked up Labour’s efforts on supply-side solutions for the housing crisis, particularly in Auckland. The city might actually live up to its “super” moniker over the coming decades, in no small part thanks to changes made by the last two governments and the council to zone more housing. This is, of course, if investors build up the confidence to pay for the construction of any (see above).

But then there’s the fiscal side.

The Government was buoyed by news from ratings agency Fitch that it had retained its AA+ credit rating but could lose it if Labour and National wriggled out of their historic commitment to fiscal discipline.

The agency gave cause to revisit Labour and National’s pre-election fiscal plans. Both parties had planned this to be the last year of deficits – both have been disappointed, but in these situations the incumbent’s disappointment is more salient than the Opposition’s.

National has a lot to fear. The Government has cut spending intensely, freeing up $20 billion or so worth of savings in each Budget. However, most of that money hasn’t been put into reducing the deficit, but ploughed into other spending initiatives – in health, education and the InvestmentBoost tax credit – designed to spur some economic growth.

The political result of this is that voters have read in detail about the scale of the Government’s spending cuts, thanks to a vigorous and effective campaign from the unions, but they’re yet to see any benefit in terms of the Government’s fiscal position, which remains challenged.

There’s no sense of common cause to rebuild public services and public finances, and where there is relief, for example, increasing Crown board director fees, it smacks of the bleak logic of an airline safety video, in which you fit your own oxygen mask, before helping those around you.

Does it matter? Robert Muldoon thought New Zealanders wouldn’t notice a deficit if they tripped over one in the street, but deficits are often treated as a proxy for poor economic management and while voters may not care about them on their own, they do tend to think poorly of governments that mismanage the economy.

Worse for the Government is the fact voters seem to think its public service cuts have been far deeper than they actually are.

Labour leader Chris Hipkins and finance spokeswoman Barbara Edmonds just prior to this year's Budget announcement. Photo / Mark Mitchell

A Taxpayers’ Union-Curia poll from earlier in the year told respondents there were about 65,700 public servants at the time of the change of government and asked them to guess the number of public servants there were by May.

The median response was 50,000, meaning the average voter thinks the Government has sacked an enormous 15,000 public servants.

Labour has prosecuted the grim economy well, forcing the polls to an effective draw, but there are still reservations.

The prosecution is mainly coming from leader Chris Hipkins, with finance spokeswoman Barbara Edmonds keeping out of the spotlight. She’s a policy wonk and a vital part of Labour’s finance team, at least in part because if you’re going to design a capital gains tax, you need to have a tax expert who can defend it from the most likely angle of attack: that it’s a compliance nightmare. However, lacking confidence and debating chops, Edmonds wilts against her opposite number Nicola Willis in the House – and sometimes outside it.

RNZ, resetting its Morning Report offering, recently hit upon the idea of a political panel, with two MPs facing off against each other in weekly debate.

An Erica Stanford vesus Barbara Edmonds line-up was one of the first options floated. But, perhaps to forestall the day Stanford’s rising star eclipses the Prime Minister, she was pulled by the National higher-ups and Willis was put up in her place.

Willis came with the bonus of being able to bring her dominant debating performance to a wider audience and was keen, but Labour swiftly went cold on Edmonds.

Kieran McAnulty was apparently considered, but he already does a weekly panel so Carmel Sepuloni was put up instead. The official reason seems to be Labour wanted a battle of the party deputies rather than a finance-focused debate, the unofficial reason seems to be a lack of confidence in Edmonds’ ability to fight her corner.

RNZ shouldn’t be upset with the result. In this week’s panel, Willis asked Sepuloni six or seven times how she would pay for Labour’s promises – she didn’t have an explicit answer, but repeatedly noted Willis’ $2.9b interest deductibility change for residential property investors. The few seconds of audio were the perfect encapsulation of the state of today’s political conversation.

Over the recess, attention will turn to the Tāmaki Makaurau byelection. Already the race has ruffled some feathers, with Labour’s candidate Peeni Henare distancing himself from his party’s pledge to keep the gang patch ban.

Te Pāti Māori candidate Oriini Kaipara and Labour Party candidate Peeni Henare during the candidate debate for the Tāmaki Makaurau byelection, at Ngā Whare Waatea Marae. Photo / Simon Wilson

Discipline counts for a lot in politics and Labour fraying on law and order was immediately seized on by the coalition, who flooded the press gallery in ever more ridiculous press releases wheezing about Labour and Te Pāti Māori’s alleged cuddliness with the gangs.

There are signs the campaign may degrade into an internecine conflict for the Opposition.

Parliament’s standing orders allow proxy votes to be cast by another party if the one they are being cast for has five MPs or fewer. The death of Takutai Moana Natasha Kemp means Te Pāti Māori now falls below this threshold, allowing other parties to cast their votes. The Greens have revived an agreement from the last term of government in which they cast proxy votes on behalf of Te Pāti Māori.

This has allowed the caucus to be absent from the House even more than usual. The party co-leaders have been absent since at least last week. The entire party has, on occasion, been absent.

Some Labour MPs have been frustrated with Te Pāti Māori’s decision to spend more time campaigning than showing up to Parliament – that frustration dates back to last term. The fact the Greens are enabling it in the middle of a byelection aggravates the offence, by making it appear as if the Greens, not standing a candidate themselves, have picked a side in the scrap between their two future coalition partners.

This is mitigated somewhat by Te Pāti Māori’s renewed attendance last week (MPs were present but the co-leaders were not in the House during Question Time), and the fact the final two weeks before the byelection are both recess weeks, allowing both parties to send hordes of MPs north to help their respective campaigns.

The question of who wins is important – can Te Pāti Māori turn the momentum of the last year or so into a victory? But also important is whether the race puts any pressure on the strained relationship between Labour and Te Pāti Māori.

Tāmaki Makaurau was the epicentre of Labour’s seething frustration with Te Pāti Māori’s occasionally grubby campaign tactics in 2023. A repeat of this would bode ill for any potential alternative government.