NZ is in recession – so far there are few signs the government has a plan to stimulate and grow the economy
- Written by Grant Duncan, Visiting Scholar in Politics, City, University of London
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[1] over the second half of last year. GDP fell in the September and December quarters by –0.3% and –0.1% respectively.
Taking into account the record high levels of immigration, Westpac’s most recent economic bulletin[2] estimated this may equate to GDP per person having fallen almost 4% 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 new government can blame the old one[3] – 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[4] in late February, New Zealanders rated the coalition’s performance at 4.6 out of ten – on par with the Labour government (4.7) just before the general election in October 2023.
Internal contradictions
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% range. The December figure was 4.7%.
Read more: The first 100 days of tax policy bode well for National's supporters – others might be worried[5]
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[6] hastened the political demise of the then UK prime minister, Liz Truss, in 2022.
Luxon and Willis have some difficult fiscal decisions to make. And there’s pressure, especially from NZ First leader Winston Peters[7], to honour the coalition agreements. Peters has already made life difficult for Willis by repeating one published estimate[8] of a potential NZ$5.6 billion “gap” between National’s election promises and “current forecasts”.
Missing innovation and skills policies
In the meantime, people are struggling to make ends meet and appear to lack confidence in the new government.
According to the IPSOS poll, the National Party has often been seen as more competent than other parties to deal with the 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:
- deliver a prudent budget
- improve economic efficiency and productivity
- stimulate innovation and skills.
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[9] 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.
Read more: The government wants to fast-track approvals of large infrastructure projects – that's bad news for NZ's biodiversity[10]
But the fast-track law is attracting criticism from environmental groups and legal experts for giving extraordinary powers[11] 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.
A lot riding on Budget 2024
In the meantime, the reinstatement of tax deductibility of interest payments[12] on rental properties does nothing at all to contribute to fiscal 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 Christopher Luxon’s suggestion[13] it would apply “downward pressure” for which renters would be grateful.
Read more: 'Applying for a home felt harder than applying for a job': NZ private rentals won't solve need for emergency housing[14]
No government can literally “grow the economy” – regardless of the National Party’s pre-election hype[15]. 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.
References
- ^ economy was in recession (www.stats.govt.nz)
- ^ economic bulletin (www.westpac.co.nz)
- ^ blame the old one (www.newstalkzb.co.nz)
- ^ IPSOS poll (www.ipsos.com)
- ^ The first 100 days of tax policy bode well for National's supporters – others might be worried (theconversation.com)
- ^ unfunded tax cuts (www.theguardian.com)
- ^ especially from NZ First leader Winston Peters (www.rnz.co.nz)
- ^ published estimate (www.thepost.co.nz)
- ^ fast-track consenting (www.beehive.govt.nz)
- ^ The government wants to fast-track approvals of large infrastructure projects – that's bad news for NZ's biodiversity (theconversation.com)
- ^ extraordinary powers (www.rnz.co.nz)
- ^ tax deductibility of interest payments (www.newshub.co.nz)
- ^ suggestion (www.1news.co.nz)
- ^ 'Applying for a home felt harder than applying for a job': NZ private rentals won't solve need for emergency housing (theconversation.com)
- ^ pre-election hype (www.national.org.nz)
