Fri Mar 22

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%.

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”.

Winston Peters speaking to media inside parliament lobby

NZ First leader and Deputy Prime Minister Winston Peters: focused on the coalition agreement. Getty Images

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.

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.

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.