Introduction
In New Zealand, the National party generally retains a reputation of being pro-business and pro-economy.
The underlying assumption is National are more competent economic managers, and by all accounts Luxon and his team have talked a good game.
Luxon heavily marketed his skills as a former CEO running New Zealand’s majority government owned airline, during the election campaign. The conservative parties also drove a robust attack campaign against the sitting Govt, claiming they were weak on the economy, and irresponsible for incurring high levels of government debt during Covid.
National said they could fix the ‘problem it posited,’ promising us, “we will rebuild the economy to reduce the cost of living, restore law and order, and improve our schools and healthcare.
Those are great things. And I support that.
But nuances and context matter.
Why?
We should manage economic circumstances realistically. We should act and be supported by independent and objective expert advice. We should make the best economic decisions for NZ’s short, medium and long term prosperity, based on facts, and we shouldn’t be afraid to change course if circumstances change.
Marketing has no real role other than having clear communications, managing expections along a journey, and positive psychological support.
I believe that to make good choices, it’s important we ground ourselves in fact within politics (or indeed, any field of management.)
Did you know? National have been accused of making New Zealand’s worst economic decision ever. In 1975, Sir Robert Muldoon repealed the country’s superannuation scheme.
It would have been worth $240 billion in 2007 - eclipsing Australia in its savings rate
First, let’s revisit the “New Zealand is fragile” narrative
In his first State of the Union address, Luxon set a sombre mood, warning New Zealanders were in a precarious financial position. The economy was “fragile,” he lectured, “tough decisions had to be made,” he and his Government were the right people to fix ‘the mess.’
And while economic headwinds were in play, how accurate was it?
Significantly, why would Prime Minister Luxon and his Finance Minister Nicola Willis take such a negative tone to our economy so early on?
In February 2024, Bernard Hickey observed:
Finance Minister Nicola Willis has again characterised the Government’s finances as too fragile to borrow in its own right to solve Aotearoa-NZ’s infrastructure deficits.
She also again compared the Government’s budget to a household budget, saying spending cuts needed to be found to ‘balance the books’ and that she was afraid of losing the confidence of financial markets when the ‘rainy day’ came for borrowing.
But the ‘grown-ups’ in financial markets and in ratings agencies are saying the exact opposite.
S&P Global Director of Sovereign and Public Finance Ratings, Anthony Walker, tells me the Crown’s AAA rating was not fragile and the Crown had 30% of GDP ($120 billion) of borrowing capacity before it would be downgraded.
He says the Crown using its balance sheet to borrow from fund managers to fix infrastructure deficits would be the fastest and cheapest way to do it. His comments came after record-high demand for a 30-year bond issued by the Treasury’s Debt Management Office at just one basis point above secondary market rates.
And,
International investors have increased their holdings of New Zealand Government bonds by about $25 billion to almost $60 billion since Covid.
Local Kiwisaver and other funds are also big buyers of NZ Government bonds, increasing their holdings by around $20 billion to $35 billion.
In other words, international markets, credit agencies, global analysts, and independent financial commentators did not agree.
And far from being fragile, New Zealand was primed to invest responsibly and efficiently for our future when the Government took over.
(BTW Hickey’s outstanding analysis is found here, and is highly recommended reading.)
S&P affirmed our AAA local current sovereign credit rating with a stable outlook in Sep 2023, stating:
We expect New Zealand's fiscal deficit to narrow over the next three years as COVID-19-related temporary spending measures come to an end.
Net general government debt will stabilize at a level that is modest compared with that of most highly rated sovereign peers.
We affirmed our 'AA+/A-1+' foreign- and 'AAA/A-1+' local-currency sovereign credit ratings on New Zealand. The outlook on the long-term rating is stable.
Moody’s also re-affirmed the AAA sovereign foreign currency credit rating with a stable outlook in December 2023.
i.e. From an independent market and global perspective, New Zealand’s debt level was consistently responsible, measured and sustainable in recent years.
Those takeaways were lost amidst the noise. And the then opposition parties, and their allied lobby groups, brought significant resources to bear in spreading a narrative of unsustainable and irresponsible debt.
Now let’s consider Treasury.
In Jan 2024, Treasury reported that despite weaker economic conditions and headwinds, the National Coalition government "inherited finances in better shape than expected."
The budget deficit for the five months ended November was $2.8 billion, about $1.1b lower than forecast
Tax revenue was $49.1b, more than half a billion dollars above forecast because of higher provisional and income tax, and tobacco, alcohol, and fuel duties.
The September quarter labour market statistics showed lower employment levels but that average hourly earnings increased
Again, the Govt’s inherited financial position, far from being razor edge “fragile,” was well positioned to invest in New Zealand’s growth, address infrastructure investments like Kiwirail, and take advantage of better than expected conditions to engineer a soft landing. Yes, there were headwinds, yes there was softening, but sentiment was positive, and the Govt’s financials were solid.
Did you know?
Treasury reports said NZ’s deficit was made worse because the scrapping of the new Cook Strait ferries project (IREX) meant $500m less due to a write down of crown assets.
Note: S&P did warn last year that maintaining higher levels of deficit for too long could affect our credit ratings.
Why the bleak tone from NACT1?
In my opinion, the rationale for the negative economic narrative was simple:
The Coalition Government was always going to slash public sector jobs, cut major infrastructure programs (e.g. 3 Waters, Lets Get Wellington moving, Auckland Light Rail, cycling projects), cancel Interislander and pull back from other public sector infrastructure investments, privatise assets, and re-allocate funds to charter schools and landlords regardless.
The Government however, needed a friendly and rational pretext, acceptable to all New Zealanders, to do so.
Hence: “New Zealand is fragile” and “unexpected fiscal cliffs forces our hand.”
Did you know?
There was never any unexpected fiscal cliff. Short term funding, including for Pharmac, was always publicly available budget information. ACT’s David Seymour even mentioned this in Sep 2023.
At each step, this Government affirms a core operating thesis elevated by the Atlas Network, a right wing think tank, called “The mother of all think tanks,” which has been linked to the Coalition govt:
“Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. Our basic function is: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.” - Milton Friedman
In New Zealand, Atlas Network funded organisations include Taxpayers Union, New Zealand Initiative, and by extension Free Speech Union and Groundswell
Over and over again, we have seen National lament a crisis that is not wholly there to pave the way for an apparent Thatcher-esque, Tory like, trickle down, neoliberal ideology approach to managing New Zealand.
What have they done to the golden goose?
Unexpected consequences
Two months after Luxon’s State of the Union, the headlines started to shift. Economists came forward to say that earlier expectations of a “soft landing” were now unrealistic.
Let’s look at how this might have happened:
Talking down the economy contributed to weakening business and consumer confidence.
Sentiment is key to economic performance as economists know
Telling New Zealand we are fragile lead to more uncertainty in household spending, and for businesses in making investments and hires
Not addressing core cost of living issues has fundamentally impacted household wallets. Despite promising it was their number one priority last year, there has been little concrete action on this.
Squeezed wallets leads to less discretionary spending, which in turn affects business revenue, confidence, employment.
i.e. Weakening business conditions leads to higher unemployment
Firing ~6500 public servants (so far and counting) at speed (to fund the tax cuts, which the Govt then borrowed $12bn for) increased the unemployment rate rapidly
Higher unemployment leads to lower tax revenues for the Govt
Lower tax revenues leads to the Govt needing to borrow more, make money elsewhere, or cut more public services (worsening the cycle)
Stoppoing thousands of Kāinga Ora construction builds around the country shuttered the construction industry
A weakened construction industry permeated to more jobs lost, less revenue for tradies, and reduced economic certainty etc.
Finally, giving out tax cuts caused more uncertainty, leading to the RBNZ grappling with another unknown variable and unable to cut rates earlier (as forecast by the IMF and Goldman Sachs this year and last.)
These are all very obvious economic compounding effects of government policy. It’s not rocket science. And they should have been anticipated by the Government if they were not too busy implementing ideological driven “targets” and “deliverables” at speed.
There are other interesting things to watch for in coming months:
Ratings agencies warned us last year that maintaining higher levels of deficit for too long could affect our credit ratings.
Nicola Willis took the dubious honour of borrowing $12bn for tax cuts to fulfil an election promise despite weakening sentiment - pushing govt. debt ratios to a peak of 45% and staying in the 40s for a further 3 years.
She delivered a worse deficit than any of the past government’s budgets, bar during Covid, despite rhetoric about fiscal responsibility
Ratings agencies have warned New Zealand that cancelling 3 Waters will incur higher debt and costs.
That will inevitably flow through to rates
The Government’s water program isn’t due until next year, but rates are already increasing steadily.
Higher taxes are also still incoming in the form of tolls on roads, fuel taxes that will hit in 2027 (12c rising to 22c over two years), prescription fees are already back, alcohol excise levies went up, the app tax wasn’t removed as promised, not addressing climate change seems short sighted as insurance bills soar through climate related risks/events and 3 Waters infrastructure is a “ticking time bomb” - for NZ’s health, lives, and money, as John Campbell showed.
Infrastructure debt also continues to accrues as Kiwirail is cancelled, public transport funding decreases, walking and cycling initiatives are canned, hospital rebuilds around the country are put on hold, and the Govt plans to expand greenfield development with speed, which has typically proven to be costly.
What is their plan?
My guess is they want to bet New Zealand on private money and foreign investment. And social outcomes and public services are not high on their priority list. Let’s put aside for now that poor social and equitable outcomes lead to higher crime, higher costs, and increasing inequality - this Government appears to believe in neoliberalism to the fullest extent. (I am happy to be proven wrong, by the way)
Opening up the doors to international investors with a Fast-Track One-Stop-Shop consent bill and amendments to the OIA aims to flood New Zealand with private money in the hopes of creating a Los Angeles or other similar ‘capitalist utopia state.’
More roads, more buildings, more density, more mining, more cars, more money to attract companies to build up New Zealand. Less climate change ‘woke’ policies, less cycleways, less walkways, less green space, less natural resources in our ownership - what could go wrong?
Whether that succeeds or not is yet to be seen, but what is certain is, we have seen them flag a specific approach to committing NZ down this path - speed run legislation, lock in long term commitments, long term contracts, long term consents, break ground as quickly as possible with minimal due diligence, implement penalty clauses if future Governments disagree.
Are we killing off a golden goose or are we building a capitalist Utopia?
Only time will tell.
Everything always comes back to that one line “Only a crisis - actual or perceived - produces real change."
Thank you for writing with remarkable clarity!
I have lived in blue electorates most of my voting life and am used to living with the perception of my fellow citizens that there is only party that is qualified to govern the country because it is “the party that supports business”.
I understand why owners of small businesses in rural areas vote for money parties but I am still trying to understand what happened in the cities.