On National’s Myths About The Desolated State Of The Economy

Familiarity breeds consent. If you repeat the line “six years of economic mis-management” about 10,000 times, it sounds like the received wisdom, whatever the evidence to the contrary. Yes, the global pandemic and the global surge in inflation that came in its wake occurred here as well – but if National had been running the country for the past five years, its arguable that the outcomes would have been worse, given National’s greater willingness to open the borders before vaccines were available, and given its aversion to state subsidies of any kind. Employers rejoicing at the prospect of a National election victory should keep in mind that National would have probably let their firms go to the wall.

Regardless of all the above… For months, the “squeezed middle class” has been encouraged to blame the current government for all of its misfortunes, and to see in National and ACT its sole means of salvation. Meanwhile, the nation’s CEOs seem to be living in denial. In reality, it was government spending that kept economic activity ticking over throughout the pandemic. Barely two years ago,- business leaders were arguing for larger relief packages, continued wage subsidies and for sectoral handouts to be kept in place for longer. It's an interesting hypothetical: If all these things were so wrong, which of those economic supports would National and ACT have ripped away and when? Those 83% of CEOs who reportedly rate Nicola Willis as a credible Finance Minister-in-waiting should be careful what they wish for.

This epic of economic gaslighting by the centre right has been made a whole lot easier by a second term Labour government that has been skittish and reluctant to trust in its ability to take the country along with it. Labour’s handling of the health and business challenges of Covid ( and its aftermath) have been widely ranked as among the best in the world, ad The historic mandate Labour won in 2020 could have been a springboard for thorough reform of this country’s social and economic structures, on a scale comparable to the first Labour government.

Instead, Labour's second term has been a timid exercise in incrementalism, in which the government has backed away from policies at the first sign of a political headwind. Fatally, Labour has allowed National to frame the political narrative. As a result, Labour has not only wasted its opportunity to dictate events... But has spent this entire year in peevishly counter-punching at the centre right’s political agenda, which has become the default setting.

The result has been predictable. As global forces continued to batter the NZ economy, National has been free to blame all of these negative outcomes on the Labour incumbent. Meanwhile, and if in a parallel universe, the bulk of the mainstream experts offshore have continued to applaud Labour’s handling of the economy. In three years time, National will be overjoyed if it can get the sort of positive reviews that the major credit rating agencies (Fitch, Moodys Analytics, Standard & Poors) and the OECD have been showering on Labour this year.

An excess of moderation

While noting the risks and challenges facing New Zealand, the general conclusion of the international credit rating agencies is that our economy was well-managed during the pandemic, and subsequently. Here’s how Standard and Poors put it a couple of weeks ago:

“New Zealand's economy is performing well, underpinned by low unemployment and pent-up demand. This is despite the after-effects of the Covid-19 pandemic, and rapidly rising inflation and interest rates....We expect the strong rebound in economic activity and the ceasing of pandemic related-support measures to narrow New Zealand's fiscal deficit from pandemic highs.....This will ease pressure on the government's debt trajectory even as debt servicing costs rise reflecting global interest rates. New Zealand managed the pandemic better than most countries in terms of health, fiscal, and economic outcomes."

That doesn’t sound like a litany of disaster. It seems Labour has weathered the immediate Covid crisis, coped pretty well with the hangover, and laid a feasible platform for better times ahead. No doubt in 12 months time, National will be claiming those better times to have been a miracle wrought by its own allegedly innate business savvy..

Keep in mind these conservative rating agencies are not left wing cheerleaders for Labour’s actions and inactions. Yet their verdicts -- sustained double A and triple A credit ratings – mean that Labour’s legacy on the economy will reduce the cost of borrowing on global financial markets for its successor. The ratings agencies (and OECD) appear to very much like what Grant Robertson has delivered

In essence, Labour successfully steered the economy through the pandemic by using the same expansionist tools (aka “quantative easing”) that got the US economy through the GFC – and with a minimum of the job losses and business failures that resulted from the austerity measures Europe pursued in the wake of the GFC. Unfortunately, National and ACT are promising to enact much the same kind of austerity measures that failed Europe after the GFC.

Take an example of active management. Labour has pursued long term reforms in health that are likely to deliver significant savings (and a related reduction in bureaucracy) thanks to the long overdue amalgamation of the nation’s DHBs. The same reform process also promises to improve health outcomes for Maori and help close the gaps in health and life expectancy created in decades past by a public health system alienated from Maori communities. On ideological grounds, the center right parties are promising to scrap the Maori Health Authority and revert to the failed model of health delivery to Maori, within an even larger bureaucracy.

At heart, ACT and National are also promising to pursue a contradictory economic programme. They will be giving with tax cuts on one hand, and taking with austerity measures on the other. Its tax cuts will pour fresh fuel on inflation just when it would otherwise be subsiding. The centre right prescription for the economy will undo the Reserve Bank’s efforts to reduce consumer demand, lower prices, and thereby dampen down inflation. In that respect, the tax cuts will put a National-led government on a collision course with the Reserve Bank, and render all but meaningless the current pain that’s being felt in the mortgage belt.

The Verdicts

If only because their verdicts are so out of whack with the election discourse, it is worth revisiting just what the professional analysts have been saying. A fortnight ago, Treasury’s PREFU (i.e. the pre-election fiscal update) portrayed a resilient economy in which (a) a nominal recession has been avoided here, temporarily at least (b) the economy is growing again albeit slower than before and (c) inflation is declining and is due back within the Reserve Bank’s 1-3% target range by the end of next year at the latest.

To take one positive metric among many: As growth has slowed, the current account deficit about which National was expressing so much alarm a few months ago is set to be self-correcting and in decline. Here’s Treasury on the reasons for the temporary widening of the current account gap, and note how little this explanation has to do with government “mis-management” :

New Zealand's current account deficit has widened considerably, owing to many factors including the disruption caused by the pandemic, poor agricultural production, and higher global interest rates. These factors have given rise to a large deficit in the trade balance (the combined goods and services balances) which helped drive the current account deficit from 1.6% of GDP in June 2020 to 9.0% of GDP in December 2022.

As mentioned, this gap is now contracting. In three years time, New Zealand’s current account deficit will be once again back at the benign levels we were experiencing three years ago:

The current account deficit began to narrow in the March quarter, falling to 8.5% of GDP, a trend that we expect to continue. In our Budget forecast, the deficit declines to 3.8% of GDP by June 2027, as tourism continues to recover, transport costs fall, and macroeconomic policy tightening weighs on import demand.

This direction of travel does nothing to validate National’s thesis of gross mis-management. As with other metrics (ratio of government debt to GDP, level of government spending relative to GDP etc) there will be no crippling legacy of economic misrule. National’s failures are all going to be of its own making, and will not be credibly explained away by what it has inherited. Finally, here’s what those credit rating verdicts had to say:

Fitch Ratings ( 8 September 2023)

The Fitch international rating agency kept New Zealand's high ++ ratings, saying that its positive evaluation of New Zealand’s prospects is “underpinned by its advanced and wealthy economy, and its robust governance standards and policy framework.” Fitch, too, was not seeing signs of gross government mis-management:

The ‘AA+’ ratings reflect Fitch Ratings’ view that the government's commitment to return to surplus will put gross government debt/GDP on a downward path in the medium term, despite more near-term fiscal expansion. Sound macro management mitigates macro-financial risks....

Inflation has peaked, Firch noted, and the future prospects for growth look pretty bright, under current settings:

Growth is set to remain subdued in 2024 as the full effects of monetary tightening become felt, before picking up to 2.2% in 2025.

In other words, the next government would be inheriting an economy that has been safely and competently steered through a global crisis and its inflationary aftermath, with good times glimmering on the horizon.

Moodys Analytics ( July 2023)

The Moodys Analytics report in July also found inflation had peaked, but was only slowly receding due to pressure from (a) weather -related food price hikes and (b) sharply rising housing costs. As with Fitch, Moodys Analytics forecast inflation will be back within the 1-3% range by the end of next year. In this country, there hasn’t been a wage/price inflationary spiral like the one we saw in the early 1980s, even though the Reserve Bank – like central banks elsewhere in the world - has acted as if it was faced with one.

While it expected inflation to slowly ease, Moodys Analytics predicted a temporary spike in the September quarter caused by transport costs – due to the mid-year re-instatement of the government’s fuel tax, and the phase out of the public transport subsidies. True to form, National criticised both those subsidies when they were introduced, and also criticised their removal.

Standatd & Poors (September 2023)

In its latest report a fortnight ago, Standard & Poors kept New Zealand’s high credit and currency ratings, and described the country’s economic condition as “stable.” As the aftermath of the Covid support spending measures recedes into history, our fiscal deficit is also being forecast to narrow. In addition, S&P foresee no lasting problem with our current debt levels, under current management: .

"Net general government debt will stabilise at a level that is modest compared with that of most highly rated sovereign peers...."

Overall, S&P deem the outlook for the economy to be pretty good:

"The country's excellent institutions, wealthy economy and moderate public indebtedness will balance credit risks associated with a large [and receding] current account deficit, high levels of external and private-sector debt, and volatile property prices over the next two years."

And to repeat, the S&P’s overall summary could hardly be more unlike the “end is nigh” panic being whipped up by National and by ACT:

New Zealand's economy is performing well, underpinned by low unemployment and pent-up demand. This is despite the after-effects of the Covid-19 pandemic, and rapidly rising inflation and interest rates....We expect the strong rebound in economic activity and the ceasing of pandemic related-support measures to narrow New Zealand's fiscal deficit from pandemic highs.....This will ease pressure on the government's debt trajectory even as debt servicing costs rise reflecting global interest rates. New Zealand managed the pandemic better than most countries in terms of health, fiscal, and economic outcomes."

Footnote One : Despite the lower commodity prices, and reduced demand from China, our exporters are gaining some benefits from our low currency, which is struggling to stay at or above 60 cents against the US dollar.

However, that same weak NZ dollar is also pushing up petrol prices at exactly the same time as the Saudis and Russians have been cutting back on oil production to foster a global scarcity that will boost their earnings. Obviously, neither a Labour-led or a National-led government is able to convince the Saudis and the Russiams to pump more oil.

Footnote Two: Finally, the OECD report on New Zealand ( June 2023) argued that the RB’s interest rate hikes alone may not be enough to cool down the economy. Interestingly, the OECD says that the inflationary risks can be mitigated by the current government “sticking to its plans to increase government spending only moderately.” This path of moderation would be hard to maintain, the OECD conceded, given the need to repair and improve the country’s infrastructure and fund the necessary responses to ”extreme weather events. “

Again, the current path of moderation being described by the OECD doesn’t sound remotely like a diagnosis of out-of-control government spending. Certainly, none of the rating agencies suggest that the country’s challenges would be best met by injecting a sugar hit of socially regressive tax cuts, given that these would be re-inflationary. More enduringly, the tax cuts would also reduce the revenue available to invest in the social and physical infrastructure required to create sustainable economic growth for our children, and grandchildren.

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