As the Labour caucus met in Christchurch to plot its election strategy last week, Chris Hipkins took a detour to attack the Coalition’s economic management.

Speaking to the Queenstown Business Chamber, the opposition leader said New Zealand’s economy was in poor shape and the Government was failing to fix it.

“Despite a lot of talk about economic growth, actually the most recent indicators are pretty concerning for us. They’re suggesting that New Zealand’s economy isn’t recovering and if anything we may be going in the other direction,” he said, according to an RNZ report.

Back in the North Island, Hipkins’ argument drew support from an unlikely ally.

Simon Bridges, Auckland Chamber chief executive and former National Party leader, said some fiscal stimulus or other immediate policy action was needed to revive the city.

He was responding to “pretty grim” data showing Auckland’s unemployment rate had risen to 6.1%, reflecting weak consumer spending and business confidence in his view.

“I do think there is a real case for serious policy and/or fiscal stimulus … particularly in the big cities. We need to raise the animal spirits of the business community,” he told RNZ.

Bridges said the Coalition should cut corporate tax rates, saying the “worthy” long-term growth policies would not address the current lack of momentum.

Spending headed south

There’s some logic to this argument. Business cycles are self-reinforcing: growth spurs more growth, while contraction fuels further decline.

Mike Jones, the chief economist at BNZ, said household disposable income growth had turned negative again in the June quarter and was suppressing spending.  

“We’re left nursing continued downside risk on the lift in household spending that we (and others like the Reserve Bank) are forecasting for the coming 12 months,” he said.  

“Certainly, consumer confidence needs to lift a long way from here for these forecasts to have any hope of panning out. The analysis above suggests that might take some time.”

Jones’ proposed remedy was for the Reserve Bank to keep cutting the Official Cash Rate, not for the Government to lower corporate taxes or airdrop bundles of cash onto Auckland rooftops.

A well-timed Treasury briefing this week advised governments to leave the central bank to manage economic cycles and avoid fiscal stimulus unless essential.

Finance Minister Nicola Willis appears to have lost track of her position on this issue.

After Wednesday’s unemployment figures, she said she was “pumping cash into the economy” and pulling every lever to create jobs.

The next day, after Treasury released its long-term briefing, she said it showed the dangers of excessive fiscal stimulus during a downturn.

“The report makes clear significant errors were made in the fiscal response to Covid. Treasury is urging policymakers not to repeat those mistakes. Our Government will not,” she said. 

Is the Coalition pumping cash into the economy, or stepping aside so the Reserve Bank can cut interest rates? It can’t really have it both ways.

Cash pump

Hipkins has not taken a firm position either, though he appears sympathetic to the cash-pump approach. He told the Queenstown Chamber governments should not be bound by a 30% of GDP spending limit or a 50% core Crown debt ceiling.

“Government spending as a percentage of GDP in a small economy like New Zealand needs to be able to fluctuate, so in a period of economic crisis or in a significant shock like a pandemic you need to be able to increase government spending to get through it.”

He said a future Labour government would focus on active “investments” to reduce the need for Crown spending on automatic stabilisers such as the Jobseeker benefit.

This is roughly the opposite of Treasury’s long-term briefing advice, which implied almost half of the $66 billion Covid response spend was ineffective.

Whatever the merits of Labour’s plan, it will need something big to fund and finance its cash pump as the Coalition is already running a $10 billion deficit without moving the dial.

Enter the capital gains tax. Former staffer Vernon Small recently reported Labour’s policy council had settled on a CGT instead of a wealth tax, subject to final caucus approval.

The 2019 Tax Working Group’s proposed capital gains tax was forecast to raise an average of 1.2% of GDP once fully phased in over about a decade.

At that point, it would be barely enough to fill today’s structural deficit, meaning it would not create much room to reverse National’s spending cuts while keeping the books in balance.

But maybe Labour doesn’t have to balance the books…

Future fiscals

In June, the Green Party released a discussion paper arguing governments do not need to run a surplus to stabilise debt. As long as the economy grows as fast as debt, the debt-to-GDP ratio stays the same.

This suggests it would be acceptable to run a small annual deficit, provided it supported growth and debt levels were not already too high.

Net core Crown debt was about 42% of GDP at the end of March and is forecast to peak near 46% before stabilising and easing slightly. Treasury has advised keeping debt below 50% in normal times, leaving a 40% buffer for crisis spending.

The Greens argued this limit was far too conservative, noting it was enough to fund the Covid response twice and still recover in unusually poor conditions. 

More moderate estimates, they said, would allow a ceiling twice the current level without risking collapse in a crisis.

Hipkins refused to commit to the 50% ceiling when asked in May, saying that would only be decided when Labour formed its fiscal plan in 2026.

Labour could choose to run moderate deficits over the forecast period and still keep debt near 50%, while waiting for capital gains tax revenue to flow. 

That could allow more capital investment and halt—though not fully reverse—the Coalition’s spending cuts without undermining stability.

None of these decisions have been made, this is just speculation. But the Coalition’s spending policies are already pushing up against the limits of current fiscal rules and tax settings.

If Labour wants to do more, it will have to do something different.