The rubber just hit the road. In a bad way.

Walking past the blacked out windows of the old Smith And Caughey store – the bad news just keeps coming. Photo: Lynn Grieveson / The Kākā

Briefly in my Saturday Soliloquy of the top news, scoops and deep-dives in Aotearoa’s political economy around housing, poverty and climate in the week to September 20:

This week the rubber hit the road on the Government’s pledge for 2025 to be the year of ‘growth, growth, growth.’ It didn’t go well.

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This week the rubber hit the road on the Government’s pledge for 2025 to be the year of ‘growth, growth, growth,’ but not in a good way.

Stats NZ reported on Friday GDP fell 0.9% in the June quarter to $69.850 billion. It has contracted 1.5% in the six quarters since the Government’s election.

Finance Minister Nicola Willis blamed Donald Trump’s April 2 ‘Liberation Day’ global tariff shock for the slump.

She said New Zealand’s economy had an ‘outsized reaction’ to the global uncertain and it had ‘knocked the stuffing’ out of the economy’s psyche. She said the economy was now growing and the Government wouldn’t change its strategy of spending restraint to ‘bend the curve’ down on Government debt.

Former National Prime Minister John Key said the Reserve Bank had not been enough of a ‘mate’ to the Government and should have cut much more and much sooner. Economists for Westpac, Kiwibank, ASB and Rabobank all called on the RBNZ to deliver a ‘bazooka’ rate cut of 50 basis points in just under three weeks time.

Former National Finance Minister Ruth Richardson and former Labour Finance Minister Roger Douglas called on the Government to more aggressively cut spending and Government borrowing. Douglas said Willis should resign.

Prime Minister Christopher Luxon let Willis handle questions on Thursday, but said on Friday he backed Willis and the Government’s strategy was ‘full steam ahead.’

In my view, the Government’s abrupt halt in early 2024 to discretionary capital spending on housing, roading, hospital planning and school building shocked the construction, infrastructure and local government sectors. It triggered thousands of job losses and hit the psyche of investors and consumers much harder than anything Trump posted on Truth Social.

The Government’s initial rhetoric around ‘belt tightening’ to deal with a fiscal crisis and its announcements of thousands of job losses both chilled consumer spending appetites through 2024 and hammered particular regional economies, including Wellington and Auckland.

The timing of the Government’s fiscal tightening in 2024 could not have been worse, arriving just as the Reserve Bank’s monetary policy tightening from 2022 and 2023 was at its most severe, and right at the bottom of a 20-30% slump in house values.

In my view, the Government has adopted a 1991-style approach to dealing with a recession, whereby it hopes businesses and households will step forward to borrow, invest and spend into the vacuum created by the Government as it pulls back to squeeze down its share of GDP. That worked for both National and Labour-led Governments after the 1991, 1999 and 2008 recessions because households had much lower debt and businesses invested at higher rates.

Households that owned homes also felt increasingly wealthy as their tax-free home equity multiplied many times over. And banks were liberalising after decades of strict controls, growing mortgage and business lending at double digit rates. As the Government pulled back and put sinking lids of investment, housing, welfare, health and education spending, households and banks stepped forward to reconfigure the economy as a housing market with bits tacked on.

But it’s different this time. Now, households are much more heavily indebted and find it difficult to leverage up even more, not least because first home buyers have to find much bigger deposits than those buying in the 1990s and early 2000s, and banks have to deal with new LVR and DTI lending controls. This time, as the Government is pulling back, households can’t or won’t step forward. Those that could, including rental property investors with plenty of equity, aren’t firing up the housing market because they’re reluctant to sell at a loss and can’t see the immediate prospect of capital gains.

The economy is now stuck in two balance sheet recessions. Firstly, there’s the wealth effect of the housing slump and the inflation burst of 2022 and 2023, which shocked consumers into spending restraint that has created a four-year-long recession in the retail and hospitality sectors. The tax cuts that were supposed to encourage households out of their shells were delivered mostly to those who save a good chunk of their earnings, either in term deposit form, or by repaying mortgages early.

The second balance sheet recession is self-inflicted by the Government, which believes wrongly that it has too much debt and faces the punishment of higher interest rates by financial markets if it doesn’t ‘bend the curve’ of public debt down. That is just plain wrong. After including the very real assets and earnings of the NZ Super Fund and ACC into the calculations, as other Governments do, New Zealand’s true debt position is miniscule compared to others and the interest burden is tiny, both in actual terms and relative to that of households and businesses.

The Government’s net interest costs in the just-finished financial year were forecast to be $2 billion or 1.17% of expected Government revevenues of $169.5 billion. Any homeowner or business going to its bank to borrow would not worry if their current interest costs were 1.17% of their revenues, especially if they were able to say to the bank they had a net worth of $183 billion, as well as ownership of NZ Super Fund and ACC investments worth nearly $150 billion.

There is no serious justification for a fiscal tightening that has driven an already stressed economy into a deeper retail and construction recession. The Government use its balance sheet to borrow and invest to grow the economy to help the Reserve Bank stimulate spending back to growth mode, rather down downward spiral mode.