‘National’s worst fears’: Why it’s back to the future as pre-election rate hikes loom – Inside Economics

Owen V.

A: Thanks, Owen. The answer is yes.

Here’s what political journalist Vernon Small wrote in the Herald on November 18, 1999 – a day after a 50-basis-point Official Cash Rate (OCR) hike and shortly before the general election that saw Labour, then led by Helen Clark, ousting National, then led by Dame Jenny Shipley.

“The Bank of New Zealand has confirmed National’s worst fears by signalling it will lift mortgage interest rates one week before the election.”

I was in the UK in 1999, so I can’t say how much of a political football monetary policy decisions were in New Zealand at that time.

But Small’s assessment suggests it was a serious problem for National.

They were different times, though, and the era of double-digit mortgage rates wasn’t such a distant memory for most people.

The hike was from 4.5% to 5%, but those rates were still considered very low by historical standards.

“On balance, we are persuaded that monetary policy should be less stimulatory as we go into 2000,” Reserve Bank Governor Don Brash said at the time.

“Despite that, we see growth continuing at close to 4% per annum over the next two years.”

Different times indeed!

This year …

Will a September or October rate rise be a nightmare for National this year?

I don’t think a rate rise right before the Kiwis go to the polls is ever going to be great news for an incumbent Government.

It is definitely not what the coalition Government would have been hoping for, especially if it is effectively being forced on us by higher inflation, rather than the prospect of 4% GDP growth.

But it is worth remembering that rates are usually cut because an economy is underperforming and hiked when it is starting to overheat.

Rates were cut substantially in the months preceding (and immediately after) the 2008 general election.

That was not a good time for the economy. The Global Financial Crisis was unfolding around us.

Given that the Reserve Bank had to cut the OCR below neutral levels to stimulate the economy, which was stuck in a recessionary slump, you could make the case that rate rises this year are actually good news.

New Zealand’s economy ought to be strong enough to sustain an OCR at about 3% (it’s currently 2.25%).

But good luck trying to make that case to voters, who view higher rates as taking cash out of their back pocket.

So I suspect the path for monetary policy very much becomes a political football in the weeks before Kiwis go to the polls.

Are government surpluses really good?

Q: Modern Monetary Theory, while by no means a great prescription for how to run an economy, nevertheless seems to provide a quite good description of how modern economies actually work. The very high levels of debt in countries like Japan, the USA and Canada (to name a few) don’t seem to have a particularly negative effect.

Equally, the quantitative easing and high spending of the Covid response resulted in the exact inflationary pressures the theory proposes.

I’m interested in the insight that government budgetary surpluses are effectively removing money from the private economy and can (and have) led to recessions.

Why do we automatically assume that deficits are bad and surpluses are good?

John O’Neill

A: Just mentioning Modern Monetary Theory (MMT) is likely to elicit a strong response from its fans. So I’m wary of getting into that topic.

But you make a good point: that in a world of deficits, debt and money printing, the MMT proposition (that governments with the capacity to issue their own currency can never really run out of money in the way a household or business can) seems more like a description of the status quo than a radical theory.

I’ve always been an MMT sceptic – at least when it comes to New Zealand’s capacity to implement it.

Whatever people think of the US Government’s ability to keep running up debt, I don’t think smaller countries can push the limits too far without suffering the wrath of global financial markets.

We remain largely at the mercy of the global financial system, whether we like it or not.

So in New Zealand, we still aspire to government surpluses – even though we’re typically running deficits.

You are right, at face value, it doesn’t seem to make sense for a Government to run a perpetual surplus.

If it ends the year with a surplus, then you can argue that it means it has either taxed too much or spent too little.

I think what politicians really mean when they say surplus is “balancing the books”, ie not going backwards.

It just sounds a bit more positive and ambitious to talk about a surplus rather than to talk about breaking even.

Surplus problems

It’s hard to believe in this current environment, but running a surplus has caused headaches for Finance Ministers in the past.

In 2006, the late Sir Michael Cullen copped plenty of flak for achieving an $11.5 billion operating surplus in the year to June 2006.

There was a lively debate about the issue in the Herald (talk about a good problem to have), with Cullen accused by various commentators of being too fiscally conservative.

There were calls from the right for tax cuts. The Greens said it should be invested in environmental and social sustainability and so on.

Sir Michael Cullen pictured making his valedictory speech as he prepared to leave Parliament in Wellington on April 29, 2009. Photo / NZPA

Cullen wasn’t having any of it.

“The recent headline ‘What to do with that $11.5 billion Govt surplus’ and subsequent editorial ‘Time for a tax break from Govt’ perpetuate the myth that the Government is sitting on a huge pile of cash”, he wrote in a submission to the Herald.

“The surplus represents the difference between government spending and revenue, but is not ‘money to burn’ as you state.”

Cullen argued that the operating surplus does not take into account other government commitments, such as new capital spending.

The operating surplus is like a family’s income after everyday expenses (which in government terms are the operating expenses), he argued.

“But as with many families, the money left over after day-to-day expenses isn’t actually ‘spare’.”

By Cullen’s maths (or most likely Treasury’s), there was just a $3 billion cash surplus after new capital spending.

“Of that, $1.8 billion was already forecast and is helping improve the Government’s debt position,” he wrote.

“The remaining $1.2 billion was unexpected, but like any windfall, this may not be repeated next year.”

I like Cullen’s arguments because I like Cullen’s politics and rate him as one of New Zealand’s best Finance Ministers.

But you might not. I appreciate that there’s a political aspect to his take.

Some readers will be of the view that taxpayers are always better placed to spend excess money in the economy than the Government.

But ultimately, what we’re really arguing about is the classic issue of how big government should be and how active it should be in the economy.

When it comes to debates about government surpluses and deficits, I think it probably makes most sense to look at the direction of travel.

Are things getting better or worse? And is our debt position sustainable?

Green shoots watch

Labour market data

Unemployment and other labour market data (due at 10.45am this morning) might provide our best shot at some decent green shoots this week.

ASB economists are picking that unemployment will fall to 5.2% (from 5.3%). Other economists see it as coming in unchanged. Either way, the hope is that it has peaked and will trend down in the coming months.

Tune in to nzherald.co.nz for live coverage.

More debt distress but …

Okay, the headlines around the Centrix Credit Indicator report for December looked bad.

The number of people behind on their repayments hit 471,000 in the month of December, up from 459,000 in October.

The hospitality sector experienced the largest rise of annual liquidations in 2025, up 50% compared with the previous year.

This was followed by retail trade (+34%), transport (+27%), property/rental (+17%), construction (+13%) and manufacturing (+12%).

But for all that, there were some green shoots below the surface.

Despite the December spike, consumer arrears were still 0.8% lower year on year.

“The fact that year-on-year consumer arrears have been trending down now for several months is a good sign, and indicates the tide could be starting to turn,” Centrix chief operating officer Monika Lacey said.

Demand for consumer credit was also up 9.4% year on year, driven by heightened borrowing over the holiday period.

“[This] could be a sign that consumers are feeling more confident about the economy and are more comfortable making those higher-cost purchases,” Lacey said.

Could also be a sign of desperation, but hey, let’s stay positive.

Early signs of improvement were also emerging with liquidation trends, Lacey said.

Company liquidations, like unemployment, are a lagging economic indicator – meaning they don’t usually improve until late in a recovery cycle.

So we probably shouldn’t be surprised that company liquidations rose to 2934 in 2025, the highest annual level since 2010.

But liquidation trends were easing in six of the 19 industry sectors, Lacey said.

“Notable improvements are being seen in agriculture, wholesale trade and information media and telecommunications services.”

Consumer confidence

The ANZ-Roy Morgan consumer confidence index was up nearly six points in January to 107.2 (anything over 100 is considered to be a positive outlook).

That was the highest level in four years.

ANZ chief economist Sharon Zollner said mortgaged households were still cautious, although Aucklanders were much more positive, with Wellingtonians the most upbeat at 109 points.

“Consumer confidence has lifted again and is at its highest level in four years. In a long-term historical comparison, it’s still pretty average, but that’s positive compared to where confidence has been in recent years,” Zollner said.

She said the number of households thinking it was a good time to buy a major purchase was finally back in the black after lingering in negative territory for nearly four years.

Building bounce

New Stats NZ data this week showed there were 36,619 new homes consented in New Zealand in the year ended December 2025, up 9% compared with the year ended December 2024.

“Auckland continued to account for a large share of new homes consented nationally,” economic indicators spokeswoman Michelle Feyen said.

“More than half of the annual increase came from the region.”

The five regions with the highest number of new homes consented in the year ended December 2025, compared with the year ended December 2024 were:

Auckland with 15,617 (up 12%)Canterbury with 7316 (up 12%)Waikato with 3044 (up 11%)Otago with 2630 (up 12%)Wellington with 2171 (up 18%).

Don’t look too closely at the monthly data. That showed a seasonally adjusted dip in December consents. But hopefully that’s a blip in what looks like a positive long-term trend.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.