Inflation is rising, and few countries achieved full price stability post Covid (think core inflation of 2%). With a 1970s-style cost shock hitting the pricing system, central banks are on alert, either raising or set to raise rates.
Brace for tough love
Such have been the messages in the Budget and the Reserve Bank of New Zealand (RBNZ) in the past two weeks. Tighter Budgets are ahead and higher interest rates. The Government and RBNZ are promising to take care of their basics; fiscal sustainability and price stability (and financial stability).
Those messages needed to be delivered. However, their delivery alone does not change the fundamentals of where New Zealand is going. They are supporting actors/actresses.
Yes, we are the two-bit player at the Trump international roulette table, but when it comes to driving growth, let’s be realistic about what budgets and interest rate decisions can and can’t, or should and shouldn’t do.
Deflate the expectations – introducing the zero line
The finger invariably gets pointed at the Government and RBNZ. Spend, or stimulate.
Maybe the best that policymakers can do is to take us to the zero line. Don’t make it impossibly hard or screw things up. Expansionary fiscal policy is fine, but not year after year. Monetary policy waded too far into the money printing pool testing their social licence.
The real heavy lifting in economic performance invariably comes from the private sector and goes beyond cyclical support mechanisms. They have their own money on the table and are not dealing with taxpayer money or OPM (other people’s money). The economic incentives for taking the managing risk are divergent when it’s your money and not the taxpayers.
The RBNZ, in the desire to tame inflation, does not really have a demand problem, they have a knee-capped, supply side capacity of the economy problem driven by low productivity growth. Monetary policy can’t fix that. Government policy has many levers that are being pulled but is not a complete saviour.
At the epicentre of any economy is the ability to take and manage risk; NZ has not been good at it. The finger needs pointed at capital productivity across central and local government but also the private sector.
Economist Cameron Bagrie.
Budget reality
Budgets amuse me. This was my 28th as an economist. Four of them were from the Treasury side.
The expectations build. Who gets what? We see a raft of pre-Budget announcements. There are trade-offs between fiscal credibility, infrastructure, and core government services, and occasionally calls for tax relief.
Budgets have followed the pattern of Easter and Christmas; becoming more of a sales and marketing story rather than a substance one.
The real stuff of government is what happens in the rest of the year. This government has been pushing through a huge legislative programme. This is microeconomics in operation not macro-economics and fiscal or monetary policy.
If you want a hint of the role microeconomics plays, just look at the performance of firms operating in the same sector but offering different performance; dairy companies, retailers, ports, a major construction firm listed on the NZX. That is microeconomics. There are winners and those with poor microeconomics who sometimes invariably blame the Government or economy.
Budgets have followed the pattern of Easter and Christmas; becoming more of a sales and marketing story rather than a substance one.
Cameron Bagrie
Yes, government spending (projected this year to be $155 billion is a huge number, against a $455b economy), but remember one number is the spend, the other is the value add.
After delivering two somewhat political appeasing Budgets (expansionary), which has resulted in zero improvement in the fiscal position, the 2026 Budget finally delivered what should have been done in 2024. Fiscal restraint.
The problem though is that it’s still heavily contingent on promise-me-nomics. The spinach and broccoli diet starts in the 2027/28 year. Expenses as a share of GDP are projected to decline by 2.3 percentage points from 2027/28 to 2029/2030.
All about the communication
Kudos to the Government and RBNZ for their communication in recent months.
The Finance Minister in particular, has stepped up; the 2026 Budget should have been delivered in 2024 but better late than never – and calling out one of their coalition partners on their stance on NZ Super is called leadership.
New Zealanders, in my view, have been looking for the big calls. Auckland Mayor Wayne Brown’s popularity in part comes down to just telling it like it is. The new Police Commissioner Richard Chambers is the same.
We now have greater clarity over the RBNZ. The vote was 3 for hiking the OCR and 3 for no change, with the Governor deciding no change. More transparency and clarity. Bank capital and a raft of other changes are going on.
These are not gamechangers. They are tweaks.
However, they take us progressively towards that zero line.
The Great Moderation
When I look at the current stance of monetary policy (generally stimulatory around the world), and fiscal policy (the same, running deficits), against a backdrop of inflation and rising sovereign debt levels, the general direction of travel is clear. Higher interest rates and inevitable fiscal consolidation. Less sugar, more broccoli.
This is part of a tectonic shift though.
We have become accustomed to monetary and fiscal policy having the economy’s back through the Great Moderation (broadly 1993-2020). Low inflation, lower interest rates and volatility, and at face value partly due to better management of economies by policymakers.
Bazooka economics reined. Central bank and fiscal policy were more active.
The severity of downturns was diluted – for some good reasons such as employment scaring – via fiscal and monetary largesse. Assisted by low inflation and little concerns over debt levels.
We now have inflation and rising concerns over debt, hence pressure on monetary and fiscal policy to pivot. The latter will not prove easy given demographic and Defence spending pressures.
The bottom line
I read a lot of research detailing why global (and New Zealand) productivity growth has waned, which is the engine room of wealth creation for any economy.
Little mention is made of the need for capital destruction to drive capital reallocation and efficiency. Downturns have their pluses. The problem is we have built a system that specifically tried for decades to minimise downturns and tough times.
Broccoli, baby spinach and green beans salad in ceramic bowl with olive oil on a white wooden background. Maybe more broccoli and spinach and less sugar is what is needed to help drive productivity growth. Photo / 123rf
Maybe more broccoli and spinach and less sugar is what is needed to help drive productivity growth.
We just received the menu in the past few weeks via the Budget and RBNZ. In 12 months’ time, the broccoli will be on the table with monetary and fiscal policy likely in the early stages of restrictive stances.
Will we eat it or will the politics of it all become too hard and regimes will change? We have shifted inflation goalposts before and been promised fiscal consolidation for many years.