Backing the economy<\/p>\n
The good news for the Government is that the economy is turning. Hours worked have turned positive. Building consents are starting to trend up. Tractor sales are up on 12 months ago. Retail foot traffic is rising as are average transaction values according to Bellwether. Tourism has recovered lost ground. Concrete production has turned positive though still well down on the prior year.<\/p>\n
A trade deal with India is pending.<\/p>\n
The recovery is gaining momentum, but this is not your normal recovery.<\/p>\n
Problems have not gone away. Rising energy prices are undermining New Zealand\u2019s industrial base. Productivity remains problematic. Real (inflation-adjusted) GDP per capita \u2013 which defines living standards – has fallen 5%. CPI inflation will likely exceed wage inflation over the coming year, meaning people will get grumpier. We have cyclical tailwinds but massive headwinds.<\/p>\n
Potential growth, which is how fast the economy can grow without generating inflation, is estimated by the Reserve Bank to be below 2%. It used to exceed 3%.<\/p>\n
Housing is not likely to be the driver it has been during previous cycles, given weak migration, valuations, rising costs (insurance\/rates), and inevitable changes to tax settings. We are overbuilding at present. Bond data shows rents are falling.<\/p>\n
The International Monetary Fund\u2019s managing director, Kristalina Georgieva, warned in 2024 that the world is in danger of becoming mired on a low-growth, high-debt path leading to \u201cdissatisfied populations\u201d, and this drives nations into the political periphery and extremism. New Zealand is experiencing the same but looks to be wearing one of the cleanest of all the dirty shirts when it comes to extremism. Witness the United Kingdom and the United States.<\/p>\n
According to Georgieva \u201cEverybody I ask here, \u2018How is your economy?\u2019 The answer is \u2018Good\u2019. \u2018How is the mood of your people?\u2019 The answer is, \u2018Not so good\u2019. Families are still hurting from high prices and global growth is anaemic.\u201d<\/p>\n
The United States has been one of the world\u2019s strongest economic performers, has a 4.4% unemployment rate, yet consumer confidence is at recessionary levels.<\/p>\n
We have the same here with business optimism but consumer pessimism.<\/p>\n
Bottom line is that the economy might not be enough to rescue this Government.<\/p>\n
The inflationary thief<\/p>\n
The biggest challenges for this Government are inflation and the cost of living. Health is also a prickle point, ranking in importance above the economy.<\/p>\n
Inflation is not high, but neither is it low. Moreover, to the average household inflation does not feel like it is 3%, when your electricity bill is up 8.8% (17.9% in two years), gas 15.1% (23.5% in two years), dental 10.3% over two years, rail transport 27.6% over two years, dwelling insurance 29.1% over two, contents insurance 30.7% over two, vehicle insurance 18.5% over two and health insurance 18.5% in one year and 31.1% in two. Food inflation has been 4.6%. You notice food inflation every time you shop.<\/p>\n
Cue substitution, where discretionary spending is shaved to cover other costs.<\/p>\n
Despite the rhetoric, the Government has not done a lot to rein-in inflation. The past two Budgets have been expansionary ones, meaning they have been stimulating the economy. It was the Reserve Bank that bludgeoned the economy into disinflation submission.<\/p>\n
Rate-capping is being called for, but local authority rates rises are one segment of double-digit central and local government inflation. When central and local government needs more money, society pays in some shape or form. Either taxes, or other charges.<\/p>\n
If there is a rabbit the Government needs to pull out of the hat, it needs to be directed at inflation – and competition policy is the vehicle. The Government needs a win in this area pre-election.<\/p>\n
According to the OECD, \u201cNew Zealand\u2019s productivity level remains markedly below the OECD frontier. Insufficient competition is an important contributor to this performance.\u201d<\/p>\n
We haven\u2019t seen a market study in a number of years. There has been some movement in the construction area, but banks won the banking inquiry 45-love, energy reform was timid, and supermarkets roll on.<\/p>\n
Tex Edwards of Monopoly Watch is David, taking on multiple Goliaths.<\/p>\n
The impossible trinity<\/p>\n
The upcoming Budget will be critical for this Government. The structural or underlying deficit has risen. Initiatives have been front-loaded and savings are backloaded. Net debt core Crown debt is projected to rise a further $63 billion over five years.<\/p>\n
The Treasury is showing more steel, commenting more sharply on fiscal challenges and the need for change. The Statement on the Long-term Fiscal position made it clear current policy settings are not fiscally sustainable. The leader of the Labour Party continues to rule out raising the retirement age, a clear hat-tip to populism policy over reality and leadership.<\/p>\n
According to the Investment Statement for 2025, \u201cSocial assets are ageing and becoming unfit for purpose … Hospital and healthcare buildings are on average 45 years old but have a typical life of 50 years.\u201d The new normal for net core Crown debt is in excess of 40% of GDP.<\/p>\n
The impossible trinity for the Finance Minister is to show fiscal restraint, provide sufficient funding for infrastructure, and maintain social services. You can hit two out of three – and it\u2019s election year. The maths on returning to surplus is simple once you rule out tax increases; real spending per capita must decline.<\/p>\n
Self-entitlement<\/p>\n
There is another underlying theme I\u2019m finding troubling. It\u2019s called self-entitlement. A belief that rules or norms do not apply to everyone. It\u2019s corrosive if it takes hold. Alas, we appear to be seeing more of it.<\/p>\n
The recent Police debacle, including diverting emails, handling of the departure of Adrian Orr by the Reserve Bank Board, Statistics NZ privacy issues with census data, poorly managed conflicts of interest across many organisations including health and ACC, the earlier departure of a former Cabinet minister emailing documents to donors, a former Minister of Justice convicted of two charges of careless driving and failing to accompany a police officer, etc, are examples.<\/p>\n
The maths on returning to surplus is simple once you rule out tax increases; real spending per capita must decline.<\/p>\n
Cameron Bagrie<\/p>\n
Unfortunately, that theme is not new. Power is challenging the rules-based system we have been used to. The Ministry of Foreign Affairs identified it in their 2023 Strategic Foreign Policy Assessment, Navigating a Shifting World. Russia, China, and the US are all exercising power to challenge rules.<\/p>\n
NZ Super is perceived to be an entitlement. Just because you\u2019ve paid tax does not make it so.<\/p>\n
Individual responsibility has been replaced by a collective nanny-state expectation that the Government will invariably write out a cheque. It\u2019s a \u201cwho can pay\u201d as opposed to \u201cwho should pay\u201d mentality. That needs to be quashed. Do due diligence when it comes to risks associated with climate change. If your business is power-dependent, make sure you have a generator and do not expect the Government to provide one. It\u2019s been good to see a shift away from joint and several liability (which meant councils were often last entity standing) to proportionate liability.<\/p>\n
The crux of the issue<\/p>\n
This Government has a choice.<\/p>\n
Stick to their knitting, taglines and slogans, and back the economy to get their polling back on track. The mood of populations around the globe in better-performing economies make me suspicious how successful this strategy will be.<\/p>\n
The alternative is to be bolder with major reform to lift living standards. Maybe we are seeing signs with the recent announcements of upping KiwiSaver contributions and a major shake-up of local councils. Put some more big policy issues on the table and trust the grown-up conversations that need to take place. Make the Opposition front with quantifiable alternatives.<\/p>\n
Put the political advisers, who everyone now seems to have, on ice. Let instinct prevail over scripts and political taglines. Richard Chambers and Wayne Brown seem to be connecting because they just tell it like it is.<\/p>\n
Among all the populism and political economy rhetoric and flip-flops we will no doubt have to contend with in 2026, it may well be that what determines the next Government comes down to one word: Trust.<\/p>\n
Cameron Bagrie is principal of Bagrie Economics.<\/p>\n","protected":false},"excerpt":{"rendered":"Backing the economy The good news for the Government is that the economy is turning. Hours worked have…\n","protected":false},"author":2,"featured_media":172915,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[3017,104955,138,3013,53314,63212,25726,219,5903,6119,3278,266,111,139,69,1118,801,25809],"class_list":["post-172914","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-ahead","tag-bagrie","tag-business","tag-but","tag-cameron","tag-distrust","tag-dynamic","tag-economy","tag-election","tag-faces","tag-facts","tag-government","tag-new-zealand","tag-newzealand","tag-nz","tag-of","tag-rising","tag-turning"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/172914","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=172914"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/172914\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/172915"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=172914"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=172914"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=172914"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}