Willis tries to change the economic debate
The New Zealand economy needs a shot in the arm and Nicola Willis plans to ‘cut the crap’. But she will have to shift a strong political narrative deployed by her predecessor. By
On Wednesday, Nicola Willis stood up and warned that the Government’s books were going to look worse than expected come May. Revenue would likely be $3 billion lower than expected next year alone, thanks to a contracting economy generating lower tax receipts.
The statement was short and to the point. Between that and the various moves to deregulate, make things easier to build, tax relief and public sector cuts, a very traditional image of a centre-right Government is forming. In fact, while the language may be out of vogue, it looks like a very traditional supply-side response to the growth illness that ails New Zealand.
This has triggered an often negative reaction in Wellington, used to the expansion and Government-as-fixer, almost old-fashioned scientific socialism culture under Ardern’s and Hipkins’ Labour. Labour so dominated and framed the political agenda during its time in charge that the political and professional public service classes are having to adjust to a new Government, playing by different rules.
In contrast to Robertson, Willis’ Budget Policy Statement was much shorter than the past few years and laid out a few major priorities for the Government through the Budget process. Stylistically it was a centre-right scripture to Robertson’s centre-left catechisms.
The finance minister is unapologetic and clearly tiring of criticism that, in effect, the coalition Government is too right wing.
“Yeah well I’m going to cut the crap, I’m going to get to the point. And I think that verbiage in the place of clear thinking and clear decision-making has been a pattern in recent years, she told the The Post in an interview.
“I want to be a finance minister, who is clear, who is principled and sticks to the facts. I went through that exercise of looking at previous Budget Policy Statements, and I found a lot of it was flowery words about things that actually no-one would disagree with.”
New Zealand’s $400b economy is not growing and per person it has shrunk over the past year.
KiwiBank chief economist Jarrod Kerr has called it a double-dip recession.
“Those numbers don’t sound big. But when you look at it on a per capita basis, we’re down 3% over the year which is big.”
“I’ve been describing the situation as being quite awkward, and I think it sums it up quite well. There are some parts that are doing okay. And there are some parts that are that are clearly struggling.”
Kerr says that because of the massive amounts of debt households are carrying – courtesy of low interest rates during the past 15 years inflating asset prices – that people right up the income distribution are feeling the squeeze
“So it’s easy to sort of, say, oh, you know, this is going to hurt the lower income households the most – unfortunately that is generally the case – but this time around because of the rapid rise in interest rates, we've seen higher income households getting hit pretty hard as well.”
Willis likens the situation New Zealand finds itself in to long Covid. On her reckoning the negative after-effect from what she calls the “overreaction” of big spending splurges and Reserve Bank money printing from the 2021 lockdown onwards is the reason New Zealand now has high interest rates and still sticky inflation.
“We’ve got really high interest rates at the same time as inflation hasn’t quite come back into band – and taken together that’s making it a really difficult context for businesses, employers and investors. And you’re seeing that flow through into low growth rates,” Willis says.
Professor Robert MacCulloch who holds the Matthew S. Abel Chair of Macroeconomics at Auckland University, also traces the current economic circumstance directly back to the 2021 lockdown. He thinks the economy is sickly.
“It’s doing extremely poorly. My view is that it’s a direct consequence of the Auckland lockdown that occurred ... for almost four months towards the end of 2021.”
He lays the blame at the feet of what he says was the Ardern government’s tardiness in ordering vaccines, in thrall to a narrow range of public health advice to keep disproportionately harsh measures in place for too long.
“I believe that’s the direct cause of an of an incredibly serious malaise in the country.”
“Into 2022 there was a painfully slow opening up. And during that time tens of billions of dollars were borrowed for the wage subsidy scheme and tens of billions of dollars of money – of cash – was printed by the Reserve Bank,” he says.
“So that was the seeds of this problem of fiscal deficits, of this problem of inflation, its origin goes back to that lockdown and Labour's defeat.”
In response to all this, the still new finance minister delivered the paredback Budget Policy Statement. It focussed narrowly on cutting back spending to drive the books back into surplus, setting the Crown’s finances onto a sustainable longterm footing and reducing government as a share of the economy to 30% or below (it’s currently 34%).
Preliminary Treasury forecasts suggested that real growth per capita will be remain sluggish for some time.
Kiwibank’s Kerr said that in 2022, as the Reserve Bank started to seriously wrestle with inflation through sustained hikes in the official cash rate, the Kiwibank economics team began noticing a sharp change in spending habits that became embedded by last year.
“People were spending less and getting a lot less. They were spending more money on essentials and getting less for their money. And then pulling back spending on non-essentials. And that’s a sign of significant stress to us,” Kerr says.
While Willis readily agrees that current economic outlook is “not great”, she is focussed on what she thinks the real issue.
“I think that what we’ve had in recent times is a growth problem. And to deal with a growth problem, we need to have very pro-growth policies as a Government and we do. And we just need to deliver those and execute them really well.
“There is significant capacity to improve from here.”
And the prescription Willis plans to administer is a pretty classic centreright one. The National Party’s tax relief programme – which, based on pre-election promises, will be a mixture of tax threshold movements and some tax credits which combine to deliver an effective tax cut – is of central and early importance.
“I think cost-of-living relief in the form of tax reduction is critically important,” Willis says, pointing out that tax brackets have not been adjusted since 2010, enabling the Government to collect more taxes over time via inflation.
“New Zealanders are effectively paying much higher tax rates because inflation has pushed them into higher tax brackets, and having gone through that prolonged cost-of-living crisis – with in many cases real incomes declining – people actually do need an injection of confidence,” she says, rejecting calls that any spending cuts should be used only on getting the books into surplus quicker.
MacCulloch, who bridles at suggestions that everyone in the economics profession thinks tax cuts now are a bad idea, agrees.
“Even though the tax cuts are not big, I think they’re signalling that we’re not going to be a tax-and-spend government. That in fact, we’re going to be investorfriendly and if anything will seek to reduce taxes on a sustainable basis,” MacCulloch says.
“Now, to the extent they pull that off, supply side economics would say they will encourage investment, and there'll be more savings, more build up of capital. The more build up of capital there is, the more investment interest rates will be lower.”
The Government’s limited other set of priorities were also flagged in the BPS. More money for health, education, law and order and basically no more money for anything else. And a constant and careful ruler being run over all expenditure, slowly weeding out programmes the Government thinks have not achieved much.
Willis says that no one should have been blindsided by any of this. “Anyone who is surprised, shouldn’t be surprised because we saw that New Zealanders were voting for a fundamental change in the way that the we manage the economy, and that’s what we’re delivering.
She lays out National’s basic approach in a few words, careful to note that it’s also a formulation used by Australian (Labor) Treasurer Jim Chalmers.
“It’s relief, you know, it’s cost of living relief; it’s repair, fixing the bugs; and it’s reform of the economy. And that’s what’s driving our agenda.”
In the longer run, Willis says that infrastructure and the new fast-track consenting to lift up New Zealand’s productive capacity and get things built will be crucial.
This, Kiwibank’s Kerr says, is important because it is at the root of just about every problem in New Zealand.
“Most of the problems that we complain about today, including the shortage of housing and the unaffordability of housing can be put down to the fact that we simply refuse to invest in infrastructure” Kerr says.
He is cautiously optimistic about anything the Government can do to get infrastructure built more quickly and cheaply.
Nevertheless the Coalition has copped a lot of criticism for its fiscal approach.
MacCulloch has been an outspoken critic of the previous Government making what he considers a compounding series of bad decisions.
He says that the exact nature of the fixup job is unclear – whether the Coalition just has to get the books back in order, or whether it must confront a longer-term malaise. He points to an apparent brain drain to Australia as an indicator over New Zealand’s modern history of the latter.
“My view of what’s happened is that we don’t know exactly at the moment how serious it is.”
MacCulloch also hit back at the Government’s critics as being out of touch and premature.
“You know, they’ve only been in the job a few months, and what they’re doing, in many ways is just classic supply side economics.”
“I mean, the supply-siders have a view that to try to improve long-run growth you cap the size of government, which is defined as how much they tax and spend, so you cut taxes, cut spending, and you cut regulation.
“About the only known way in economics to build long-run economic growth, are supply side policies to increase the productivity and the capacity to produce. So you know, they’re trying desperately to trim taxes and not blow out the deficit by cutting spending as well.”
MacCulloch says that this basic orthodoxy has somehow ended up in the weird tumble-drier of Labour politics which has moulded the public debate to its purposes and was now trying to equate Willis to former minister of Finance Ruth Richardson.
“They’ve done a very sophisticated job of it and they know damn well that if you get a narrative going, that all our problems can be blamed on this bogeyman [Roger Douglas].
“And will Willis be as big a devil as Ruth [Richardson], because we all know Ruth wrecked New Zealand, you see what I mean? “This is a sort of a made up mythology that they’ve used to frame the debate. And none of it's true, of course, in fact, my view is they’ve been riding off their [Douglas and Richardson’s] coat tails.”
MacCulloch also rejects the commonly thrown around phrase that the Coalition is an “austerity” government.
“I think that’s wrong. Austerity is about hiking taxes and cutting spending.”
Willis clearly bristles at the quite frequent comparisons with Richardson and notes that she just happens to be most frequently compared with the other female finance minister in New Zealand’s history, rather than the men.
But for the time being, she is focussed on getting the Government back to basics. After a couple of days off in Easter, she says she is looking forward to hitting the books again.
And while she remains an extremely “on message” politician, she is clearly doing some early thinking about broader economic issues than just fiscal repair. We discuss global shipping lanes, China’s slowing growth and other international trends.
But one thing sticks out – she’s talking and thinking about AI.
“When you look back on history, there are bouts of technology which suddenly bump up productivity – and AI could be that next thing if we grasp it well.
“So that’s an area where I think New Zealand needs to be watching the leaders and working out how we make that work for us and our people here in a way that means higher incomes and better productivity and doesn’t leave people behind.”