Willis: Inflation top priority
“... but the truth is what I’m hearing from businesses, what I’m hearing from employers, or I’m hearing from people on the ground, is that the long, slow recession is really biting now.”
Finance Minister Nicola Willis
Finance Minister Nicola Willis has warned that slaying inflation is still the number one priority for the Government in the fight to arrest New Zealand’s falling living standards.
When Willis hands down her first Budget on May 30, it will be against an economic backdrop of two now embedded economic numbers which she keeps a particularly close eye on.
“I think the big story of the New Zealand economy in the past couple of years has been inflation. And that means that I track CPI like a hawk,” Willis told The Post from her Beehive office yesterday.
Willis’ meta-theory of New Zealand’s economy is that inflation has found it way into every crack.
“We obviously wish for all normal things: we wish for growth. We wish for low unemployment, we wish for high per capita growth, but I’m conscious that none of those things will be achievable, sustainable, unless we get inflation back to target,” she said.
“Only then will the other shoes drop in the form of interest rates coming down, and only really when interest rates come down and are sustained at lower levels, will we get the investment coming back in the economy, confidence coming back to the economy, growth and job creation.”
And with nature of lags in economic data, out in the real economy, New Zealanders are either feeling it now, or are worried about the next 12 months. The latest ANZ Roy Morgan Consumer Confidence Survey, released last week, showed a sharp dip in consumers’ expectations over the coming 12 months.
Willis said she preferred to be optimistic, “but the truth is what I’m hearing from businesses, what I’m hearing from employers, or I’m hearing from people on the ground, is that the long, slow recession is really biting now”.
With much-publicised job cuts in Wellington, the latest unemployment data – to be released on Wednesday – will give a sense of just how much the labour market has cooled nationally.
The other big indicator Willis says she tracks is real per-capita gross domestic product, which she said had been masked somewhat by high levels of immigration and population growth.
“I think the other number that I look at retrospectively – which really concerns that sense of recession and malaise that New Zealanders have been feeling for some time – is per capita GDP.
“What our recent history tells us is that actually on a per person basis, we’re producing less, we’re earning less, we’re doing worse.
“On a per-person basis, the New Zealand economy going backwards.”
This, Willis says, is the growth number the Government really has to turn around.
A related but less remarked-on indicator for the reduction in New Zealanders’ global purchasing power is real gross national disposable income (RGNDI). It contracted by 2.8% per capita in the year to December.
“New Zealand’s ability to buy goods and services from its income, RGNDI, fell 1.4% in the December 2023 quarter. Economic activity, the terms of trade, net transfer flows, and net investment income on our international investments all decreased,” the Statistics New Zealand release accompanying the December GDP figures stated, painting a gloomy picture.
In plain English, the world gave New Zealand a pay cut.
It is into this context that the Budget will be handed down in a month’s time, and while Willis keeps a keen eye on historical parallels, she doesn’t want to name which. But she gives the clearest indication yet that this will not be a “rip shit and bust” Budget.
“My lesson from history is I could come at that challenge all guns blazing, and do really dramatic things to reduce government spending and get the books back into balance in a really speedy fashion.
“History tells me that that would create a lot of carnage and harm on the way, and it might just be that that would not be a government that would get more than three years to do the job.”
While ratings agencies have been mostly comfortable with New Zealand’s fiscal management over the past six years, Standard and Poor’s did issue a caution over Government debt and the current account deficit last year.
“We need to demonstrate on this budget path back to balance and our government finances, because it’s become really clear that actually as a country, our government has been living beyond its means. It’s been taking up too much resources being too expensive in proportion to how wealthy we really are as a country,” Willis said.
The global outlook is almost looking more problematic. China’s post-Covid economic growth has resumed around 5%, two percentage points lower than pre-Covid. About a quarter of New Zealand’s agricultural exports go to China, compared with 3% in Australia. But China accounts for two-thirds of Australia’s resources exports.
A slowing China has the potential to hit New Zealand directly via agriculture and then indirectly, through Australia
Willis ties the Government overspend with the Government’s tax cut agenda, arguing that inflation just means PAYE workers have paid an ever-growing share of the taxes in order to finance consumption today.
“The size of government grew considerably as proportionately of the economy – up from about 27% to more like 33% – very short period of time. And that was basically paid for through debt and taxpayers paying more tax, and that isn’t sustainable.”
Willis has been quick to insist that there is nothing wrong with governments taking on debt to deliver long-term economic infrastructure.
“There will be projects like that, that our Government will borrow for. Whether it’s hospitals, whether it’s transport infrastructure, whether it’s climate adaptation, there will be things that make sense for the long run.”
However, she confirmed that she does have concerns about the structural deficit and intergenerational equity.
“Where it gets problematic is where the Government is borrowing for the groceries, where it’s borrowing for the day-today, which ... with a structural deficit on a daily basis, is spending more than it’s earning.
“Then you, I think, have a moral issue, because then what you are asking is future generations to pay down the debt of the more expensive government that a previous generation was able to enjoy but couldn’t afford.”