Shoe is now on the other foot for National

Christopher Luxon is about to find out everything is his fault

At some point in the next 12 months, Labour’s finance spokesperson, probably Grant Robertson, will gleefully type out a press release detailing how the new finance minister is wrecking the economy.

It might be that the inflation rate, currently set to fall into the 1-3 per cent target band next year, has ticked up again.

It could be that the unemployment rate, currently set to rise to above 5 per cent by 2025, rises even faster, or it could be that the Reserve Bank continues to hike interest rates — some banks are still picking a hike this year or next.

How much of this will be Nicola Willis’ fault? Well, that’s difficult to say, which is why Labour, just to be on the safe side, will blame National for most of it.

They’ll be returning a favour. While the National opposition occasionally noted that the inflation crisis of the past two years had an offshore component, the party was always more keen to talk about the domestic side of things — the stuff Labour could be blamed for — regardless of whether domestic or international factors were the key driver of the problem.

For all the outgoing Government’s flaws (and there were many flaws), the big story of the past 12 months hasn’t been Labour versus National as much as it has been incumbent versus opposition.

The problem for Christopher Luxon is that in a few weeks’ time, the incumbent will be him.

Just how long the public allows Luxon to present himself as the proverbial new broom is down to how well he’s able to blame Labour for the challenges that he has inherited: a large fiscal deficit, large debt servicing costs, and high inflation.

The inflation challenge is the most severe and immediate challenge.

Luxon was elected on a mandate to bring down inflation, which currently sits at 5.6 per cent for the year to September, down from over 7 per cent last year, allowing Labour to claim it left National with inflation heading in the right direction.

But this could all go south for reasons well beyond Luxon’s control. War in the Middle East, on no-one’s mind when the first ballots were cast in late September, could severely curtail Luxon’s ability to deliver on one of his key promises: bringing down the cost of living.

Already the oil markets are pricing in a year of higher prices.

At the beginning of the campaign, Treasury’s Prefu forecast a fairly benign economic picture for the next year, showing inflation falling and the economy growing.

But those forecasts were based on an oil price (WTI) of US$73.5 ($126) barrel rising to US$75 ($128) a barrel by 2027 — figures based on average prices for the June quarter of this year.

A spike in oil prices since Hamas’ attacks has dated these numbers horribly. WTI spiked as high as US$93.5 ($159) a barrel, and has settled at US$83 ($142) a barrel, with markets pricing in further instability.

The futures market shows traders are not expecting WTI to fall below US$80 for about a year.

This means one of the key inputs to those Treasury forecasts — one of the inputs that would go towards reducing the inflation rate — is now running in the other direction, putting upwards pressure on the inflation rate.

New Zealand burns through about 150,000 barrels of oil a day. The US$10 difference between the forecast and what has eventuated works out at about just under $1 billion a year for all the oil we directly consume, to use a very crude metric (advanced financial instruments limit some exposure to fluctuating oil prices).

The risk is that prices could go even higher should Israel launch a

There’s very little upside. No silver lining to the very dark clouds that loom over the Beehive.

ground invasion of Gaza, and Hezbollah open a second front in the war. There’s also risk coming from China, where the economy is showing some post-Covid strength. That’s good news for our exporters, but Chinese growth will increase demand for oil and putting pressure on prices.

This isn’t a great backdrop for Luxon and National to implement its key climate policy, allowing the ETS price to take the lead on New Zealand’s climate strategy, a move that would push the cost of filling up even higher.

Also in the column of inflationary challenges Luxon has some limited control over are rates and insurance.

Higher rates bills were one of the significant contributors to inflation in the September quarter.

The recent future of local government report was told that households are reaching “peak rates” with rates rising, in many rohe, faster than people’s incomes. But the hikes will not be stopping. In fact, National’s Three Waters policy is likely to put further pressure on rates, forcing councils to hike them faster or implement new water charges.

The party will establish a new entity to force councils to spend more money on Three Waters investment, while scrapping the Government’s 10 water entities which would have made it cheaper for councils (or entities) to pay for that investment.

Insurance is another problem for households, with insurers passing the costs they face because of climate change back to the consumer in the form of rising premiums. One of the things National and Labour see eyeto-eye on is the importance of planned retreat from uninsurable, unliveable areas, but that’s going to be a cost too. Households will collectively need to pay to shift communities from the coastline.

This isn’t a problem that can be kicked to the next Government. It’s actually something the outgoing Government envisaged tackling this term alongside the RMA reforms, and its something National and its coalition partners will need to address next term (there’s currently a select committee inquiry on the issue).

There’s very little upside. No silver lining to the very dark clouds that loom over the Beehive.

As former prime minister Bill English said in his appearance on the Shared Lunch podcast, for all the nightmares he faced in the first term of the Key Government, like the GFC and the Christchurch Earthquakes, they had a significant tailwind thanks to an economic miracle in China, which New Zealand, thanks to its fresh FTA, was uniquely placed to capitalise on.

Luxon has no such luck. China posted double-digit GDP growth for each year of National’s first term. It’s about half that now. Trade relations with China are good, but could be challenged as the geopolitical temperature rises.

For Labour and its partners, these are no longer the gripes of government, but opportunities for the Opposition.

The Labour Opposition will be assisted by the last set of forecasts prepared by Treasury for this Government, the relic of the road not taken. Amid the fairly ugly fiscal picture of high government debt and years of deficits, is a fairly positive economic story of growth, low (but rising) unemployment and falling inflation.

National will not let itself be a hostage to fortune. Like previous governments, it will blame its misfortunes on whatever it inherited.

The past two governments have prolonged their honeymoon period by blaming any problems on their predecessors. These slurs took the form of the “decade of deficits” bequeathed by Helen Clark to John Key or the “nine years of neglect” endured under Key and English presided over before Jacinda Ardern stormed the Beehive.

The trick for Labour will be encouraging voters to remind voters it is now the Opposition, and developing a platform of policies to fix whatever problems it can find with the incumbent.