Economic Crossroads: Government Confronts Distrust Amid Pre-Election Uncertainty

Key Takeaways

• The New Zealand economy is showing signs of recovery, but it’s not a typical recovery due to rising energy prices and productivity issues.
• Inflation and the cost of living are major concerns, with households feeling the pinch from high prices for essentials like electricity, gas, and food.
• The Government faces challenges in balancing fiscal restraint, infrastructure funding, and social services, making it difficult to return to surplus without tax increases.
• Self-entitlement and a lack of individual responsibility are underlying themes that need to be addressed, with a shift towards personal accountability and away from a nanny-state mentality.
• The Government has a choice to either stick with their current strategy or implement major reforms to lift living standards and trust with the public.

Introduction to the Economy
The New Zealand economy is turning, with hours worked, building consents, and tractor sales trending upwards. Tourism has also recovered, and concrete production has turned positive, although it’s still down on the prior year. A trade deal with India is pending, which could provide a further boost to the economy. However, this recovery is not without its challenges, including rising energy prices that are undermining the country’s industrial base and problematic productivity.

The Impact of Inflation
Inflation is a significant concern, with the average household feeling the effects of high prices for essentials like electricity, gas, and food. Despite the official inflation rate being around 3%, the reality is that many households are experiencing much higher price increases, leading to substitution and discretionary spending being shaved to cover other costs. The Government has not done enough to rein in inflation, with the past two Budgets being expansionary and stimulating the economy. The Reserve Bank has taken a more heavy-handed approach, but the Government needs to take action to address inflation, particularly through competition policy.

The Impossible Trinity
The upcoming Budget will be critical for the Government, with the structural or underlying deficit having risen and net debt core Crown debt projected to increase by $63 billion over five years. The Treasury is taking a more robust approach, commenting on fiscal challenges and the need for change. The Finance Minister faces an impossible trinity of showing fiscal restraint, providing sufficient funding for infrastructure, and maintaining social services. To return to surplus, real spending per capita must decline, which will be a challenging task, especially in an election year.

Self-Entitlement and Individual Responsibility
A troubling theme of self-entitlement is emerging, where individuals believe that rules or norms do not apply to them. This is corrosive and can have significant consequences. The recent Police debacle, Statistics NZ privacy issues, and poorly managed conflicts of interest are examples of this. The Government needs to address this issue and promote individual responsibility, rather than a collective nanny-state expectation. This includes taking a more nuanced approach to risks associated with climate change and encouraging businesses to take responsibility for their own risks.

The Crux of the Issue
The Government has a choice to make: stick with their current strategy and hope that the economy will rescue them, or implement major reforms to lift living standards and trust with the public. The mood of populations around the globe in better-performing economies suggests that the former approach may not be successful. The alternative is to be bolder with major reform, putting big policy issues on the table and trusting that grown-up conversations will take place. This includes addressing the underlying themes of self-entitlement and individual responsibility, and promoting a more accountable and responsible approach to governance. Ultimately, trust will be a critical factor in determining the next Government, and the current administration needs to take bold action to restore trust with the public.