‘Let’s do this’ in a holding pattern

Jacinda Ardern sings a sweet tune about improving wellbeing and winning back business confidence. But her self-administered debt shackles are blocking real action on both fronts, writes Bernard Hickey.

Jacinda Ardern’s first big economic speech of the year warned of global economic headwinds, but it lacked action in response, or a major plan to improve wellbeing. Instead, it exposed how her Government is stuck in a fiscal holding pattern before the 2020 election, when it hopes it can throw off its debt target and capital gains tax shackles.

The breakfast speech to a polite audience of Auckland’s business elite at the Hilton Hotel on the waterfront showed the Prime Minister at the top of her game. She is a smooth operator with a knack for a self-deprecating quip or an aside that can win over even the most sceptical audience.

Ardern again talked a good ‘Wellbeing Budget' game and was well practised after wowing the rest of the world’s B team of leaders at the Davos summit in Switzerland late last month.

Her speech to BusinessNZ was full of ambition and she was not afraid to paint New Zealand as a world leader.

“I saw just yesterday the issue of wellbeing economics being discussed in a Swedish newspaper. I can’t tell you what it said but I am sure it was eminently sensible,” Ardern said, gaining a laugh.

“Our starting point for the Wellbeing Budget is that while economic growth is important, it alone does not guarantee improvements to New Zealanders’ living standards,” she said, going on to make a strong case to address our obvious wellbeing problems.

“An everyday New Zealander - hearing of the “rock star economy” while their housing costs are skyrocketing, or they can’t afford to send their kids to school with a proper lunch or their mental health is strained - tends to have their faith in the system and in institutions undermined.”

She went on to detail the plans and the priorities for the first Wellbeing Budget in May, and suggested it would help New Zealand cope with economic headwinds from overseas.

“It will ensure that those closest to the margins are protected and that no one is left behind,” she said.


How can that be true when Kiwibuild is behind schedule and there are massive infrastructure deficits in housing, health, education and transport, which can only be addressed with tens of billions of extra public investment. New Zealand’s population is growing five times faster than the OECD average and Ardern acknowledged in her speech that governments had encouraged population growth without investing in infrastructure to deal with it.

What the shackles look like

I asked Ardern afterwards if the Government was planning to respond to the slowing economy and higher unemployment by loosening fiscal policy with extra operational or investment spending.

She stuck to the usual line that the Government would keep operating within its Budget Responsibility Rules, which are to get net debt down to 20 percent of GDP and keep the budget in surplus across the economic cycle.

Ardern and right-hand-man and now-Finance Minister Grant Robertson agreed with Green Leader James Shaw shortly after her election as Labour leader to essentially sign up to the same fiscal settings as National had up until earlier that year. The only exception to this rule is the need to spend up large to cope with either natural or man-made financial disasters such as the Global Financial Crisis and the Christchurch earthquakes. John Key and Bill English used this exception without any political cost.

That decision to adopt National’s pre-2017 debt target has hamstrung the Labour-New Zealand First coalition Government ever since, particularly once it got into power against everyone’s expectations and realized the extent of the infrastructure deficit and pent-up need to lift operational spending on health, education and transport to catch up on years of under-spending.

Ardern and Robertson have pledged not to cast off their shackles during the current term, which of course ensures they kept their promise to voters in 2017. But it does mean they cannot address the obvious deficits immediately or give the wider business community a clear road-map for infrastructure spending and economic support in the event of a sharper global slowdown.

Sadly, no crisis to unlock the shackles

The irony is they need a new global financial crisis to give them the excuse to do what they need to do to make a real improvement in wellbeing. That is not in prospect at the moment.

Instead, they are in a holding pattern as they nurse their budgets through to the 2020 election and ready their arguments to change the Budget Responsibility Rules for their second term. It’s clear that the Government is working behind the scenes to make that case and it will be one of the big debates next year. There is some wiggle room in the existing settings for a bit of extra spending in this May’s Budget and maybe the election-year Budget, but not the $50 billion necessary over the next 10 years to really improve housing and transport affordability, and deliver health and education improvements.

Ardern pointed to last year’s Families package as the sort of stimulus that is helping the economy respond to the downturn. It has softened the blow, but in reality the Government’s Budget track over the next five years is actually forecast to be a fiscal contraction, not a loosening. The chart below from Treasury in its December Fiscal and Economic Update shows an expansion in 2018/19 followed by four years of contraction. The net figure for the five years is a net contraction of 0.2 percent of GDP. That’s the most the Government can do and still meet its 20 percent debt target.

Borrowing costs near 2 percent

So should the Government use its strong balance sheet to fix New Zealand’s massive infrastructure deficits? Yes should be the answer, but the timing should be now, not in two years time.

Savers both here and overseas are begging for it, and the referees in global financial markets would have no problems. Standard and Poor’s has just upgraded the outlook for New Zealand’s sovereign credit rating. New Zealand’s 10 year government bond yield fell to a record low 2.08 percent on Friday.

This week Treasury sold $100m of inflation indexed bonds maturing in 2040 at a cost of 1.49 percent. The offer was more than twice subscribed. Last week Treasury sold $200m of six-year bonds at 1.91 percent and it was subscribed more than four times over.

Savers still nervous after the GFC are hungry for the safest types of bonds being issued by countries without much debt. Banks and pension funds overseas are also flush with all the cash created by the Federal Reserve, the Bank of Japan, the Bank of England and the European Central Bank to buy their own government bonds.

Use the freshly printed money

They have pumped US$20 trillion of cash into the hands of pension funds and banks. They are now roaming the globe looking for safe government bonds. No wonder they are keen to buy New Zealand government bonds, as shown by recent auctions and the ongoing fall in our bond yields. Demand for bond pushes up their prices, which are expressed as a fall in yields or interest rates.

Ardern's Government could be using a small fraction of that printed money to rebuild our infrastructure and massively improving wellbeing. This Government is choosing not to because of a political decision it made just before an election it expected to lose.

Unwilling to break its promise, it is now in a holding pattern and hopes voters keep the faith for long enough to give it a chance to throw off the shackles.

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