Imagine your house has a plumbing problem. A plumbing firm tendering for the job assures you that hey, no problem they can fix it, so you hire them. Two years down the track they’ve actually made things worse, but are still claiming to have a fixit plan. They keep on blaming the previous tenant… even though previously they’d said they could fix everything, no sweat. Wouldn’t you have every right to be feeling a little bit vexed?
You get the analogy. Here’s the current state of the New Zealand economy, as outlined last week in a open letter signed by a team of leading economists and researchers:
Economic growth has been going backwards now for 9 out of the past 15 months. The economy is now 1.3% smaller than it was at the election. Quarterly GDP is now smaller than at any time since June 2022 – 3 years ago. GDP per capita is now lower than it was in Q1 2021. Business and residential investment is falling. The construction sector has fallen by 9.4% this year. Annual manufacturing sector output has been particularly badly affected and is now smaller than it was in 2015.
True, headline inflation is down, but that trend had started before the end of 2023. Like the 100 Years War, the cost of living crisis seems to be rolling on forever, with no end in sight:
Food prices are up by 5% annually. Electricity prices are up by 11.4%. Support to use public transport, free prescriptions, and early childhood education have all ended, or been cut for the vast majority. The minimum wage has been cut in real terms for two years, leaving the average full-time worker $1,300 worse off in real terms.
Talk about envious. If only we’d hired a different plumber. Why, our neighbours used to have the same Covid-created problems as we do, but they’ve fixed them, and have moved on:
Overseas, countries that we often compare ourselves to are growing and creating employment opportunities. In Australia – a country impacted by tariffs like ours – unemployment is 4.2% and GDP grew 1.8% this year. The UK saw 1.4% GDP growth. Kiwis are leaving in record numbers, with 73,400 New Zealand citizens migrating away last year – one every 7 minutes and 11 seconds. They are taking with them their skills and endowed capital.
Australia and the United Kingdom – it should be pointed out – have done so under centre-left management. Lula’s left wing government in Brazil is also doing pretty well, despite Donald Trump’s best efforts at undermining the Brazilian economy with sky-high tariffs. In Argentina on the other hand, the extreme neo-liberal government of Javier Milei is failing miserably, despite receiving a $20 billion bailout from Trump. And yet, and yet…despite all this evidence to the contrary, our captains of industry still cling to the quaint belief that the centre-right knows best how to manage the economy.
It is, for example, core right wing dogma that tax cuts will unleash the forces of capital, and set free the entrepreneurial tigers of economic growth. Not so. As the economists point out in their letter, $23 billion of tax cuts and depreciation changes have failed to kick start our economy. In desperation, the Luxon/Willis team are now expecting the Reserve Bank to do their job for them. Interest rates cuts have become the Great Last Hope for providing the necessary boost to consumer spending.
There are a few problems with relying on the central bank to do the job of government. If the real brake on consumer spending is job insecurity, then cutting interest rates won’t address that concern. People fearful of losing their jobs will remain reluctant to spend up large. Secondly, not everyone has a mortgage, and so not everyone will enjoy a back-pocket fillip from lower interest rates.
Moreover, as interest rates fall, so does the exchange rate, as speculative money leaves to find more lucrative pickings offshore. As the exchange rate falls, the cost of imported goods – including food and oil – rises. Meaning: there is no free lunch when monetary policy gets loosened. If anything the price of lunch (and everything else) increases. This is called inflation. At some medium term point, the RBNZ will probably have to throw the interest rate lever into reverse to stamp it out. Rinse and repeat.
As the economists conclude, the nation’s plumbing isn’t on track to be fixed any time soon. On the current settings, the government’s underlying revenue less expenses (aka OBEGAL) will be in deficit for the rest of this decade, and more :
Given that OBEGAL is not forecast to be in surplus until 2031, we question whether your government’s decision to give away significant amounts of taxation revenue is right. That foregone revenue could have sustained urgently needed public services while enabling new borrowing to be used to deliver much-needed public investment and, by extension, economic growth. Distributionally, the revenue changes delivered to date also predominantly support higher-income earners and owners of capital assets. Neither is likely to support additional output….
And besides:
The current approach has little within it that is designed to tackle climate change. It has nothing that experts would advise to tackle child poverty. Its impacts on productivity are likely to be weak or negative. It does nothing to reduce tax distortions in investment markets. It does nothing to restore adequacy of support to the rising number of people reliant on the welfare system.
At this rate, New Zealand really can’t afford to keep these plumbers on the job. Too bad the main opposition party is refusing to give any quotes on what they’d do differently, to fix the plumbing.
Maritime murder
I can’t help thinking that if China was regularly blowing up ships in international waters and killing their crews, our politicians and media would be incandescent with rage at such violent, criminal violations of international law.
After all, as soon as the Houthis in Yemen began firing missiles at shipping in the Red Sea (in solidarity with the Palestinians in Gaza) New Zealand readily joined a US-led coalition force aimed at stopping this outrage, given the threat the Houthis were allegedly posing to the free transit of sea-borne trade on which we, as a small island trading nation, depend.
Yet our leaders have been completely silent when it comes to the Trump administration’s repeated attacks on shipping in international waters in the Caribbean. On four separate occasions in the past two months, the US military has blown up ships sailing in international waters off the coast of Venezuela, killing a total of 21 people in the process.
The US claim is that these boats were carrying drugs. Even if this was true – and the Americans have presented no evidence – drug smuggling is not a capital offence. Moreover, the normal methods of drug interdiction continue to intercept and seize large shipments of cartel drugs. On one occasion, the ship being attacked had reportedly turned around and was headed back towards port before it was blown up by repeated air strikes. Colombia’s president Gustavo Petro has claimed that (a) the air strikes have killed some Colombian crew members, and that (b) the attacks are not about curtailing drug shipments, but were about sabotaging the Venezuelan economy in order to win US oil companies direct access to that country’s major oil deposits.
Why should we care? Because New Zealand regularly claims that the sanctity of international maritime law is essential to this country’s trading interests – and for that reason, the protection of sea-borne trade justifies the massive increase in defence spending that’s now in train. Obvious point: if we truly believe in upholding the rules of international maritime and human rights law, this commitment can’t be conditional on which country is violating those laws.
To repeat : If China was doing off the coast of Taiwan (or in the South China Sea) what the Trump administration has been doing for two months now to shipping in the southern Caribbean, the world would now be on the brink of World War Three. Doubtless, New Zealand would be on board, loudly proclaiming our commitment to the cause.
Footnote One: The US is not a signatory to the International Law of the Sea, but this neutral and extremely polite overview of the relevant international laws makes it plain that the Trump case for using vigilante force doesn’t stack up. More succinctly, Human Rights Watch has called the US actions “extrajudicial killings.”
“US officials cannot summarily kill people they accuse of smuggling drugs,” said Sarah Yager, Washington director at HRW. “The problem of narcotics entering the United States is not an armed conflict, and US officials cannot circumvent their human rights obligations by pretending otherwise.”
Footnote Two: When US Vice- President J. D. Vance was challenged that the US actions were a crime under international law, Vance reportedly replied: “I don’t give a shit what you call it.”