Jun 5, 2024 Politics
It’s difficult for those on the centre-right to believe there could ever be a flakier prime minister than Jacinda Ardern or a more fiscally irresponsible finance minister than Grant Robertson, yet here we are. The one good thing about the new regime’s first months is that it has confirmed one of the eternal rules of politics I cite on the speaking circuit: that under MMP, each New Zealand government is worse than the one before.
To succeed, prime ministers need the widest possible general knowledge, obsessive curiosity and inquisitiveness, practical intelligence and wisdom, love for and deep connection with New Zealand and its peoples, sufficient communication skills and some degree of charisma. John Key had them all. Ardern had some. Luxon demonstrates none. Already, he is the most unpopular prime minister this century, having lost nearly a third of his support since the election. Unlike Key, Bill English, Ardern and even Chris Hipkins, pollsters report more people have always disliked than liked him.
Two floors down in the Beehive, finance ministers need to know basic macroeconomics or be able to learn it. They then need the economic and political judgement to rationally prioritise demands on the public purse, from tax cuts and debt repayment to national defence and social services. They must then rigorously pursue those priorities in the face of unreasonable demands from other ministers, not least prime ministers.
It’s clear already that Nicola Willis came to the job lacking any intuitive grasp of the relationships between national income, taxes, spending, borrowing, inflation, interest rates, the value of the dollar, export and import prices, company profits and family incomes, and house prices. But the new finance minister has also shown no ability to rationally prioritise.
Willis is right that Robertson retired in disgrace, having left her with a permanent structural deficit. Without radical change, his legacy means New Zealand’s debt will now keep growing through every business cycle until the bond market decides we can borrow no more. Willis would also be right if she pointed out that Robertson made no provision for the further fiscal disasters that Treasury forecasts from 2030. That’s when health and superannuation costs will really start to explode, thanks to an ageing population and more advanced pharmaceuticals and other medical technologies. To put it bluntly, when the young and middle-aged get sick, many more will be able to be saved, but at enormous cost. Sadly for the Treasury, they’ll then make it to 65, receive their superannuation and SuperGold card, and push on for decades, again being kept alive by ever-more expensive medical interventions.
Yet Robertson being a fiscal vandal is no excuse for Willis to be worse, any more than Ardern spouting kindness babble warrants Luxon using even more meaningless twaddle from the self-help books he claims to devour. Luxon and Willis’s now $18 billion package of tax cuts and other handouts for landlords and the middle class was shown during the election campaign not to add up and to be inflationary, suggesting its authors were, at best, innumerate. Parts of it were cut and pasted from briefing documents prepared by lobbyists for the casino and property development industries. Embarrassed National Party candidates were told by election strategists that, sure, nothing added up, but they’d just have to brazen it out. No problem.
It’s one thing to negligently promise a disastrously unthought-through policy from opposition but quite another to then proceed with it in government. Those advising Luxon and Willis that recklessly stimulating the economy with inflationary tax cuts is exactly the last thing to do when inflation is high and the books are deep in the red aren’t just limited to the usual anti-National forces. They include the Treasury, the Inland Revenue Department, the Reserve Bank, the New Zealand Initiative (formerly the Business Roundtable), former Act and National Party leaders, the International Monetary Fund and every mainstream economist and business leader.
Their advice is not just based on the tax policy not adding up, but on the latest economic data saying that the economy is in recession and growth will be lower than expected. It means the economy will produce around $40 billion less in goods and services over the next four financial years and generate almost $14 billion less in tax, even before accounting for Luxon and Willis’s $18 billion in tax cuts.
The problem can legitimately be blamed on Robertson, providing both an irrefutable economic argument to postpone the tax cuts and the political cover to do so. Yet, for reasons known only unto them, Luxon and Willis have decided to push on regardless.
Their claims that the tax cuts are “fully funded” are at best meaningless and at worst untrue. There’s no such thing as a fully funded tax cut. Governments, like households, have money that comes in, money that goes out, and a surplus or deficit between them. If you cancel Sky TV to save money, it doesn’t mean your boss cutting your salary by the same amount doesn’t hurt you.
In any case, Willis admitted in her Budget Policy Statement on 27 March that the spending cuts she promised would fund the tax cuts will have only been ‘identified’ on 1 July, while the tax cuts themselves will be ‘delivered’ from that date.
That concedes, contrary to the approach of any mainstream centre-right finance minister or the advice of any orthodox market economist, that Willis is happy for her tax cuts to start fuelling inflation and increasing debt from July even though her spending cuts to dampen inflation and lower debt won’t all have happened and may never happen.
Luxon, wholly confident in his own managerial powers, seems to have thought that merely by his becoming prime minister the economy would be boosted and the numbers add up. Such magical thinking seems to have infected Willis. But the economy has worsened, maths is maths, and so Luxon and Willis’s numbers will never add up. The pair may somehow stumble through the presentation of a Budget on 30 May without a docile daily media pulling them up. But they won’t be able to hide from the Treasury’s monthly fiscal updates later in the year or from its formal Half Year Economic and Fiscal Update in December.
What’s the chance one of them will be gone by then? Worse things could befall the nation, and have.
