How Luxon can rebuild the economy... and why he’ll struggle - Liam Dann

Christopher Luxon might get a clearer tilt at economic transformation in 2026 if inflation and interest rates fall and house prices and GDP growth rise. Hopefully, though, he can do better than that, says Liam Dann. Photo / Mark Mitchell

OPINION

It is an odd time for economic debate.

The Government is talking the economy down, not up. That’s taking a lot of the heat out of things. With former Finance Minister Grant Robertson stepping down and Labour facing a strategic rethink, there isn’t much push-back from the Opposition.

And frankly, it’s hard to argue the economy is in good shape. New Zealand is struggling with both the short-term cycle and the longer-term structural issues.

All eyes are on the Reserve Bank next week. Will it hold or hike the Official Cash Rate? One thing we can be sure of is that it won’t be cutting.

So conditions will remain tough for months ahead.

Christopher Luxon and Nicola Willis might be laying it on a bit thick with their catastrophising rhetoric.

If we step back and look at what was forecast for the economy this time last year, it is a stretch to call current conditions a surprise.

Recession has arrived on schedule but the economy is not collapsing. This is all going to script.

Unemployment is likely to tick up above 5 per cent. We’ll see more business failures and mortgagee sales but inflation will fade and rates will fall.

National’s pessimistic take on the economy is a predictable but understandable political strategy.

History is written by the victors and one can hardly begrudge a new regime for framing the narrative.

The political upside in the economic doom and gloom is that Luxon and Willis will be able to point to some immediate wins when the cycle inevitably turns.

But they can achieve that by doing nothing other than ensuring the country ticks over in an orderly fashion.

That would be terrible for the country and, by Luxon’s self-imposed benchmarks, is not good enough.

What we need is a Government that is brave enough to tackle the big structural issues in the economy.

Unfortunately, one of these structural issues is an enormous infrastructure deficit. And the other is that we are running fiscal deficits - spending more than we earn as a nation.

The country needs massive investment in water infrastructure, roads, hospitals, schools ... the list goes on.

It also needs to balance the books.

That puts the new Government in a very tight position if it is serious about making significant long-term change.

Essentially there are just four ways for a government to balance the books and invest more.

It can take in more tax, it can cut spending radically in other areas, it can borrow more or it can privatise (either by selling assets or by inviting in private investors to build new stuff).

National has promised its voters tax cuts, which effectively put it on the fiscal back foot right from the start.

The old argument that lower taxes will boost GDP growth, ultimately delivering more tax revenue, is debatable at best. Famously described as “voodoo economics” by George Bush Senior, it has fallen out of favour in modern politics.

But even if it works, it represents a long, slow path to higher revenue. It doesn’t solve the urgent investment challenges.

The same might be said of efforts to drive tax revenue by boosting productivity (the preferred talking point of all finance ministers).

National’s policy approach so far appears to a be lighter regulatory touch. Helpful for business no doubt, but hardly transformative.

The Government has talked big about cutting wasteful spending. There is some low-hanging fruit there. But it has thus far stopped short of the radical cuts that might described as austerity measures.

One reason for that is they are unpopular with voters, the other is that they’d likely tank an already fragile economy.

National doesn’t want to borrow more either. That’s not because it couldn’t. New Zealand’s core Crown debt remains low relative to our international peers.

The ratings agencies continue to be more generous in their assessment of our economy than the Government currently is.

New Zealand’s big debt problem is almost entirely a private one. If we saved more and invested more in productive assets - as opposed to borrowing from Aussie banks to bid up our own house prices - the Government could borrow billions more without any issues.

But that won’t change.

National’s big hope is to develop innovative new ways to fund infrastructure investment, bringing in private capital. That means private-public partnerships, it means tolls and user-pays charges. New Zealand is “open for business”, as Luxon and Willis keep saying.

This makes a lot of sense to me. Let’s get things built and pay as we go.

But there’s a problem. It also most likely means foreign money. There’s been talk of iwi partnership and redeploying KiwiSaver funds but ultimately, if we want to supercharge our economy we need to get over our fear of foreign investment.

National finds itself tied to a coalition partner in NZ First that is founded on the rejection of foreign investment.

Faced with these challenges hampering the obvious economic policy paths, perhaps the best we can hope is that Luxon can do a little bit of everything - with greater efficiency and efficacy than the last lot.

But there’s the risk that a little bit of everything sometimes equals a whole lot of nothing.

His best bet might be to push as hard as he can in all the right directions... and wait.

Ironically (because things aren’t really as bad as he says), the economic cycle may be on his side.

As long as inflation and interest rates go down, house prices and GDP growth go up, Luxon be well placed to get a clearer run at the economic transformation in 2026.

Hopefully, though, he can do better than that.