National fought the election on the economy and the cost of living, and it fought hard. Labour had taken on too much debt! All its reckless spending was driving up prices! The interest rate hikes to correct this were sending the nation into recession! This economic vandalism was hitting hard-working Kiwi families in their back pocket! The government’s books were worse than they appeared!
Week after week, Christopher Luxon and Nicola Willis alleged that Labour had cooked the numbers: infrastructure commitments weren’t properly funded; major ongoing costs like the school lunches programme had been temporarily accounted for by diverting money from the emergency Covid relief. In its pre-election fiscal update (Prefu), Treasury predicted at least three years of deficits. Willis famously demanded of Grant Robertson, “How big is his [fiscal] hole?”
A National government would fix all that. It would address the cost-of-living crisis in its first Budget by delivering $14.6 billion of tax cuts over four years, Working for Families extensions and tax credits, most of which would trigger on July 1 this year. This would be funded by a combination of savings and new revenue measures. They swore they could still get the country back to surplus and that there definitely wouldn’t be any new taxes to pay for it all. There would be spending cuts but not to front-line services.
Nearly every economic commentator in the country expressed scepticism about the affordability of National’s extravagant promises but Luxon and Willis refused to release their modelling, reassuring the nation that the numbers were “rock solid”.
In the months since the government was formed, we’ve seen an elaborate pantomime routine from the Prime Minister and his Finance Minister, playing the role of sad-faced clowns turning out their pockets and rubbing tears from their eyes.
There’s no money! The economy is deteriorating! There are fiscal holes in the government’s books! All of these problems National warned us about during the campaign have found them dumbstruck in its aftermath.
Curiosity about how this new government could possibly keep its contradictory election promises intensified in the wake of Winston Peters’ recent State of the Nation speech.
In an hour-long, disjointed and sometimes confusing sermon, the Deputy Prime Minister attacked most of his traditional enemies – the media, academics, Māori activists, the Labour government (who can even remember who Labour was in coalition with from 2017 to 2020? It was all so long ago) – before revealing a hole in the government’s books of $5.6b.
He had no idea how this would be filled or how the upcoming tax relief package could be funded – but, he assured his supporters, it certainly wouldn’t come from compromising NZ First’s coalition deal.
Self-inflicted woes
Peters’ speech attracted criticism from Labour after he likened Te Pāti Māori statements to Nazi Germany, prompting a rebuke from the Holocaust Centre. He also generated a feud with the UK anarcho-punk band Chumbawamba over his use of their hit song Tubthumping.
But he has also returned attention to the coalition’s self-inflicted quandary. How can it deliver sizeable tax cuts without significant spending cuts, borrowing or introducing new taxes? Luxon’s stock reply is that we’ll have to wait until the Budget, but he delivers this with a nervous smile, as if he’s also curious to find out what the answer is.
The best thing for the economy would be to cancel or defer the tax cuts: they’re obviously unaffordable, and if they’re part-funded by borrowing, there’s a risk they’ll be inflationary.
Cost of living is still the most important political issue for voters. But breaking a flagship election promise would be deeply unpopular, and the nation has not embraced Luxon or his government with the same warmth as the John Key or Jacinda Ardern regimes.
The coalition has been scrupulous in delivering to landlords, tobacco companies and mining interests, but it has not yet done much for the average household.
Instead, it is cancelling subsidies for prescriptions and public transport. New Zealand voters are very reluctant to vote a government out after a single term, but a breach of trust on that scale might warrant an exception.
Shadow-boxing
In the aftermath of Peters’ speech, Luxon and Willis spent a few chaotic days shadow-boxing with journalists, refusing to rule anything in or out before taking the politically astute but economically dubious course of committing to tax cuts. There will be “tax relief to low- and middle-income New Zealanders”, a phrase the Prime Minister now repeats so frequently he seems more like a glitching live-stream than a biological human. The funding mechanisms are still a total mystery. If he borrows to pay for them he’ll be compared to Liz Truss, the shortest-serving prime minister in British history, who generated a currency crisis with a reckless plan to fund tax cuts with large-scale borrowing, and would risk lowering the value of the dollar. He is trapped in a haunted house of his own making; every time he turns around, $20 blocks of cheese and haemorrhaging approval ratings lunge at him.
National blames Labour for its dilemma and it’s not completely wrong: there were fiscal cliffs, although they were well signposted. Former finance minister Grant Robertson’s decision to keep borrowing and spending during the overheated post-lockdown environment was a mistake and it is costing the country dearly.
Labour did it because it wanted to be popular. It was bad economics but good politics – or so it thought at the time. Now its replacement seems set to make the same mistake. If it does, it will learn the same lesson as its predecessors: that a broken economy is the worst kind of politics there is.
