For roughly 20 years – the late 1990s to the late 2010s – successive Labour and National governments adopted the same approach to the economy. High migrant numbers delivered economic growth without any of the bother of building good companies or improving worker productivity. By increasing the population without building more houses, we saw a boom in house prices: this kept middle-class property owners happy. And by failing to build the roads, public transport, wastewater, stormwater, schools, hospitals, etc to meet population growth, or even maintaining the existing infrastructure, they could keep taxes and property rates low. Various economic and political commentators did ask Helen Clark and John Key how sustainable any of this was, but the questions were always batted away. The future was someone else’s problem.
Unfortunately, the future is now. And that someone else is Prime Minister-elect Christopher Luxon. He’s unlikely to form a government until the official results are declared on November 3 – and depending on the nature of those negotiations, it could take weeks, even months before he replaces Chris Hipkins, who currently serves as caretaker Prime Minister. When he moves into Premier House and the ninth floor of the Beehive, he has a host of intractable problems – all wound up with each other – with which to grapple.
Infrastructure
Three weeks out from election day, a 13m-deep sinkhole opened up in Parnell, blocking a sewer main and spilling wastewater into the Waitematā Harbour. Auckland’s Watercare has temporarily bypassed the blockage. This morning, I walked to work from one of Wellington’s western suburbs into the city centre: it hasn’t rained in days, but the gutters were flowing with water from the city’s countless leaks. The local water authority is warning of a water crisis in the capital this summer.
New Zealand’s infrastructure deficit stands at an estimated $210 billion. The outgoing government has allocated $92 billion, leaving the pipeline more than $110 billion short. And, since we’re now seeing record immigration, the deficit is likely to grow, as more people place more strain on the roads and pipes. The government will have to spend tens of billions each year to sustain the status quo.
National’s proposed solution to water infrastructure is to shut down Labour’s newly established co-governed mega-entities and establish its own new opt-in, council-controlled mega-entities that can finance their own infrastructure projects. It could be years before this arrangement delivers a new centimetre of pipe. Meanwhile, the water and sewage keep flowing…
Crime, health, education
In addition to clean drinking water, voters also want to feel safe in their homes and workplaces and have access to public healthcare and education. There has been a significant increase in violent and property crime over the past two years. National believes this is attributable to softer sentencing, an over-reliance on home detention and electronic monitoring rather than custodial sentences. And it has promised to send youth offenders to boot camps.
Previous experiments with boot camps have been failures – the policy is basically just a marketing slogan. And judges are reluctant to send younger offenders to prison because there’s considerable evidence to show that it would increase their probability of reoffending. So, National will have to rewrite the sentencing laws, compelling judges to issue tougher sentences. And it will also need to allocate more funding to the corrections system: each prisoner costs about $150,000 a year, and it will need to sentence thousands of offenders to restore the prison population to 2017 levels.
National faces similar problems with health. A combination of Covid, post-pandemic burn-out, global scarcity of healthcare workers and a botched bureaucratic restructure have led to a shortage of doctors and nurses, long wait times for health care and a decline in health metrics such as immunisations. National will restructure Labour’s restructure – but only a little. It will scrap the Māori Health Authority and replace it with a Māori Health Directorate. And it will begin construction on a medical school with a rural focus at the University of Waikato. But it takes six years to train medical students, and it’s hard to imagine the school being finished before 2030.
When Luxon took over as leader of National, he signalled an interest in education. The sector faces multiple crises: the polytechnic merger has been an expensive failure, most of the universities are closing departments and laying off staff; school attendance has deteriorated post-pandemic, and student performance has declined. National has indicated it will address all these problems – but beyond its proposal to ban cell phones in schools and “teach the basics” to primary-school students, the solutions are vague. And whatever they are, they will face strong resistance from the heavily unionised, famously left-wing education sector.
The public sector is often compared to an oil tanker: vast, slow moving, very hard to turn around. Health, education and the judiciary are tankers that like to steer themselves. All three will put up a fierce struggle against attempts to reform them.
Trade
New Zealand always spends more than it earns, but in recent years, the gap between what we sell the rest of the world and what we buy from them has been modest. This is no longer the case. The current account deficit is larger than it has been since the mid-1970s. We’re reliant on sending milk powder, cheese, wool, raw logs and meat to a small number of trading partners. The most important of these is China, a source of rising geo-political tension with our traditional allies.
These liabilities are the reason Hipkins and Luxon were falling over each other to promise trade delegations to India during the leaders’ debates. Australia just negotiated an economic and trade agreement with India; we’re desperate to follow. If we can’t convince someone in the world to buy more of our stuff, the value of our currency will fall. That will lead to higher prices for our major imports: oil, cars, IT gear, pharmaceuticals. Which in turn leads to the new government’s next challenge.
Inflation
Two days after the election, Stats NZ released the consumer price index for the September quarter: it found that the annual inflation rate was 5.6%. This is lower than it’s been since September 2021. Inflation is heading in the right direction, but very slowly. The Reserve Bank is expected to keep interest rates high throughout next year. National has promised to reduce inflation and increase economic growth, but it has limited control over either problem. The Reserve Bank expects to keep interest rates high well into next year, softening growth to keep price increases down. National’s policy to cut taxes and increase Working for Families payments will probably be inflationary – either through the additional $20 billion of foreign investment it hopes to fund it with, or the increase in government debt if that does not eventuate. So, National’s key policy puts it in danger of a high-inflation-low-growth first term in government.
All these problems are interconnected. All of them are hard to solve – which is why previous governments have failed to solve them. And now they’re converging on a new administration that’s made promises about tax and spending cuts it will struggle to keep – while governing with a coalition that may be more dysfunctional than any we’ve seen during the MMP era.
