What if?

Economist Dennis Wesselbaum says whoever wins the election will have to lead the country out of stormy economic waters with a much-needed ambitious growth policy.

In Business9 Minutes

Politicians are tasked with a serious job, being responsible for policy decisions that affect each one of us. In the words of Sir Humphrey Appleby: “We can’t worry about entertaining people. We are not scriptwriters for a comedian. Well not a professional one, anyway.”

In an earlier piece in Country-Wide I predicted that economic topics would decide this year’s election and tried to make a convincing argument based on insights from political science.

What would happen if Labour or National win the upcoming election with an absolute majority and abstain from coalitions. Even though ACT’s economic policy looks balanced and credible, and the Greens’ economic policy is so terrible it isn’t worth discussing.

While all parties are starting to reveal more about their election programmes, we still know very little about key economic and other policies. Therefore, please take the following predictions with a grain (or better, a pound) of salt.

The general outlook for the world economy and New Zealand’s economy is bleak. The IMF predicts world economic growth in 2023 will be 2.8% and 3.0% in 2024, but NZ’s economy will grow by only 1.1% and 0.8% in 2023, 2024 respectively. In contrast, China and Australia, our largest trading partners, are predicted to grow by >4% and about 1.7% respectively.

The Reserve Bank predicts a negative output gap far beyond 2025, (actual output is below potential output, meaning we are not producing as much as we should based on underlying factors) with the unemployment rate peaking at about 6% and inflation returning to 2% by about 2025. In short, we are facing low growth and high inflation for another year or two, while other countries are predicted to do much better.

If it’s Labour

If Labour wins in October, expect to see more policies, such as the already implemented 39% top income tax rate, “ute” tax, Fair Pay Agreements (FPA), carbon forestry, policies designed to cut greenhouse gas emissions outside the ETS, and a revised NCEA History curriculum. There will also be the debated unemployment insurance scheme and Three Waters (sorry, I mean “Affordable Water Reform”). I could debate the usefulness of each of these and argue why all of these policies at least will fall short of expectations, if they are not outrightly dubious (e.g. unemployment insurance scheme). From public comments made by its officials, I also argue that the next Labour government would introduce a capital gains tax, maybe even a wealth tax.

Don’t forget that the unemployment insurance scheme discussed was going to be financed by an increase in income taxes. Maybe we need this additional tax revenue to fund the ever-increasing number of government employees (recall that from 2020 to 2021, the government added 3948 full-time equivalent workers) and pay the bill for consultants (e.g. for 2020/2021 Ministry of Education = $176m, Ministry of Social Development = $94.8m). Government spending by Labour, at least since 2021, has been the key factor driving inflation. Even in the latest “bread and butter” Budget, we see yet another substantial fiscal deficit. In short, the next Labour government will tax more, spend more and micromanage more. Often these policies are not even in line with economic research insights (e.g. the FPA or unemployment insurance scheme). Maybe these policies have (net) positive effects, but the bad economic performance NZ has seen since Labour took office in 2017 makes me more sceptic than optimistic.

What about National?

If National wins in October, and based on public comments by its officials, expect them to reduce the size of the government, stop relying heavily on consultants and use the existing highly paid bureaucrats. It will cut income taxes, reduce the red tape faced by businesses, change zoning laws to increase housing supply, and generally limit the role played by Wellington in people’s lives. Of course, all these promises must survive the reality of governing and the likely resistance the new government would face by bureaucrats.

Therefore, a public sector reform is urgently needed and should be the foremost goal for the first 100 days in office. We will not see a capital gains tax or a wealth tax and neither will there be an unemployment insurance scheme financed by income tax increases. The so-called “FamilyBoost” programme is a step in the right direction and better than Labour’s recently announced extended 20 hours free ECE programme, but it still falls short of an entirely free childcare system. Evidence about the usefulness of boot camps for youth offenders generally finds only small effects. The Teaching the Basics Brilliantly plan, while again a step in the right direction, should go further in emphasising a change in culture. Focus on competitiveness, encouraging academic excellence and the fundamental roles of mathematics and computer programming for the future of work.

Partnering up

Overall, there are two important differences between a Labour/Green win and a National/ACT win. First, Labour/Green will continue to grow the government and heavily use consultants, while National/ACT have signalled that they want to reduce the size of government and the use of consultants. I agree with Ronald Reagan: “If more government is the answer, then it was a really stupid question.” Second, and again in the words of Ronald Reagan: “Government is not the solution to our problem; government is the problem.” While Labour/Green claim to have understood the sources of inflation, this year’s budget still runs a substantial deficit, again fuelling inflation.

In contrast, a National/ACT government would rely on research insights and evidence to make economic policy decisions that benefit businesses (explicitly I want to include agriculture here) and therefore the average Kiwi. As an example, I do not see a National/ACT government suggesting an unemployment benefit scheme financed by higher taxes, as suggested by Labour/Green. There is no need for such a policy nor any evidence that this would improve outcomes; rather, the opposite is true. This is a prime example of a political project rather than an idea based on research. This type of uninformed, ideological policy making will happen more and more with another Labour/Green government, but not with a National/ACT government.

Whoever ends up governing after the election faces the problem of leading the country out of a stormy economic water. A much-needed ambitious growth policy is needed that focuses on improving educational standards, reforming the health system, future-proofing infrastructure, and creating incentives for economic growth and increased productivity.

  • Dr Dennis Wesselbaum is an associate professor in the Department of Economics at the University of Otago.