Briefly in Aotearoa’s political economy in the week to Sunday, May 11:
PM Christopher Luxon this week allowed ACT’s policies on pay equity and the Treaty of Waitangi to make National less electable in 2026.
He also doubled down on a budget-tightening strategy built on the false premise that the Government faced spiralling interest costs.
An overseas slowdown and that unnecessary tightening has stalled the housing market again and is driving real spending and investment towards another winter recession.
(This is a weekly summary email and podcast I do for paid subscribers. There is more detail and analysis below the paywall fold and in the soliloquy above, which was taken from the last 10 minutes of Thursday’s Hoon)
‘Blown minds’ kept a $17b pay shock secret for 18 months
The Government shocked the body politic and at least half the population this week by ramming legislation through Parliament under urgency that retrospectively stripped pay equity rights from over 300,000 women without submissions or a regulatory impact statement. It had been planning it for 18 months, even keeping it secret from its own MPs until Monday. Treasury also hid it in Budget documents.
ACT Deputy Leader Brooke van Velden said she had proposed the repeal of the Pay Equity Act passed by the whole Parliament in 2020, including National, in a letter to PM Christopher Luxon as soon as she became Workplace Relations and Safety Minister in late 2023.
Finance Minister Nicola Willis said she learned in late 2023 from Treasury of the potential cost for the Government of meeting the 33 pay equity claims already being processed, saying: “That number blew my mind... it seemed disproportionate to what I thought Parliament had envisaged when it passed the Pay Equity Act in 2020.”
Here’s what Willis said in Parliament in June 2020 about that Act, which she voted for then, but has been planning to change since at least June last year (bolding mine):
“National supports the Equal Pay Amendment Bill. We support it for the very good reason that we think that gender should not be the basis for determining the pay that someone gets and that men and women deserve not only equal pay for doing the same work but equity in the payment for the work that they do based on the value of that work rather than the gender of the people doing it. This is what this bill sets out to achieve and it establishes mechanisms which allow people to make claims where pay equity and equal pay principles are not upheld.
“So when my two daughters grow up, how will we know whether this bill has actually been successful? Well, we know that this bill’s been successful when we actually see that these sorts of claims are no longer necessary, because we’ve established a framework in which people don’t want to have to be doing compensation and that they pay people fairly to begin with. But we will also see that that gap between the pay of men and women, which currently sits at about 9.3%, is reducing in real time.” Nicola Willis speaking in Parliament for the second reading of the Pay Equity Bill on June 24, 2020 via Hansard
But after seeing the financial cost, which was buried in the ‘unallocated operating contingencies’ line (page 125, note 6 reproduced below) of Budget 2024 and totalling nearly $17 billion over the next four years, she wrote this Cabinet paper dated June 2024 and titled: Pay Equity Reset.
A Cabinet sub-committee was set up in December, which culminated in a Cabinet decision in March and plans for a legislative ram-raid last week. Willis did not tell her MPs until Sunday, many of whom had spoken with her in favour of the original 2020 Act. Then National Health Minister Jonathan Coleman signed the Care and Support Workers' pay equity settlement agreement in 2017 with care worker and campaigner Kristine Bartlett. (See more in quote of the week below.)
Willis told a news conference on Thursday a regulatory impact statement was not produced because she said it may have influenced the ongoing bargaining.
“Once we had made the decision that we would amend the Act, we were aware that there were significant risks that if that information entered the public domain, then that could affect bargaining behaviour and legal behaviour. So we wanted to make sure that we progressed it rapidly.” Willis via RNZ.
The Cabinet paper’s sections on the costs of these wage increases for over 300,000 workers were redacted. This bit wasn’t though:
“This paper has no cost of living implications.” Willis in the June Cabinet paper.
Luxon said during the announcement on Tuesday the decision would save the Government “billions,” but that was not the reason for the change.
"It's got nothing to do with the Budget, this is about making sure we have a piece of legislation that is incredibly workable, and not as complex as it has been."
That was not how Act Party leader and associate finance minister David Seymour viewed it, applauding van Velden for finding such huge savings at a crucial time.
"I actually think that Brooke van Velden has saved the taxpayer billions, she's saved the Budget for the government and she has made pay equity workable for New Zealand women, men and everyone who wants a fair go in this country," he said.
Luxon said rushing the changes through urgency was about making sure there was one system with "maximum levels of clarity". Via Jo Moir for RNZ
‘Spiralling’ interest costs made us do it, say Luxon & Willis
Luxon may have denied on Tuesday the lightning gutting of pay equity legislation National had previously supported was to save money, but by Thursday he put the Government’s decisions into a bigger picture, focused on returning to surplus, cutting net debt to 40% of GDP from over 43% now, and reducing the size of Government over time towards 30% of GDP from over 33%.
Here’s Luxon in a speech on Thursday (bolding mine):
“The previous Government’s spending decisions during and after Covid have left New Zealand with a sea of debt and red-ink in the government finances. Government debt leapt up by almost $120 billion between 2019 and 2024, soaring from under $58 billion to $175 billion.
“Those are big numbers, almost too big to comprehend, so let me explain it this way: That amounts to $22,000 more in debt for every New Zealander. You may well ask: what do we have to show for all that debt?
“To give you some further historical context, New Zealand’s net core Crown debt, which once hovered between five and 25 per cent of GDP, rose to around 42 per cent last year. That’s the highest level of government debt New Zealand has shouldered since the mid-1990s. Servicing that debt is expensive.
“The interest bill on government debt has soared from $3.6 billion in 2014 to $8.9 billion last year. That sum is more than annual core Crown expenses for the Police, Corrections, the Ministry of Justice, Customs and the Defence Force combined.
“Our Government’s goal is to put net core Crown debt on a downward trajectory towards 40 per cent of GDP and in the longer term keep it below that percentage.
“Why? Because allowing debt to keep spiralling would threaten the livelihood of every New Zealander.
“We must ensure our country is financially strong and resilient enough to effectively respond to whatever the future may throw: be it earthquakes, extreme climatic events, biosecurity incursions or whatever. We need the world to keep seeing us as a good country to invest in and lend to. Manageable debt levels are an essential foundation for a strong economy and for your financial future.” Luxon speech
Words and phrases such as ‘soaring’, ‘spiralling,’ ‘sea of red ink,’ and ‘highest since the mid-1990s’ sounds like the Government’s debt situation is in crisis, requiring crisis actions such as hiding $17 billion of pay equity settlements and retrospectively killing claims for that $17 billion.
But is it?
Are debt levels and interest costs really unmanageable?
The ‘worst since the mid-1990s’ sounds bad. Back in the early 1990s, New Zealand was trying to work off the ‘Think Big’ foreign debt taken on by Robert Muldoon in the 1980s and having to be serviced at interest rates well into their teens. This level of foreign-denominated debt with floating interest rates through a just-floated currency was threatening our credit ratings. Ruth Richardson had to cut benefits to avoid a double-digit credit rating downgrade.
So is it that bad?
No. The interest costs from total gross public debt are barely 2% of GDP, well below the 8% level hit in the early 1990s, as this IMF chart shows.
This measure also doesn’t take into account that since the creation of the NZ Superannuation Fund in 2001, New Zealand’s net interest costs are even lower than that. Net interest costs for the Crown are forecast at $2.128 billion for the current year to June 30, which equates to 1.6% of total Government revenues and 0.5% of GDP.
The Government and Nicola Willis in particular have made a point of comparing the Government’s debt, interest costs and finances with those of a household. Willis has also used the ‘spiralling’ word. Here’s what she said about debt and interest costs last week when announcing another $1.3 billion per year cut in spending in this year’s Budget:
“Our Government’s goal is to put net core Crown debt on a downward trajectory towards 40 per cent of GDP and in the longer term keep it below that percentage.
“Why? Because allowing debt to keep spiralling would threaten the livelihood of every New Zealander.
“Every Thursday afternoon, New Zealand Debt Management issues around $500 million of Government bonds. Some of this is to that roll over existing bonds that have expired, but large chunks of it are for new borrowing.
“That level of borrowing obviously can’t go on forever, or else our kids and grandkids will be left with unsustainable debt and considerable economic uncertainty.
“Most of you can probably relate to this if you think about your own household budget: sure, sensible borrowing has its place, but no overdraft can be extended forever, and while you can keep giving the credit card a hammering, left unpaid, it does, eventually, get declined.
“It’s worth bearing this in mind next time somebody tries to suggest to you that the New Zealand Government needs to spend more on something.” Willis speech last week.
The suggestion is that the Government’s debts are not only like a household, but are in just as much stress as many households. We’re all in this together, is the suggestion, and the best possible thing the Government can do is cut spending to lower interest rates for struggling home owners.
Some households do have big mortgages and have been paying more, but actually the biggest stress is on renters. In aggregate, households have actually been getting more money in their accounts in recent years because many have term deposits and they’ve benefited from higher interest rates.
Households are paying 16% of income in interest. Govt is paying 1.6%.
Households with mortgages have interest costs of around 16% of disposable income. Households with mortgages say their housing costs are around 31% of disposable income, including rates, insurance and maintenance. Over 40% of the poorest 60% of renters are paying more than 40% of their income in rent.
So what?
The Government’s actual interest costs are 1.6% of revenues and 0.5% of GDP, less than a 16th of their level in the early 1990s. They compare with the interest costs of households of 16%.
If your bank had said to you that you needed to stop investing in making your house healthier and stop donating the Women’s refuge because your interest costs were ‘spiralling’ towards 2% of your disposable income, how would you feel? Especially when you were able to force all the people in the neighbourhood to pay you a portion of their income in income tax and a portion of their spending in GST.
Would you be so worried that you reneged on a contract with your neighbours and kept your plans secret until the last minute so they wouldn’t be able to do anything about it?
Ka kite ano
Bernard
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