Briefly, here’s the six big things to note in Aotearoa-NZ’s political economy around housing, poverty and climate in the week to Sunday, May 4:
In response to slower global growth and wider deficit forecasts, Nicola Willis signalled another $4.4 billion in spending cuts over the next four years, all to get an uncertain extra 5-10 basis points of cuts in interest rates. See more below
Over 5,500 hospital doctors struck on Thursday against a Health NZ pay offer of 1.5% per year, which would cut their pay in real terms and do little to fill the staffing holes that cost $380 million a year to fill with temps. See more below in number of the week.
Hit hard by the Government’s initial investment freeze in early 2024, Infrastructure NZ called on Willis to re-start investment by launching new projects in the Budget on May 22. It also called for a population strategy.
This weekend’s must-read1 is Steve Kilgallon’s deep-dive for Stuff into migrant abuse rife in the cleaning industry, which exposes how our temporary worker industrial complex prop up our housing-market-with-bits-tacked-on economy.
Surprisingly large come-from-behind election victories for Trump-opposing centre-left Governments in Canada and Australia sent a timely warning to politicians here that Trump and his policies are now deeply unpopular. The leaders of both the Trump-supporting opposition conservative parties lost their electorate seats this week.
The US economy contracted in the March quarter for the first time in three years because of a pre-tariff surge in imports. US imports from China are now collapsing. The Port of Los Angeles expects a 35% fall in imports this week.2
The week to Sunday, May 4, 2025
Willis chooses more cuts as recessionary headwinds gather
Finance Minister Nicola Willis announced a further tightening of Government spending in a pre-Budget speech on Tuesday detailing her response to new Treasury forecasts that Donald Trump’s tariff shock would slow global growth, which in turn would slow taxation revenues and make it harder to achieve surplus by 2028/29.
Titled Budget 2025: The Growth Budget, her speech noted returning to surplus within three years repaying more debt faster was more important than spending more on Government services or infrastructure.
“I am confirming today that the Government has reduced the size of our Budget 2025 operating allowance to $1.3 billion.
“This means we will be spending billions less over the forecast period than would have otherwise been the case. This will reduce the amount of extra borrowing our country needs to do over the next few years and it will keep us on track towards balanced books and debt reduction.
“The fiscal forecasts will not be finalised until later this week, but according to the latest numbers I have seen, this smaller operating allowance means we will continue to forecast a surplus in 2029.
“The reality of global economic events is that if we’d pushed on with a larger operating allowance then we would be staring down the barrel of even bigger deficits and debt.” Nicola Willis speech
She described Government interest costs as spiralling out of control.
“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.” Nicola Willis speech
Actually, there is no spiralling of interest costs
It’s worth challenging Willis’ characterisation of the Government’s debt levels as threatening because that is the spectre behind all of the Government’s drive to cut costs and reduce debt. It’s the ultimate reason given for choosing not to spend more on doctors, hospitals, schools, housing, buses, roads and welfare. The ‘spiralling debt’ line is the burning platform being described as the problem to be dealt with, so voters would think it seems natural that things have to be thrown overboard in a crisis.
Willis regularly suggests the Government is just like a household and therefore it’s natural it ‘tighten its belt’ when it has a debt problem. Here’s the bit in the speech using that framing (bolding mine):
“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.” Nicola Willis speech
But this is not a crisis. Nowhere near it
The cuts in the face of recessionary headwinds and against the grain of the Reserve Bank’s attempt to stimulate the economy out of recession are unnecessary and counter-productive, in my view.
The Government’s net interest costs, after the NZ Super Fund receives interest on its overseas assets, is actually forecast to be around $2.1 billion or 1.6% of total Government revenues or 0.5% of GDP in the current 2024/25 year.3 To put that into context, households overall are spending an average of 22% of their disposable income on rent or their mortgage interest costs. Home owners with mortgages spent an average of 21% of their disposable income on interest costs in the year to June 30, 2024. Renters spent 23% on average.4
If a neighbour said to you that your household’s interest bill was 1.6% of your income, which meant it was ‘spiralling out of control,’ what would you say to them?
‘Bullshit.’
This is all about reducing mortgage rates
Willis’ argument and actions do make sense if you listen to the bits about trying to further reduce interest rates. A Government can tighten its policy to force the Reserve Bank to ease even more to stop an economy going into a recession bad enough to lower inflation below its 1-3% target band. Here’s those bits on why cutting spending is good for interest rates (bolding mine):
“I always take pause to celebrate that since our Government came to office inflation has returned to normal levels, resulting in a 200 basis point reduction in interest rates.
“In this year’s Budget we’ve also had to carefully consider whether, in light of major global economic events, our fiscal strategy still remains achievable.
“The strategy is focused on two key goals: putting net debt on a downward trajectory and returning the books to an OBEGALx surplus by 2028.
“This strategy matters, it matters for getting the books back in order and that’s about more than a set of numbers. It’s about keeping interest rates lower and providing a solid platform for future growth.” Nicola Willis speech
In theory, the Government could slash and burn even more aggressively to make the Reserve Bank cut the Official Cash Rate even deeper towards 0%, but that would make clear that the Government’s real strategy is to create a recession that lowers mortgage rates to further benefit home owners, both by lowering their costs and increasing house values, which has happened as interest rates have fallen in the past.
So how much might the cuts of $1.1 billion per year for the next four years actually ‘buy’ the Government in the form of lower mortgage rates? Is it worth the political and real grief involved in denying doctors and nurses and teachers and beneficiaries and disabled people the wages and facilities they need to keep working and living sustainable?
It buys the Government 5-10 bps of rate cuts and lowers GDP by $550m
Luckily for us, a few people have some calculators on both the initial impact on GDP of Government spending cuts and the end result after the Reserve Bank is forced into even deeper cuts in the OCR.
Here’s ANZ NZ Chief Economist Sharon Zollner in her weekly note on Friday (bolding mine):
“While the reduction in the operating allowance only reflects around 0.25% of nominal GDP, that’s still less pressure on short-term interest rates (all else equal).
“A rough rule of thumb implies the reduction could be worth around 5-10bp off the OCR – not enough to move the dial if the RBNZ is cutting in 25bp increments, but certainly enough to tip the balance to cut if other economic factors are also moving in that direction.” ANZ NZ Chief Economist Sharon Zollner in her weekly note on Friday
The next Reserve Bank rates decision is on May 28, six days after the Budget. Currently, financial markets and economists expect another cut of 25 basis points in the OCR to 3.25%. Willis will be hoping her nudge this week might bump it up to 50 basis points, but the $1.1 billion per year cut in spending will only be enough for less than half of the 25 basis points she’s trying to ‘buy’.
And what might be the net result for the economy of the offsetting spending cuts and rate cuts? The Reserve Bank estimated in August last year5 that the net ‘multiplier effect’ of a change in Government consumption was around 0.5, even after the Reserve Bank response. IE. That means the Government’s spending cut will result in a cut in GDP by about half the amount of the cuts, or around $550 million or 0.13% of GDP.
So, the end, the Government is not ‘Going for Growth.’ It’s going for lower mortgage rates and higher land prices. GDP actually falls.
Just like the rest of the nation’s home-owning households in our housing-market-with-bits-tacked-on political economy, the Government is prioritising leveraged capital gains on land values over actual investment in growing real productivity, output and wellbeing.
The best of the rest here & overseas this week
My Pick ‘n’ Mix Six for the week to Sunday, May 6
Health & politics analysis by Marine Lourens for The Press-$: Growing privatisation of health sector will only benefit ‘wealthy and powerful’, doctors warn.
Transport & Auckland explainer by Gabi Lardies for The Spinoff: The changes to plans for the streets around the Karanga-a-Hape CRL station: Disgraceful switcheroo' or response to feedback?
Geopolitics investigation by Paula Penfold & Justin Wong for Stuff: 'Full of lies': Chinese Embassy hits back over Stuff role in global investigation.
Geopolitics & economy explainer by Ian King and Debby Wu for Bloomberg (gift): Why World Powers Are Battling Over Computer Chips
Geopolitics & global economy explainer by Alastair MacDonald, Chelsea Delaney & Hannah Miao for WSJ (gift): The Rush to Beat Tariffs Is Distorting the Economy. There’s More to Come.
Former Australian PM Malcolm Turnbull told Guyon Espiner in an interview for RNZ that Winston Peters has been weak and too subservient in his comments about Donald Trump. Former Aussie PM: 'Showing weakness to Trump is a major, major mistake'
Quote of the week: Let them eat two dolls
“They made a trillion dollars with Biden selling us stuff. Much of it we don't need. You know, somebody said, ‘Oh, the shelves are going to be open.’ Well, maybe the children will have two dolls instead of 30 dolls. So maybe the two dolls will cost a couple bucks more than they would normally.” Donald Trump via AP: Trump says US kids may get ‘2 dolls instead of 30,’ but China will suffer more in a trade war
Number of the week: Tail-chasing
$380 million - The amount per year spent by Health NZ on locum and temporary doctors to fill gaps in hospitals because of unfilled permanent positions, as estimated by the Association of Salaried Medical Specialists (ASMS), which is the union for the 5,500 doctors in hospitals who went on strike on Thursday for a better deal than the 1.5% offer from Health NZ. Via RNZ: Doctors won't rule out another strike as 4300 patients face delays
Cartoon of the week: What were we thinking?
Ka kite ano
Bernard
PS: May the fourth be with you.
By Steve Kilgallon for Stuff: ‘Dirty little secret’: The dark heart of the cleaning industry
Via Statistics NZ: Household income and housing-cost statistics: Year ended June 2024
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