Long story short: PM Christopher Luxon said in January his Government was ‘going for growth’ and he wanted New Zealanders to develop a ‘culture of yes.’ Yet his own Government is constantly saying no, or not yet, to anchor investments that would unleash real private business investment and GDP growth.
Instead, Luxon’s cabinet is choosing to reduce public borrowing at a time when investors are desperate to lend their cash piles to Governments. Businesses are becoming increasingly frustrated and said in a monthly business survey last month that central Government policy and a lack of economic growth were the two main reasons for almost half of them investing less than they were a year ago.
Banks are also uninterested in increasing lending to businesses to invest in anything other than houses, with bank lending to farmers and businesses not backed by housing land down $11 billion since Covid, while lending to home owners and landlords has risen $110 billion.
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(Not) going for growth in a housing market with bits tacked on
Prime Minister Christopher Luxon talks a good game about breaking the ‘culture of no’ and ‘going for growth,’ but his own Government is regularly saying ‘talk to the hand’ whenever businesses want the Government to invest to unleash growth. Its actions show it is more focused on reducing home owners’ costs and increasing their tax-free capital gains, rather than growing real businesses and exports.
Luxon and Finance Minister Nicola Willis yesterday rejected Auckland Council’s plea for a $75 million investment to unlock $2 billion worth of America’s Cup-driven economic activity that would fill hotel rooms and get tills ringing. He framed the rejection as a tough choice to invest in roads and hospitals, rather than the America’s Cup. But his unspoken assumption that goes unchallenged daily is that the Government can’t borrow to invest because ‘there’s no money left’ or the Government is so vulnerable to an investor revolt that it needs to ‘tighten its belt.’ That’s demonstrably not true. Bond investors regularly bid for more than four times the $500 million worth of bonds being sold each week by Treasury. They are expected to swamp the Government with bids for a new bond being sold this week.
Luxon’s decision is all about choosing not to borrow to invest, rather than being forced or being stopped from borrowing. He’s making that choice because it might take a smidgen of pressure off interest rates, which he hopes will encourage private investment and economic growth. The trouble is banks aren’t increasing lending to real businesses any more. Since Covid, bank lending to real businesses (farmers and those not backed by residential property) has fallen by 10.7% to $90.3 billion, but lending to home owners and landlords has risen 31.2% to $461 billion.
Since Covid arrived in February 2020, bank lending to businesses and farms rose $10 billion to $190 billion, but that included a $24 billion rise in lending to landlords to $94 billion. Meanwhile, lending to home owners has risen by $90 billion to $367 billion. Since Covid, our banks have become mortgage banks, rather than banks for business. In effect, lending to real businesses and farmers not secured by residential property, which the Government has described as the backbone of the economy and the source of export growth, has fallen by $10.8 billion to $90.3 billion, while lending to those owning homes has risen by $110 billion to $461 billion, Reserve Bank figures show.
Reducing Government borrowing by a few billion might reduce mortgage borrowing costs by, for example, five basis points, which would save those borrowers $230 million a year. It might also contribute to a marginal increase in land values, which is not taxed. Luxon’s assumption is that fiscal restraint will encourage businesses to invest and grow the economy. That’s simply not happening, both because businesses are worried that Government’s restraint is contracting the economy and because its decisions since the election to not invest in housing, roading, hospitals and schools is removing the catalysts for private growth.
Here’s Luxon’s thinking in his own words (bolding mine):
“It would be nice to do, genuinely it would be nice to do, but we've inherited a very messy set of economic books and I think most New Zealanders would sit there and go, 'What's the choice, actually upgrading regional provincial hospitals across New Zealand or actually investing in America's Cup?' and it's pretty clear to me that actually New Zealanders want us to invest in proper infrastructure.
“We have a responsibility to be very grown-up and responsible with taxpayers' money.” Luxon talking to reporters yesterday via RNZ
The unspoken assumption is that he cannot borrow for public investments and that the economy will be better off with fiscal restraint.
‘I don’t trust those economic impact reports. Unless they’re about roads.’
Finance Minister Nicola Willis was similarly dismissive of the Auckland request and used similar framing yesterday, saying New Zealanders understood there was “no magic money tree” and the government could not pay “huge costs for everything.” Here’s more in her own words, including her doubts about the economic impacts assessed by the Auckland bid:
“We just judged that at this time those resources are better in our hospitals, our schools and the other pressing needs of New Zealanders.
“I think that those numbers are questionable... there would have to be a lot of analysis to ascertain whether that was the case, and I'm not sure that I accept that would have been the case." Willis talking to reporters yesterday via RNZ
Willis is criticising the same sort of economic impact reports by consultants that are used to justify investments in roads, in particular. Even then, the benefit to cost ratios of many of the Roads of National Significance projects are barely 1:1, rather than the many multiples for an America’s Cup bid, where $75 million of investment would lead to hundreds of millions worth of extra income taxes, GST receipts and promotional value for tourism.
Willis may not believe that these sorts of special events generate real economic growth, but those representing businesses in Auckland, and business leaders more generally, do think these sorts of investment unleash growth.
‘Um. What happened to our special events strategy?’
Here’s Heart of the City CEO Viv Beck talking yesterday (bolding mine):
“This is an event that would bring thousands of people to our waterfront and a boost in business for hotels and local businesses while it’s on.
“This was a golden opportunity to utilise purpose-built infrastructure and reap a timely economic return.
“It is frustrating that ongoing representation to Government about the need for urgency in resolving a sustainable funding mechanism for major events has not yet delivered an outcome.
“Getting this funding in place must be fast-tracked so missing out to well-funded bidders competing for other major events doesn’t become the norm.” Beck via NZ Herald.
‘Occupancy rates are soft. We need these special events’
Hoteliers heard yesterday that occupancy rates are softening, as Miriam Bell reported this morning for The Press-$.
She quoted hospitality analyst Matthew Burke, a regional director of Asia Pacfic at CoStar's hospitality analytics division, as telling an Accor conference the data showed New Zealand was one of two major countries to see occupancy and average daily rate declines in 2024. Here’s his comments (bolding mine):
“Demand continued to grow overall, but it softened out in winter before starting to grow again towards the end of the year. Not having a big event, like the Fifa Women’s World Cup the year before, made a difference.
Wellington was reflecting the effects of government cutbacks, with a big slip in midweek occupancy rates and average daily rate heavily impacted, but Christchurch’s occupancy rates were solid and looking positive going forward, he said.
“There are early signs that winter 2025 will be tough again across New Zealand, with soft demand in forward occupancy in Auckland and Wellington. But there’s a slightly better outlook for the South Island.” Burke via The Press-$.
‘Your policy of saying ‘talk to the hand’ is a big problem for us’
Hoteliers and shop owners are not the only ones concerned that the Government’s preference for reducing borrowing rather than investing was slowing the economy and leading them to invest less.
ANZ’s Business Outlook survey for March was published on Monday and showed businesses were frustrated with those Government policies and subsequently poor demand from a stuttering economy. They saw Government policy and weak consumer demand as their main reasons to invest less. Their frustration was only slightly less than it was in the last days of the Labour Government.
Frustration is building too among retailers, including many who would view themselves as natural supporters of the current Government.
Briscoe Group Managing Director Rod Duke was typically blunt in his assessment last month when talking to the NZ Herald-$ about a lack of consumer demand that had led to flat sales.
He said the Government needed to “get their a** into gear” and “actually do something” to help the economy.
Here’s Duke in his own words (bolding mine):
“The closer you get to the election, the more likely they are to be doing something seriously proactive, and I just see the back half as being significantly easier than the first half.
“I think they’re of the view that up until now they’ve been able to blame the prior Government, which is typical of a lot of governments I guess, but you know the time has just about come where you’re going to have to make your own mark.
“You’ve had enough time to study, to tighten, to understand what the books look like, and now you’ve got to put some policies into place.” Duke via NZ Herald-$
The Government might well say it is continuing spending on day-to-day items, but the real problem is a lack of investment.
‘The economy stalled because the Govt cut capital spending, not Opex’
Construction spending fell in the December quarter by the most since the Global Financial Crisis, largely due to freezes in Kāinga Ora, school classroom, hospital and local road building, due to suspensions and cuts to capital grants.
Here’s the detail via Simplicity Economist Shamubeel Eaqub on LinkedIn about how the Government’s spending restraint has mostly been around cutting capital investment since the election.
Here’s Shamubeel in his own words on the Government’s actions and inactions affecting the economy (bolding mine):
“Fiscal austerity so far has been reduced investment and not much else, because red projects were turned off by the blue team. Politics cannot be wished away, but politics should be for projects 5- or 10-years out, not the current short-term-ribbon-cutting trap.
“In the 7 months to Jan-25, government net cash spend (opex+capex-revenue) into the economy was down 41% from the previous year. [See left chart.] Rising tax revenue may surprise; they would have increased more without income tax cuts.
“Operating spending is still growing (1/4 from NZ Super!), despite announced cuts. So, tax cuts have not been offset by spending cuts and efficiencies. NZ is borrowing money to fund operations not investment, as a prudent country does. The biggest slashing has been in investment spending, which slowed sharply in the 2024 calendar year, down $2.3b or 14% from 2023. [See right chart.]
“It’s a shame, because in a recession speeding up infrastructure investment moderates the economic pain, and delivers much needed infrastructure, typically under budget and on time. (It’s also one part of unlocking NZ's stagnant productivity.)” Shamubeel Eaqub on LinkedIn
Christopher Luxon has talked about turning around the ‘culture of no’ in our economy. He should consider his own Government’s approach first.
Ka kite ano
Bernard
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