“I don’t make merry myself at Christmas, and I can't afford to make idle people merry. I help to support [the poorhouses].... They cost enough, and those who are badly off must go to them.” – Ebenezer Scrooge, in Charles Dickens’ A Christmas Carol.

To put it mildly, yesterday’s “mini-budget” was lacking in specifics. Basically, the mini-budget was an announcement that announcements will be made in May about the likely time-line for the subsequent phasing-in of policies. So don’t hold your breath. National is making this stuff up as it goes along. At this point, Finance Minister Nicola Willis doesn’t know how big the tax cuts lollipop bag will be, how it will be paid for or when it will arrive.

Instead of shedding light on such mysteries, Willis spent most of her time yesterday lambasting Labour for the economic slowdown. You know, for the same economic slowdown that the Reserve Bank has been openly trying to engineer for the past 12 months, in order to bring down inflation. If economic growth is slowing, if the tax take is down, if unemployment is on the rise – this is exactly in line with the Reserve Bank’s blueprint. This is what happens when the central bank carries out the most aggressive interest rate hikes in the developed world.

Meaning: If Willis wants to blame someone else – and she usually does - then she should be criticising the Reserve Bank for overshooting on its prolonged raising of interest rates. Arguably, the Bank should have recognised the lag between its rate hikes and the slowdown this was triggering – and it should have eased off earlier. Instead, the RB pressed on. (To use the Vietnam war analogy, it was willing to destroy the village in order to save it.) That’s why we are set to experience more pain than was necessary, and for longer than people living in comparable economies elsewhere in the world.

In sum, the Reserve Bank has plainly overshot on the tightening side of the economy. It made the opposite error when it overshot with the monetary easing stimulus it launched (with more reason) when Covid arrived here in 2020. Last year, National kept insisting that tackling inflation was this country’s number one priority. Well, it is now inheriting the fallout from doing so. It got what it asked for, and yet National now wants to blame someone else for the way things have turned out. That’s its style.

Lovin’ the landlords

Yesterday, some people received more care and attention from Willis than others. Landlords, for instance, were assured that (a) their $3 billion tax break and the changes to the bright line test were in the mail. As early as next month, landlords will be told if their handout is going to be back-dated, along with further details on how it will be phased in. The reduction in the bright line test means that landlords will soon have to wait for only two years before they can flick on their properties without incurring a tax penalty. Yesterday, we heard that this change will cost taxpayers a further $180 million. For landlords, this Christmas is bringing good tidings of great joy.

Willis left ordinary punters however, with little other than her past promises of tax relief of some sort, sometime next year, and regardless of the crisis that Willis claims to have inherited. Actually, she can’t have it both ways. If the economy is truly in crisis, then the tax cuts are reckless and unaffordable. If the tax cuts are affordable, then there can’t be much of a crisis.

Here’s the most credible scenario. The tax cuts are:

(a) Unaffordable. The new revenue streams required to pay for them are now either non-existent (the foreign buyers levy) or inadequate (the online casino tax.) Only by slashing essential services and by deferring urgently needed projects can National make the numbers add up. This is called cutting off your nose to spite your face.

(b) Inequitable. These socially regressive tax cuts will deliver their biggest rewards to those least in need. Conversely, those most in need will get the least. People on low incomes may receive as little as $2 extra a week, while the likes of Christopher Luxon stand to receive an extra $18,000 a year. More than enough one would have thought, for Luxon to pay taxpayers back for the cost of upskilling himself in te reo.

(c) Economically counter-productive. Treasury says the tax cuts will be fiscally neutral. Good luck with that. If Willis wants to talk about risks, surely there is a risk that if you put more money into peoples back pockets, chances are it is likely to be spent. All year, household spending has been demonised (by the Reserve Bank) as being the main driver of price inflation, aka the cost of living crisis. Therefore, there has to be a risk that a massive tax cut stimulus will undo some of the recent gains made on inflation, and induce the Reserve Bank to keep interest rates higher for longer – just to be sure that those claims of fiscal neutrality do pan out in practice.

In the US economy, investors have reportedly already factored in an expectation that the Federal Reserve will make six quarter point interest rate cuts next year. No such luck here. In the Auckland mortgage belt, the risk is that households are going to be paying as much in needlessly prolonged interest payments on their mortgages than they are going to get back in tax cuts.

Audience segregation

... I have seen your nobler aspirations fall off one by one, until the master passion, Gain, engrosses you. Have I not?”- A Christmas Carol by Charles Dickens

Willis tends to give out very different messages depending on the audience. Her message to the ordinary public is that things are awful, the economy is tanking, we inherited a mess, tighten your belts and prepare for human sacrifices to the market gods.

To National’s donors and corporate friends though: Everything is now under control, nothing to worry about, we’ve inherited a few challenges but hey relax, we’ve got this.

Willis used her mini-budget to outline the $7.5 billion in “savings” she has “booked” mainly by cancelling and/or deferring major projects. She has binned the Clean Car Discount. Luckily, the Luxon household got in quick and got a discount on their Tesla before almost everyone else was made to miss out. She has also “saved” a further $2 billion by gutting the country’s climate change policies.

Apparently, New Zealanders are being left to combat the effects of climate change with the spare change left over in their back pockets after the tax cuts. Why worry? The wealthy will be able to build cyclone shelters or houses on hills in Queenstown with a view, well above the flood line. Not a problem.

Like Shane Jones, Willis isn’t getting “hysterical” about the threats posed by climate change. Under her stewardship, New Zealand is going to magically meet its future climate change commitments, but without going to the bother of actually having any policies likely to significantly reduce emissions.

Par for the course. Willis has “saved” another $2.6 billion by leaving the hard work to future generations by scrapping much of the investment in the capital city’s vital transport infrastructure. A further $2.8 billion will be saved by tax changes, and by switching the indexing of benefit levels from wages to inflation, as from April next year.

That last point was a doozy. Willis claimed that this would make benefit and pension levels higher – a rise! – by April 2025. So... How come these moves are also being estimated to provide a $2.8 billion reduction in spending. Is she planning to significantly reduce the welfare rolls next year, just as the self-created recession begins to toss people out of work? Unemployment is being tipped to rise throughout 2024 to 5.25% by year’s end. A prudent (and compassionate) government should not be budgeting for savings in this area. It should be setting aside extra funds.

Also on this point... Since inflation is being forecast to be back within the Reserve Bank’s 1-3% target range by this time next year. In future therefore this indexation change that ties benefit increases to inflation (instead of to wage increases) looks very much like a benefit cut in disguise.

As mentioned, some of those “savings” of $76.5 billion involve ditching a whole lot of stuff – including the free prescriptions, free childcare for two year olds, half price public transport for young people, spending on cycleways and walkways, Wellington transport infrastructure etc etc. This is miserliness dressed up as virtuous thrift.

For the greater good of tax cuts, the Cook Strait ferry upgrade has been canned, even though no-one (including Willis) seems to have a clue about what the net gain might be, if any, of proceeding with an as yet un-costed replacement known to be of inferior quality. Willis is requiring Kiwirail to run second hand “Corolla” vessels in perpetuity on the most important freight and tourism link in the country. All so that we can each get a few bob extra a week to spend.

Finally, the mini-budget confirmed that public service bosses will be expected to find $1.5 billion every year in “savings.“ Willis is taking credit for “booking” this entire amount, even though fully one third of the initial $1.5 billion haircut will come from the cuts and deferrals set in train by Grant Robertson earlier this year.

Unknown quantities

As mentioned, Willis has been wildly over-egging the dire state of the economy. Everywhere she looks, Willis sees snakes and snails and fiscal cliffs and time-limited funding and legacy problems so immense that she allegedly has to cut spending and cancel projects left right and centre, to make ends meet.

Of course, she needs to do no such thing. The economic outlook doesn’t justify a plunge into austerity. Yesterday, the Treasury update provided no reason for panic. As mentioned, inflation is predicted to fall back sharply to within the RB’s target range by this time next year. Price inflation is set to ease.

In the interim, there will be (at worst) a shallow but temporary recession in 2024 before the global recovery that’s already under way elsewhere comes to our rescue. Yesterday, Treasury predicted the economy will keep growing – only a little, and slowly – but at an average rate of 1.5% over the next two years, before bouncing back to a healthy average of 2.8% a year by 2026. By then a slim surplus of $140 million is being forecast, down from the $2.1 billion figure formerly predicted. Not boom times, but not Armageddon, either. Nor is there any evidence of a structural malaise created by the previous government. Once the Covid stimulus has finally been shaken out of the system, the good times are being predicted to return. There is no need for socially damaging bouts of austerity.

In sum... New Zealand is being forecast to return to fairly robust rates of growth as soon as the Reserve Bank stops bashing the economy with its interest rate hammer. Privately, the government will be feeling happy to hear that the economy is expected to be closing in on a 3% rate of growth during the final year of the coalition government’s first term. No doubt, Willis will claim all the credit for steering the country to this entirely predictable destination.

In the meantime, we deserve to be spared any more nonsense about the terrible, awful, no good mess the coalition government has inherited. Under every rock and stone, the government is discovering fake crisis after fake crisis. Belt yourself in. We’re facing at least another year of Nicola Willis playing the victim card.

Footnote: Right now, this country’s glaring problems mainly lie offshore, given the sorry state of our export markets. Even with our low Kiwi dollar working for us, the world is either not buying as much of our stuff as it used to (e.g. China) or is reluctant to pay top dollar for it. As Moody’s Analytics pointed out this week in its survey of the September quarter:

Kiwi exports were a sore sight. Broad-based falls in aluminium products, wine, and the notoriously volatile crude oil segments pushed exports down NZ$337 from last November. The strongest export gain was a meagre NZ$76 million increase in meat product shipments. Tepid demand from China again weighed on the trade result, with November marking the sixth month of deteriorating exports year on year to New Zealand’s biggest export market.

With the domestic economy still fragile, Kiwis spent less on imports.... New Zealand’s trade situation is looking a little rough. Low prices for exports and lacklustre demand from China could extend the run of deficits for some time to come...

Right. Evidently New Zealand has to start planning on the basis that China’s chronic economic problems will not be fixed by this time next year. We urgently need to diversify away from the addiction to China that was peddled so relentlessly and foolishly by John Key, among others. Empty talk by Luxon on the campaign trail that he would quickly clinch a trade deal with India was a soundbite, not a solution. As it showed with its FTA with Australia, India has absolutely no interest in any trade deal with New Zealand that would require them to let in our dairy exports.

Instead of relying on one big market, we are going to have to cultivate a number of different, smaller markets all across Asia, and each one will cost money to develop. Too bad that we will have blown the budget on tax cuts.

I will honour Christmas in my heart, and try to keep it all the year. I will live in the Past, the Present, and the Future. The Spirits of all Three shall strive within me. I will not shut out the lessons that they teach.”

Charles Dickens,

A Christmas Carol

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