With inflation worsening, mortgage interest rates rising, and businesses facing increasing shortages of goods and raw materials, many will be looking to next month’s Budget for relief. Economists, business commentators and non-government political parties alike have been calling for the Budget to reset current government spending levels to take some of the heat out of the economy. But comments this week from the Minister of Finance make it clear they are all going to be disappointed. 

Not only has the Minister defiantly defended both the level and content of increased government spending since the outbreak of the pandemic, but he has also ruled out curbing spending or introducing tax cuts to help families struggling from the currently rapidly rising cost of living.  His answer is more of the same, and more, rather than less, spending. This time he says his target is the health system, which the government largely ignored in the lead-up to the pandemic, leaving it so woefully unprepared that many of the restrictions introduced subsequently were more because of a fear that the health system would not be able to cope with the Covid19 virus, than the virus itself. 

While on the face of it the government's belated commitment to better funding of the health system is laudable, it will be met with scepticism. After all, this is the same government that committed an additional $1.9 billion to the mental health system a couple of years ago, only to admit earlier this year that none of the additional funding has yet been spent, and that consequently there have been no service improvements. 

Yet, the government has no alternative but to continue its high spending policy. To do otherwise would be an admission of failure. Its constant refrain since coming to office nearly five years ago, and excuse for things not happening as it might wish has been blaming it all on apparent underinvestment by the previous government. Given that nothing much has improved in that time and significant areas like housing and deprivation have gone backwards, the government can hardly turn round now with a recession looming and cut the very spending it said was no necessary. 

However, New Zealand has been no different to most other countries facing the pandemic. Spending in critical areas had to increase to meet a wide range of hitherto unforeseen needs. Like others, we borrowed heavily, although not nearly as much as some of the world’s major economies, and now face having to repay those loans over time. Now that the worst of the pandemic appears behind us, and economies are starting to return to more normal times, albeit with the global inflation spike and rising interest rates the pandemic has caused, the time has also come to return to more normal Budget times. And that means looking more closely at expenditure settings and whether the priorities set by the pandemic are as relevant now as they were two years ago. 

That is where the challenge around the coming Budget begins. There is a balance to be struck between carrying on with Covid19 Budget settings unchanged and paring some of these back to address current circumstances. Neither Labour nor National is yet showing the finesse required to manage such circumstances. 

For Labour, it is all about protecting existing Budget settings as evidence it knows how to manage the economy effectively. National, on the other hand, seems yet to have grasped fully the implications of the pandemic, and its impact on the Budget. It gives the impression that the country can easily return to pre-Covid19 settings and expenditure levels and priorities, whereas its real opportunity – yet to be shown – is to position itself as the Party with the fresh ideas for the future. 

By ruling out spending reductions or tax cuts, the Minister of Finance has already begun the branding of this Budget as a genuine Labour Budget for the difficult times ahead. He has been finessing two broad lines which we can expect to be repeated more strongly and frequently in the lead-up to and aftermath of the Budget. The Prime Minister and other Ministers also will join in this refrain. 

Labour’s first line of attack (and defence) will be to hark back to its claims of underinvestment by the previous government. It is to the credit of Labour’s media management strategy that it is still able to blame everything on the previous government, without public ridicule, after nearly five years in office. That is normally an excuse new governments can only use credibly in their first year or so in office, until their own Budget settings kick in. But to be still running that line of argument nearly five years on and apparently having it accepted as legitimate is virtually unheard of, and a remarkable tribute to the current government’s powers of political spin over substance. 

The second prong, which flows neatly from the first, is to dismiss any criticism of its new spending by demanding to know which essential services the Opposition wants to see cut. It will also shamelessly play the Covid19 sympathy card of how this government’s spending kept people alive during the pandemic. (By unproven implication, more people would have died had National been in office.) The government is helped in this by a pliant media which sees it as quite appropriate to persistently demand the Opposition spell out where it would cut spending, but rarely if ever challenge the government on the purpose or quality of any of its additional spending. 

Labour’s unstated ideological assumption is that all government spending is of itself good, regardless of value or purpose. It dismisses Opposition calls for performance targets and cost-benefit analyses as just code for spending cuts. The approach easily enables Labour to portray itself as kind and caring, concerned more about people, and paint National and ACT as just focused on the money and looking after “the rich”. 

This is the superficial level that debate around the coming Budget seems set to focus on. More detailed analysis, commentary and criticism will be confined to the business sections of the media, where it will be written off as the whining of special interest groups. Opposition parties seeking to raise these concerns in the wider public environment will easily be portrayed as looking after “their rich business mates” or the “top end of the town.” And Labour will be hoping that the more households are struggling, the more resentment there will be of perceptions the better off are trying to look out for themselves. 

Labour pulled off a massive electoral victory in 2020, by its appeal to the majority of the “team of five million” over its handling of the pandemic. Mindful of this, Labour will now be hoping to mobilise the support of most of the country’s “team” of almost 1.9 million households in the vastly different circumstances of the 2023 election. New Zealand’s comparatively flat income distribution scale – with only 16% of households earning above $100,000 a year – makes this a far more achievable goal for Labour. 

Next month’s Budget will be effectively Labour’s opening shot in its 2023 re-election campaign. It will do its best to trap National and its allies in its headlights, as modern day Grinches, planning to take away all the “good” spending Labour has made. National’s challenge is to avoid being caught in this trap, while sharpening its argument that the main reason New Zealand households are suffering at present is because the rise in the cost of living is a direct consequence of this government’s economic management. Its task then is to convince enough New Zealanders that the Minister of Finance’s “more of the same” approach is not going to change things in their favour any time soon. However, so far, National seems to be playing into Labour’s hands. 

The first indication of which of these approaches has the greater public appeal could come as early as the Tauranga by-election a month after the Budget.   

 

 

An elaborate but ultimately irrelevant game of pass the parcel is being played out at present about who is responsible for inflation rocketing to a 30-year high, with home mortgage rates and other lending costs set to do likewise. 

According to the Minister of Finance, it is all Vladimir Putin’s fault for invading Ukraine and disrupting world supply chains, causing shortages and pushing up costs. Coming on top of the wider disruption caused by Covid19 over the previous two years it is all just too much to bear for even well-managed economies like ours, he says. 

The Opposition will have none of this, blaming it all on the government’s mismanagement, by using the arrival of the pandemic as an excuse for a massive borrowing programme to enable it to spend indiscriminately on pet projects, many of which have had nothing to do with helping the economy recover from the onset of the pandemic. 

Meanwhile, the Governor of the Reserve Bank whose autonomy wings have already been clipped somewhat by this government requiring him to take the impact on employment into account when adjusting monetary policy laments to an offshore audience that he may no longer have the tools to get on top of this bout of inflation as quickly as he would like. 

Ominously, the only thing they all seem to agree on so far is that the rise in inflation this year will continue for some time, possibly well above the 7% level already forecast. 

Meanwhile, homeowners and taxpayers look on slightly dazed and bemused, while bracing themselves for whatever shocks may lie ahead. Already there are mounting reports from foodbanks and other social service agencies of unprecedented demand on their services, and the general expectation that the worst is yet to come. None of them care whether Vladimir Putin or the government is to blame – they just know the impact it is having on their already stretched household budgets, and they want the government to do something about it. 

So far, the government’s response has been mixed. A 50% subsidy on public transport costs and a 25 cent per litre reduction in fuel excise tax have been introduced – but for a period of three months only, with no indication of what is to follow. The Minister of Finance has also pointed to the April 1 benefit adjustments and the Winter Energy Subsidy for beneficiaries and superannuitants, as further income support measures the government is introducing. But these are annual payments already in place, with increases based on the lower cost of living of the last twelve months, rather than the likely much higher cost of living of the next twelve months.

Beyond that, he appears to have little else to offer, unless he is holding something back for the Budget due in just over a month. But he has already ruled out income tax cuts, changes to the Goods and Services Tax, and paring back any of the spending commitments the government has made since the advent of the pandemic. 

So, his immediate options look limited. It is possible he might extend further – or even make permanent – the public transport concessions and justify them on climate change policy grounds, but they are at best of limited value. Not everyone is able to use cheaper public transport to get to and from work, and with so many people, including many public servants, still working from home and the government seemingly unwilling to insist on people returning to their offices, the subsidy is of dubious value anyway.  

The government’s policy is looking increasingly like a modern-day version of borrow and hope which was an ultimately unsuccessful mainstay of governments in the 1970s and 1980s, leading to the massive restructuring of the economy after 1984. It is beginning to look like a repeat performance is underway. 

The Opposition’s response is no less unspectacular. There is the almost obligatory commitment to tax cuts as the universal panacea, and the predictable references to cutting back on wasteful spending. However, when asked to identify examples of where that might be, a sudden shyness comes to the fore. 

However, the Opposition does have the luxury of not being in power at present, so it does not have to deal with the inflation crisis. It can afford to sit on the side-lines and pick holes in the government’s response and sympathise mightily with the plight of households struggling because of high inflation, without having to reveal too much of its own hand. It knows that if inflation becomes too high and whatever measures the government may take to try to bring it under control do not appear to be working, it will be the electoral beneficiary. 

Just as Labour will be desperate to keep the focus on the current inflation outbreak being an international phenomenon over which New Zealand has little immediate control, National will be equally determined to hammer home the message that Labour’s borrowing and spending policies are making inflationary pressures worse than they need to be. The Prime Minister, on her current trip overseas, can be expected to make much of how, as in New Zealand, inflation is rising to new highs in both Singapore and Japan, but the comparisons may not be to her advantage. While inflation in Singapore is forecast to hit an eight-year high this year, at 3.4% it will be at least half the rate forecast for New Zealand. Although Japan’s inflation rate is expected to hit a two-year high, it was only a mere 0.6% in the year to February. 

A saving grace for Labour might be that domestic unemployment continues to be at a very low level. Whether that can be sustained in the medium term as international supply chains become more disrupted, and cause shortages of goods on the domestic market, leading to slowdowns in local production because of unreliable supplies of imported raw materials will be a major challenge. Labour could yet find itself in the same position the 1972-75 Labour Government of high inflation, and rising domestic shortages, leading to increasing unemployment. Then it was the fault of the First Oil Shock in 1974, just as it is argued to be the fault of Covid19 and Vladimir Putin today. But it was ultimately the government that paid the price at the next election.

 

 

Recent events raise the question of whether New Zealand’s self-proclaimed independent foreign policy is slowly but surely being whittled away in response to the Russian invasion of Ukraine. 

First there was the so-called autonomous sanctions legislation rushed through Parliament unanimously a few weeks ago to enable economic sanctions to be made against Russia. Yet when a virtually identical Bill had been introduced last July by National it had been rejected as contrary to the flavour and intent of current foreign policy. 

Autonomous sanctions legislation allows for the unilateral imposition of economic and other sanctions outside a United Nations’ mandate. As a staunch supporter of the United Nations New Zealand had always preferred to act against rogue states in accordance with a United Nations’ mandate rather than at the behest of a superpower like the United States, or another grouping of countries. The absence of domestic autonomous sanctions legislation made it easier for us to do so. It was why, for example, New Zealand was able to resist United States’ pressure to join George Bush’s coalition of the willing in the ill-fated venture against Iraq and was a cornerstone of our foreign policy under both the Clark and Key governments. 

No-one would deny that there are strong reasons for the imposition of sanctions against Russia over the invasion of Ukraine. To that extent, given New Zealand’s abhorrence of Russia’s invasion of Ukraine, it made sense to alter our position on autonomous sanctions to enable us to do so. However, the passage of broad autonomous sanctions legislation means that New Zealand will now find it more difficult to resist United States’ and British pressure to become involved in similar situations in the future, where the moral, political and national interest arguments for New Zealand to do so are far less compelling. At the same time, the passage of the legislation also sends a clear signal that New Zealand will be less inclined to await a mandate from the United Nations in the future. 

The commitment of a small contingent of Defence personnel and an aged Hercules to the Ukraine war is a similar subtle shift in focus. No-one is suggesting this intervention will have any practical impact on the overall situation there – indeed, a fair chunk of the personnel being sent are RNZAF support crew to make sure the Hercules gets there and back safely. It is more a question of the symbolism involved. 

Nor is it the first time New Zealand personnel have been deployed. Post-event peacekeepers and reconstruction forces have played valuable and lengthy roles in the Balkans, Timor Leste, the Solomon Islands, Sinai, Iraq and Afghanistan in the last quarter century. They have won a worthy reputation for their contribution, and we properly honour the sacrifices of those who died performing such service. 

What is different now is that while the personnel now being sent to Europe to support Ukraine will not be actively involved in the conflict, nor will even enter Ukraine, the move does signal a more active response than to previous crises. We appear to be quietly moving beyond the hitherto post-event logistical support, peacekeeping and recovery roles New Zealand has become so adept at. 

The counterargument is that Russia’s unprovoked, premeditated assault on Ukraine is the most profound threat to international order since the end of the Second World War, and therefore requires the combined response of the liberal Western democracies to help Ukraine counter it. There is also the modern-day version of the Domino Theory argument – that if Ukraine falls, then other independent states, once in the old Soviet orbit, like Moldova, Latvia, Lithuania, and Estonia come under more immediate risk. The consequence of that occurring would be a far more serious conflagration. The belief is that a strong and united front from the liberal Western democracies is required to bring home to Russia and its apparently obstinate leadership the complete unacceptability of its conduct.  

New Zealand has every right to conclude that support for Ukraine is not only justified in humanitarian and moral terms, but that it is also in our national interests to do so. But for a small country so far away from the scene of the conflict there is only so much we can do. We have taken some steps on refugee resettlement and the provision of general humanitarian aid, but we can do much more in that space that will be far more effective than a token military response. 

It is clear from the number of blue and yellow flags and emblems fluttering around our cities and towns that New Zealanders strongly support Ukraine’s independence and want to do the best we can to uphold that. It is doubtful that a small group in an elderly Hercules is that best effort. 

While a dispassionate assessment would downplay the efficacy of direct military involvement, it is easy to understand why the government has made limited moves in this direction. It is a practical display to other nations supporting Ukraine of our support for the cause. While understandable, it leaves unanswered, if not unconsidered, the bigger question of the precedent it creates. 

It may well be that New Zealand is now realising that in today’s changing international environment an independent foreign policy approach probably needs to become less purist and more flexible and pragmatic. The rising tension between the United States and China – two nations with whom New Zealand has close relations but for very different reasons – was already leading many to speculate that eventually we will have to make a choice between the two. Trying to be friends with both will become an increasingly difficult line to straddle if tensions between them persist and escalate. 

Therefore, if the latest response to the Ukraine situation does represent a shift in foreign policy direction towards more active engagement with and support of historic partners than has been the case since the 1980s, the government should say so. It cannot just rely on other countries interpreting the subtleties of our policy shifts correctly. If that is not the intention, the government needs to be equally clear in reasserting our independent foreign policy and presenting our stand on Ukraine as consistent with that. It cannot afford ambiguity. 

It has often been said that one of the reasons for the impasse with the United States in the 1980s over our anti-nuclear policy was because of initial mixed messages from New Zealand on the scope of the policy. If a general foreign policy reset is now underway prompted by the Ukraine invasion, New Zealand needs to make the scope of that change very clear to friends and allies from the outset, to avoid similar confusion, resentment and distrust occurring in the future.

 

 

 

 

The call by Te Pāti Māori co-leader Rawiri Waititi to pay Māori a pension from the age of 57 should not be dismissed out of hand. He is right to draw attention to the fact that on average Māori die earlier, and therefore have less time to enjoy a quality retirement. In terms of equity, he also has a point, given that the New Zealand Superannuation Scheme is a taxpayer funded, “pay as you go” scheme, meaning that Māori who do not live as long in retirement are effectively short-changed on the taxpayer contribution they have made over their working years.

A similar argument can also be made in respect of other groups, like manual workers for example, who on average do not enjoy the same post-65 life span as others. However, the problem with setting a blanket age limit – like Waititi’s suggestion of 57 for Māori, or 65 for the general population for that matter – is that not everyone’s circumstances are the same. So, what would be a decided benefit for some, would have little impact for others and would therefore not be a particularly helpful or well-targeted intervention.

But that does not detract from the relevance of Waititi’s call or mean it should just be swept under the carpet as too difficult to address. Fortunately, there is another way of resolving the problem he has raised.

Some years ago, I suggested the concept of variable New Zealand Superannuation arrangements, or Flexisuper as it became known. It was designed to address fairly the issues Waititi is concerned about today, by giving people choices over when they took up New Zealand Superannuation.

Under Flexisuper, a person would have the option of choosing to receive New Zealand Superannuation from the age of 60 at a lower rate from the normal rate. In practical terms, that would mean about 66% for life of the rate payable to those who chose to wait until 65 to take up their entitlement. For those with a likely shorter life span this would mean they would be able to choose to collect a reasonable pension from the age of 60 for whatever years are left to them, whereas currently they are entitled to nothing until and unless they reach 65. Under Flexisuper, someone choosing not to uplift New Zealand Superannuation until the age of 70 or above would receive a higher rate.

Flexisuper could therefore be close to cost neutral – those opting for 60 would be effectively offset by those deferring until age 70 – which would peg current superannuation expenditure at roughly current levels. This would make New Zealand Superannuation not only financially sustainable into the future but would also mean that there would be no need to lift the standard age of entitlement beyond 65.

Flexisuper would not be means tested, nor affect any private pension arrangements or eligibility for Kiwisaver pay-outs at the age of 65 for those who were members of that scheme. Its great advantage is that it gives people the opportunity to plan their retirement lifestyles according to their needs and circumstances, without the arbitrary intervention of the state.

Consistent with confidence and supply agreement provisions, the National-led government released a discussion paper on Flexisuper in 2013 and invited public submissions. These showed strong support for and understanding of the idea, and separate polling at the same time showed that Flexisuper was nearly twice as popular with the public as other options like raising the age of entitlement or bringing back means or asset testing.

Unfortunately, National declined to go any further. It was worried about the impact a choice-based scheme might have on universality, especially for those who chose the 60 option but lived on well after the age of 65. In any case, National was more interested in reducing the overall cost of New Zealand Superannuation than notions of flexibility or equity.

Its answer to the affordability question was to propose a gradual upwards shift over the twenty years to 2037 in the eligibility age to 67. But that did nothing to address the plight of the under 65s seeking to leave the workforce early.  Of the other parties, only Te Pāti Māori showed any interest in the idea at that time, for pretty much the same reasons as Waititi is advancing today.

But the issue is not going to go away. Demographic projections suggest the proportion of Māori and Pasifika will rise steadily to almost 30% of the population by 2038. Because the mortality gap with Pakeha looks likely to remain about the same as now, the problem Waititi is drawing attention to will be escalated – more Māori and Pasifika coming to the end of their working lives but still dying earlier than Pakeha.

At the same time, as the population reaches 6 million or more by 2040, the sustainability of the present New Zealand Superannuation Scheme will be severely tested. Lifespans are expected to be increasing steadily (the gap with Māori and Pasifika notwithstanding) meaning a higher proportion of New Zealanders than ever before will be eligible for New Zealand Superannuation.

Labour now seems to be joining National in acknowledging that this may mean an upwards adjustment of the age of entitlement at some future point to maintain universal superannuation. While gradually raising the age of entitlement seems standard practice among OECD countries, it is still an overly heavy reliance on a single tool that will do little to address some of the wider social and demographic issues now emerging. Those in their 30s and 40s now are unlikely to appreciate being told that while they will continue to “pay as you go”, their future entitlements are likely to be arbitrarily capped by the state.

In planning their futures, people want to have some control over the circumstances they are likely to face. This applies whether they be Māori whom Waititi is properly concerned about, Pasifika, those approaching retirement, or those early in or near the middle of their working careers. FlexiSuper could be a step towards giving all of them greater flexibility and options in planning for their retirement. It therefore deserves fresh consideration. Rawiri Waititi’s call provides a timely opportunity to rekindle that discussion.