Wednesday, September 20, 2023

NZCPR Newsletter: Opening the Books

Back in 2017, when New Zealand’s economy was being described as a “rock star”, the opposition Labour Party railed against the role being played by immigration. 

Figures at the time showed that under National, annual net migration had grown from just 5,000 in 2008, when they first took office, to 72,000, with Treasury forecasting the numbers would stabilise at around 50,000 a year.

Labour was highly critical of growth generated on the back of high immigration rates, and their 2017 election pledge was to reduce net migration by 20,000, to 30,000 a year.

It was therefore a surprise, to find in last week’s Pre-election Economic and Fiscal Update (PREFU) – the set of Government accounts released by Treasury ahead of every general election – that Labour has opened the floodgates to migration: “In the September 2023 quarter annual net migration is forecast to peak close to 100,000, about 33,000 higher than forecast in the Budget Update.”

No doubt it was the economic activity generated by tens of thousands of new migrants that have helped Labour claim the economy has turned a corner and that they are great economic managers.

As Prime Minister Chris Hipkins stated, “Economic growth is returning, the government’s books are heading back into surplus and we’re winning the battle against inflation. The forecasts are showing that unemployment will remain low and there is real reason for optimism about the future of the New Zealand economy and I think the pre election fiscal update shows that. I said when I became prime minister that I wanted to refocus the government on getting back to basics, that we were going to focus on issues like the cost of living, the inflation coming down shows that we’re starting to win that battle.”

But that’s not the whole story.

Treasury secretary Dr Caralee McLiesh noted in the PREFU that the “surge in migration” will make it harder for the Reserve Bank to reduce inflation because of the additional demand it is adding to the economy. As a result, interest rates will need to stay higher for longer – until at least December 2024 – and they may even need to rise further.

The PREFU spells it out: “Slow economic growth is forecast to continue over the next eighteen months as high inflation necessitates high interest rates. Domestic inflationary pressure has remained persistent, and with ongoing domestic demand pressure, interest rates are expected to remain at their current level over the next year in order to reduce inflation. High interest rates are expected to constrain economic growth to a quarterly average of 0.4% over the next year, and the unemployment rate is expected to rise to 5.4% while wage growth eases from a relatively high 6.9% in June 2023 to 3.7% in June 2027.”

In other words, by increasing pressure on inflation, the record rate of migration is ensuring interest rates remain higher for longer. This is expected to lead to business closures and rising unemployment, all of which flies in the face of the Prime Minister’s claims that Labour is managing the economy well.

The record levels of migration caught many people by surprise.

Jarrod Kerr, chief economist at Kiwibank, expected net migration to be running at around 40,000, not 100,000: “It’s much greater than anticipated.” He estimated another 40,000 or 50,000 homes will be needed: “we simply don’t have enough…we’re going to find ourselves with an even greater shortage in a year’s time. That’s something that worries me.”

Westpac’s chief economist Kelly Eckhold explained that as a result of the increased population growth, “Our forecast is for house prices to go up a shade under 8% in the next year.”

Clearly, the effect of record migration on house prices will be yet another challenge to confront the incoming government.

The July 2023 international migration data from Stats NZ provides some insight into what’s going on. It explains that present net migration levels are the highest on record and it identifies citizens of India, the Philippines, China, South Africa, and Fiji as driving this record immigration influx.

They also explain that this year’s migration gain is more than double the long term pre-Covid July year average. And when it comes to Kiwis leaving the country, they note there’s been an almost two-year exodus: “There have been 21 consecutive months of net migration losses of New Zealand citizens to July 2023, amounting to 55,600.”

What’s quite bizarre about all of this, is the fact while the Labour had approved the highest number of immigrants ever to enter the country, virtually no-one seemed to be aware of what was going on.

While the Minister of Finance was glowing about the state of the books, Auckland University’s Economics Professor Robert MacCulloch had questions: “I can’t make sense of the Finance Minister’s statements… He claims the country is in better shape than expected and that the ’forecasts showed New Zealand would avoid recession, with wages keeping ahead of inflation’.

“So here’s my question – GDP growth up to June 2024 is forecast to be just over 1%. On the other hand, it is also stated immigration is now running at 100,000 a year, corresponding to an increase in 2% of our entire population. But if total GDP is only growing at a bit over 1% and the population is growing at 2%, then GDP per capita must be declining, since GDP per capita equals total GDP over population size.

“In other words, from an individual perspective, we are entering a deep recession. But the Finance Minister says Kiwis are getting better off since our inflation-adjusted incomes are rising, so everything is hunky dory. Have I missed something? It doesn’t add up… No one feels they are getting better off. I reckon the Finance Minister is telling a porker.”

As Professor MacCulloch points out, in spite of the Finance Minister’s own PREFU numbers showing GDP per capita is collapsing – from a 2.1 percentage increase in the year to July 2023, to negative 0.7 percent in the current financial year, before recovering to 0.6 percent increase in 2025, and stabilising at a 2 percent increase in 2026 – he’s telling 5 million Kiwis they are all better off!

This week’s NZCPR Guest Commentator, Dr Bryce Wilkinson, a Senior Fellow at the New Zealand Initiative and a former Director of Treasury, explains the PREFU raises serious concerns about Labour’s management of the economy:

“Treasury’s pre-election forecasts confirmed that Government spending exceeds revenue by more than what was forecast in the May 2023 Budget.

“Far too many commentators are concluding the increase is not too bad.

“Do not be fooled. The forecasts are not realistic. They are too optimistic.”

Dr Wilkinson points out that while Treasury must accept the advice given by the Minister of Finance that they have cut back on new spending through to 2027, he reminds us that Labour has a track record of seriously blowing their budgets:

“Labour’s Fiscal Plan in 2017 proposed to increase core Crown operating spending by just $11.7 billion. Two years later Treasury put the increase at $27.7b. That increase made a mockery of Labour’s fiscal plan.

“The subsequent spending response to Covid-19 took the increase to $77.4b. That additional blow-out would have been understandable were it temporary.

“It is neither temporary nor the full story. Spending in the year ended June 2024 was forecast to be $116b. This week, the forecast spending is $139b.”

Over the six years that Labour has been in office, Core Crown expenditure has blown out from just over 27 percent of GDP in 2018, to almost 34 percent in this current financial year.

The debt story is eye watering. From net core Crown debt of $57.5 billion when Labour took office, it is expected to be $181.6 billion by the end of this financial year, rising to an astonishing $195 billion by 2027.

Now that we better understand just how appalling Labour’s economic management really is, it’s worth remembering an important lesson from history.

Following the Second World War both Germany and Britain found themselves mired in economic crisis.

In 1948, West Germany’s Economics Minister Ludwig Erhardt introduced sweeping reforms. Virtually overnight, the bureaucracy was curtailed, taxes were flattened, and the country was transformed into a free market economy.

To encourage hard work, tax on earnings from hours worked over 40 hours a week was abolished, and to incentivise exports, taxes on all profits earned through exports, were eliminated.

Released from the shackles of an overbearing bureaucracy and excessive taxation, innovation flourished, productivity soared, and exports skyrocketed. The country prospered, and Germany, the vanquished, overtook the victorious UK to become one of the world’s strongest economies.

Meanwhile, in the years after the War, the British state assumed more power and virtually ran the country into the ground. Racked by stagflation and labour strife, when Margaret Thatcher became  Prime Minister in 1979, she promised to restore a culture of entrepreneurship: “I came to office with one deliberate intent: to change Britain from a dependent to a self-reliant society – from a give-it-to-me, to a do-it-yourself nation. A get-up-and-go, instead of a sit-back-and-wait-for-it Britain.”

Her reforms, which embraced the virtues of freedom, lower taxes, and less regulation, reinvigorated the British economy. 

History is clear. The best way to grow an economy is for the Government to get out of the way and let businesses do what they do best: create jobs and wealth. New Zealand’s future should harness the entrepreneurialism, energy, and expertise of Kiwis wanting to build a good future for themselves and their families.

With that in mind, Dr Wilkinson warns against detractors who claim the PREFU shows lower taxes are not possible: “Some commentators argue that the forecasts mean tax cuts are off the table. That assumes all existing spending is sacrosanct. That assumption is absurd.”

And absurd it is.

Thanks to Labour the bloated Public Service is awash with taxpayers’ cash. Spending blowouts are everywhere – like the plan by the Ministry of Disabled Peoples to hold a two-day staff meeting at a cost of $88,000! Or the Ministry for Pacific Peoples, not only wasting $40,000 on a farewell party for their Chief Executive, but also spending $52,000 promoting Labour MPs at post-budget breakfasts.

And how much money will Labour have wasted on propaganda?

The revelation that last year they paid $500,000 for climate propaganda to be reported as news is undoubtedly just the tip of a very large iceberg.

What about the $1 billion Greens Jobs for Nature scheme, or the $3 billion Provincial Growth Fund, or the $50 million spent on consultants for a bike bridge that was never built.

Then there’s the $100 million Labour spent over the last six years on consultants for Auckland’s light rail – a project originally costed at $4 billion, that Treasury has now estimated at $30 billion, that hasn’t even been started!

Or what about the billions of dollars that have been spent implementing the divisive race-based objectives of He Puapua. That, of course, includes Three Waters, which has already suffered a billion-dollar blowout in establishment costs – a figure that could end up being many times higher by the time this senseless policy is reversed by a new government.

With Dr Wilkinson reminding us that core Crown spending is averaging $1 billion every three days and that the Auditor-General has expressed grave concerns over a lack of accountability for spending by Labour, there will be no end of wasteful projects that can be curtailed by a new government to make tax cuts affordable.

Finally, it is indeed ironic that in the days following the release of the PREFU, instead of the mainstream media holding the Government to account for the economic catastrophe they have created, their main focus appeared to be on helping Labour attack National’s tax policies.

Whether voters are still bothering to listen to such spin, will no doubt be revealed on October 14! 

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*How would you rate Labour’s management of our economy? 

Dr Muriel Newman established the New Zealand Centre for Political Research as a public policy think tank in 2005 after nine years as a Member of Parliament. The NZCPR website is HERE. We also run this Breaking Views Blog and our NZCPR Facebook Group HERE


Rob Beechey said...

Muriel’s excellent and startling assembly of the facts that New Zealand finds itself in is frightening. What is even more disturbing is the criminal behaviour of the Marxist lapdogs, the paid off MSM’s failure to disclose this to the NZ people. Robertson, Hipkins and Ardern must be held to account for turning this once rockstar economy into a generational mess. Why we are even going through this election run up hype says a lot about the failure to inform how dire our position is. Power to govern sensibly in NZ is clearly absent in this current group of idiots and must be immediately replaced by grownups to formulate a journey out of this mess.

Anonymous said...

This election should have little to do with finances - the headlines should be about restoring democracy to NZ.
Our last chance to be regarded as a First World nation that runs on true democratic principles.