Coalition scenarios outlined; focus on NZ First roles

Nick Tuffley
Nick Tuffley
Negotiation and friction are likely to play a big part in coalition talks before the final makeup of the government is announced, but Saturday's election result does not seem to have upset financial markets.

ASB chief economist Nick Tuffley outlined various scenarios in his election economic note entitled ``The Hunger Games''.

One aspect of the negotiations would be ministerial roles for New Zealand First MPs - how many and what. Most important will be what role NZ First leader Winston Peters would take.

``The other key aspect will be the policy negotiations to see which of the major parties will give NZ First the most concessions.''

The immediate reaction on money markets was for the New Zealand dollar to oscillate in a tight range, but it remained largely unchanged from Saturday's offshore close of US73.3c, he said.

Interest rates had not moved.

Brokers said investors were likely cheered when the National Party won the most votes, but any upside had been capped by National's inability to form a government on its own.

During the period of coalition negotiations, markets could experience modest volatility as they tried to keep track of which way New Zealand First would lean.

In the short term, different coalitions would have some subtle differences, Mr Tuffley said.

Under a National-NZ First government, ASB expected negligible lasting election impact on the assumption the economic direction of the coalition would not materially shift.

Under a Labour-NZ First government there would be potential for both the dollar and short-term interest rates to soften slightly in the short term on uncertainty about the economy's near-term direction and on potential or actual changes to the monetary policy framework.

``A change in government means fresher faces and less immediate familiarity with policies. The size of the majority may also matter.''

Longer term, local and global economic environments would dominate, Mr Tuffley said.

The fiscal differences were only subtle in the scheme of things. In all probability, any government was likely to run looser fiscal policy than the pre-election status quo. Fiscal policy would be ``relatively looser'' under a Labour-led coalition.

Labour's Budget responsibility rules suggested net government debt in the 2020-21 financial year would be $11billion higher than Treasury's pre-election debt forecast.

However, Labour's plans showed net core Crown debt still fell from 22.5% of GDP in 2016-17 to 21% of GDP in 2020-21 - a positive trend.

For perspective, the median lift in 10-year bond yields right after Labour victories had been a modest 0.15%, a move of a single eventful day in financial markets, Mr Tuffley said.


 

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