This year’s general election is shaping up to be a close one and a strong economy is providing more scope for campaign promises than seen for a long time, Westpac acting chief economist Michael Gordon says. Business editor Dene Mackenzie reviews the implications of the election on the economy.
Until a few months ago, New Zealand was comparatively free of the political uncertainties abounding across many parts of the world.
That began to change in December when John Key unexpectedly resigned as Prime Minister. Bill English, the former deputy prime minister and finance minister, was chosen by his colleagues as Prime Minister and will lead the party into the general election on September 23.
Westpac acting chief economist Michael Gordon said Mr Key’s departure added to the uncertainty around what was already shaping up to be a close election.
Depending on the election results, National might need additional partners to reach a majority this time. That was also true of the main Opposition Labour Party, and its ally the Greens.
"This means both sides could come under pressure to make larger campaign promises, and more concessions to the minor parties, to get enough votes for forming a government."
In terms of economic policy, the areas where the current government appeared most vulnerable were migration and housing affordability — and the extent to which the two were connected in the minds of voters, Mr Gordon said.
There had already been some policy movement in those areas, but more could still be coming.
Fiscal policy could take a more stimulatory turn by the end of the year, regardless of who won power. With the operating balance now back in surplus, the scope for additional spending promises was greater than it had been for the past decade.
Labour had indicated it would favour more social spending, a position supported by the Greens.
National had long favoured personal tax cuts but had raised the possibility of a family assistance package, he said.
The Government also ran a sizeable capital expenditure budget, covering areas such as roading, hospitals, schools and defence.
The capital spending allowance had already been increased twice in the past year, in recognition of the fact the nation’s infrastructure needed to keep up with its rapidly growing population.
With net migration, and population, running ahead of the Treasury’s forecasts yet again, it was likely a further boost to spending in that area would be needed, Mr Gordon said.
In the past two elections Labour campaigned on detailed changes to the policy framework.
This time around, it had been less prominent but Labour had indicated it would add a focus to the Reserve Bank’s goals. It was also possible if New Zealand First held the balance of power after the election, it could demand changes to the monetary policy framework as part of any support agreement.
The election combined a second source of uncertainty for monetary policy. Reserve Bank governor Graeme Wheeler would leave when his term expired on September 25. Assistant governor and head of financial stability Grant Spencer would be acting governor for six months to avoid any potential conflict of starting the search for a new governor immediately after the election, Mr Gordon said.
The Reserve Bank governor was not, at least directly, a political appointment. By delaying the search until after the election, the board could select a candidate who was open to any changes an incoming government might have in mind. That could include not just changes to the Reserve Bank’s goals as defined in the Policy Targets Agreement, but also changes to the monetary policy framework itself, such as a formal shift to a committee decision-making structure.
The Reserve Bank had been seeking to add debt-to-income ratio limits to the list of macroprudential tools covered in its Memorandum of Understanding with the Government. There were already signs of wariness about such tools. New Finance Minister Steven Joyce had requested a full cost-benefit analysis of the limits before adding them to the toolkit, Mr Gordon said.
The vacancies at the top of the Reserve Bank — Mr Spencer would retire after serving as acting governor — placed macroprudential policy even further into unclear waters.
"The next governors could bring a different philosophical approach to this branch of policy and perhaps a more critical view of the evidence for its effectiveness."
