Can New Zealand cut its way to growth?

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1. 0:06Speaker 1: Kia ora, I'm Jane Yee, in for Chelsea Daniels, and this is The Front Page, a daily podcast presented by
2. 0:11Speaker 1: the New Zealand Herald. For decades, New Zealand's economy has relied heavily on a booming housing market. Rising house prices
3. 0:22Speaker 1: made homeowners feel wealthier, encouraged borrowing, and kept the money flowing.
4. 0:27Speaker 1: But house prices are no longer climbing, in fact they're falling.
5. 0:30Speaker 1: Households are reluctant to spend and the economic recovery we've been promised has yet to materialise. Now with both National and Labour's fiscal plans on the table, could the very
6. 0:39Speaker 1: policies intended to get our economy growing actually be holding it back? Today on the front page, economic commentator Bernard Hickey joins us to explain why he thinks New Zealand's
7. 0:49Speaker 1: economic playbook is broken and what needs to change. Bernard, thank you for joining us. Much to talk about, but
8. 0:59Speaker 1: something that you mentioned that I want to pick up on in particular is you've described both major parties as imposing a sinking lid on government spending.
9. 1:07Speaker 2: What do you mean by that?
10. 1:09Speaker 3: Yeah, so over the next three or four years, essentially they're doing the same thing, which is trying to squeeze the size of government overall down from about 32% of
11. 1:19Speaker 3: GDP to 30% of GDP.
12. 1:22Speaker 4: And you ask, well, how is that possible? Because.
13. 1:25Speaker 3: There isn't much changing in terms of the government promises to people. You know, there's still the same rules about New Zealand superannuation. We still expect to turn up at
14. 1:35Speaker 3: the hospital and be treated. We still expect to send our kids to school and not have to pay for it.
15. 1:41Speaker 3: So how do I do that? Well, essentially, this is a trick that governments have been doing for the last 30 or 40 years, which essentially is holding spending down
16. 1:50Speaker 3: while the rest of the economy grows around it. And the idea is that you can just squeeze things tight, put a sinking lid on it, and then if you're lucky,
17. 2:00Speaker 3: you'll get plenty of growth around it. And then over time, that spending as a share of GDP will be squeezed down.
18. 2:08Speaker 3: And that's worked a few times through the 2000s under both the then Labour government and then the national government,
19. 2:16Speaker 3: and also through the mid-2010s. So after the earthquakes, after Bill English brought in the so-called zero budgets, there was
20. 2:26Speaker 3: a really tight period where the government actually reduced its share of the economy. So when you have a government
21. 2:34Speaker 3: reducing its share of spending in the economy, you really need someone else to step forward.
22. 2:40Speaker 2: Okay, so what's the problem? What's the problem then?
23. 2:42Speaker 1: If it's worked before, then why might it not work again?
24. 2:46Speaker 4: Exactly.
25. 2:47Speaker 3: So it's worth looking at why it worked in the 2000s and why it worked in the mid-2010s. Essentially, as the government stepped back, households, to a large extent, and
26. 2:59Speaker 3: early on businesses, stepped forward. And they said, right, well, if the government's not going to.
27. 3:03Speaker 4: Spend, I'll spend.
28. 3:04Speaker 3: So they went to the hardware stores, they went to the real estate offices, they built houses, they did renovations, they bought cars, they went on holiday. There was a
29. 3:16Speaker 3: lot of spending that went on. And largely it was from people who owned homes, could see the value of those homes rising. And remember, when you've got a mortgage and the value of your home rises 10%, if you've
30. 3:28Speaker 3: got a 50% mortgage, then you've got a 20% rise in the value of your equity. And of course, you're not paying tax on it. So people suddenly felt quite rich.
31. 3:37Speaker 3: And when you feel rich, A, you're quite keen on spending.
32. 3:40Speaker 3: And secondly, you can also borrow some money from the bank.
33. 3:44Speaker 3: We forget that between 2000 and 2008, the bank's growth of mortgage lending was running at 10%, 15%, 20%. Now
34. 3:55Speaker 3: we'd be lucky to get 3% or 4% growth. And that's the real difference. Back then, in the 2000s and in the mid-2010s, There were very few restrictions on bank
35. 4:06Speaker 3: lending to people. People back then, before the boom, didn't have so much mortgage debt relative to their income. And also interest rates were falling through much of that time
36. 4:18Speaker 3: or relatively low.
37. 4:19Speaker 4: House prices aren't rising. Okay.
38. 4:21Speaker 1: And you said another key word that you mentioned in your very first answer was if we're lucky.
39. 4:26Speaker 2: If we're lucky.
40. 4:27Speaker 1: So the government are relying on economic growth. Opposition also would be relying heavily on economic- Same forecasts.
41. 4:35Speaker 2: Same forecasts.
42. 4:38Speaker 1: But in your mind, perhaps that economic growth isn't on the horizon.
43. 4:42Speaker 3: No. And it's worth challenging Treasury on this because for the last four years, they've been saying, the growth is coming.
44. 4:49Speaker 4: Don't worry. It always comes. We always bounce back.
45. 4:52Speaker 3: Now, over that time, the Reserve Bank had to step in a couple of times and say, hey, that's looking a bit too hot, people, just calm down. We'll put some loan-to-value ratio restrictions on you. And there was a
46. 5:04Speaker 3: ramping up of those restrictions over those years, which slowed things down. And the one moment when they were taking it off during COVID, poof, off we went again.
47. 5:12Speaker 4: Then they were put back on.
48. 5:14Speaker 3: And actually, there's a new one in the last year or so called the Debt-to-Income Multiple Control, which actually also restricts rental property investors from jumping into the market. And
49. 5:23Speaker 3: since then, of course, since 2022, We've seen anywhere between a 20% and a 40% fall in house prices, depending
50. 5:32Speaker 3: on where you are in the country. There's exceptions, you know, Queenstown, which is part of the Australian economy, I personally think. Christchurch, which is doing pretty well, partly because of Queenstown, but also because there's been a lot of rebuilding there. And
51. 5:44Speaker 3: of course, it's doing well from the rural economy, all of that dairy money that pumps in and down in Canterbury.
52. 5:49Speaker 4: Yeah.
53. 5:51Speaker 3: Auckland, Wellington, Hamilton, Nelson, Dunedin, these are places where people who live there have seen their house prices fall 20%
54. 6:00Speaker 3: to 40%. In some parts of Wellington, for example, it's awful.
55. 6:05Speaker 3: I mean, those people who happen to buy in 2020, 2021 are just wiped out. And so they're not in the mood to spend. And the question is, the Treasury
56. 6:15Speaker 3: is saying, don't worry, we'll get some house price inflation eventually, although not particularly quickly. And households and businesses will get
57. 6:22Speaker 3: back into investing. But actually, households are slowing their borrowing growth.
58. 6:29Speaker 3: That's because the amount of sales in the housing market is slowing down. And you're getting a sort of a compounding effect, a bit of a spiral going on here.
59. 6:38Speaker 3: Treasury is saying we'll get a rebound in consumer spending and in business investment. but we haven't seen it for three years. They've been wrong for three years. They were
60. 6:47Speaker 3: forecasting 200,000 jobs growing for years and years.
61. 6:50Speaker 4: Hasn't happened.
62. 6:52Speaker 3: They're forecasting it again. So why do we trust them or believe it this time around when actually the headwinds, not just from falling house prices, but also from the
63. 7:02Speaker 3: rest of the world, higher interest rates, higher energy costs, costs of living. This is really dampening down on the consumer.
64. 7:10Speaker 3: And it means that as the government pulls back, There's nothing to go into it, into the gap. And so the economy stagnates in many ways in the way it has for the last three years.
65. 7:20Speaker 2: Okay. So you talked specifically about health and social.
66. 7:23Speaker 1: So let's talk about, because we could talk about housing and the effect of the housing market till the cows come home. Let's talk health and social because you highlighted that.
67. 7:31Speaker 1: How does government spending on health and social services contribute to economic growth?
68. 7:36Speaker 3: Yeah, so when someone turns up at the hospital to do the work, they get paid a good wage and then they go and spend it. And essentially all of that money that goes in from the government will circulate
69. 7:48Speaker 3: through the economy and often at quite a high rate because most people who are working for the government, they might be nurses or cleaning hospitals or they might be
70. 7:59Speaker 3: teachers or doctors or they might be working in an MSD office, typically they're spending all their money. So they're not putting a lot aside. And also, there's a whole
71. 8:09Speaker 3: bunch of other services that happen as well. Who's going to clean the hospital? Who's going to build a hospital?
72. 8:14Speaker 3: And so there's a lot of work that goes in there, and that's GDP. And when the government pulls back, that means less economic activity. And if you're looking for an example of that, just go to what I call ground
73. 8:25Speaker 3: zero of our economy right now, which is the Wellington economy, where you've got a double whammy of A slowdown in consumer spending generally linked to the housing market, but then
74. 8:35Speaker 3: a slowdown in spending because there's fewer people employed in the civil service. And more importantly, warnings about another 10,000 job losses to come.
75. 8:44Speaker 1: In terms of, you know, you've talked about jobs in health services and in social services, but presumably also the care and the level of care that people get will mean people are back to work sooner, that sort of thing too?
76. 8:56Speaker 4: Exactly.
77. 8:56Speaker 3: And when you look at some of the spending reductions that we've seen and the ones that are about to happen, so things like making teenagers stay at home, withdrawing spending
78. 9:08Speaker 3: on people with disabilities, the compounding effect of less spending in the healthcare sector to deal with shortages in staff
79. 9:18Speaker 3: and equipment. You know, also homelessness. You know, there are people who are homeless because the government hasn't spent more money on building new houses or putting people in motels.
80. 9:29Speaker 3: And so when they get sick, they go to the hospital.
81. 9:32Speaker 3: Same with a lot of the spending with the elderly.
82. 9:36Speaker 3: If you're not being looked after, if you don't have the right care at home, that means you're more likely to turn up in hospital and it's $ 1, 000 a night once you're there And of course, we've got these underlying
83. 9:46Speaker 3: health conditions with obesity, with mental health, which means that the weight of spending demand in the health care system is actually faster than the rest of the economy. So
84. 9:57Speaker 3: we've got an ageing population, a sicker population. And so when you constantly put a sinking lid on that, and it will be both national and labour, and labour did
85. 10:08Speaker 3: it between 2017 and 2020, you can see it in the spending on capital expenditure, on staffing, There just wasn't the same growth. Now, it was different after 2020. We
86. 10:19Speaker 3: had an excuse, if you like, to spend properly. But then that was reined in, and the same thing happened in 2023. So when the government pulls back that spending,
87. 10:30Speaker 3: that's money that's not going into the economy. Now, you argue, well, we have to do it sometime because the theory is money being spent by the government is never as efficient
88. 10:40Speaker 3: and never generates as much productivity, never– really solves the problem.
89. 10:46Speaker 3: It's always better with the private sector. Well, that may be true in some cases. It's a good question about whether it's true in the long run. But what's interesting
90. 10:55Speaker 3: about the private sector spending, which often has to come from borrowing against houses, is that it doesn't always circulate.
91. 11:03Speaker 3: I that goes to people who are already quite wealthy, that tends to stay in the bank. And when you actually look at the amount of money that's in our
92. 11:14Speaker 3: term deposit accounts and our savings accounts right now, it's close to $ 300 billion.
93. 11:18Speaker 4: It's not circulating.
94. 11:20Speaker 3: And that's one of the issues when you, you know, for example, give big tax breaks to landlords. The landlord's are not necessarily interested in spending it. And so it's
95. 11:32Speaker 3: sitting there in a bank account. And that's one of the issues here. Now, sometimes the proponents of this idea say, oh, don't worry, businesses will step forward. And look at all these exporters. You know, we've got all this money being
96. 11:43Speaker 3: earned from the dairy and meat sectors and kiwi fruits are going gangbusters. And look, there'll be lots of employment and expansion there. Well, the trouble with that is that
97. 11:55Speaker 3: our export sector is not very big. Our export sector is barely 25% of GDP. It's down from 35% of GDP 20 years ago. We are now much more about services.
98. 12:07Speaker 3: We are now much more about healthcare, education, retail, tourism, and they are not necessarily full of jobs that earn
99. 12:19Speaker 3: lots of money. And secondly, if you are expending money, the agricultural sector and agricultural exports.
100. 12:25Speaker 4: That's great.
101. 12:25Speaker 3: You might earn some export receipts, but you're not employing a lot of people. Farms these days.
102. 12:30Speaker 4: Are quite efficient.
103. 12:31Speaker 3: That's one of the great stories is that we produce a lot more lambs and bags of milk powder per person per hour than we ever had, thanks to automation
104. 12:42Speaker 3: and technology and tractors.
105. 12:44Speaker 2: But there go the jobs.
106. 12:45Speaker 1: Yeah.
107. 12:45Speaker 4: The interesting thing, how do we get the money circulating?
108. 12:48Speaker 3: Because remember, the other dirty little secret in our economy is we might be a housing market with bits tacked on, but every year we leak around about three to 4%
109. 12:59Speaker 3: of GDP goes out of the country and it goes out in profits from overseas owned companies and the banks and the insurers are the biggest of those. And also,
110. 13:09Speaker 3: we've got a lot of foreign owners of other assets here.
111. 13:12Speaker 3: And also, we've borrowed money from overseas, albeit government bonds in New Zealand dollars, so we can pay out in New Zealand dollars. And often the way we do it
112. 13:21Speaker 3: is by creating fresh money. The banks lend it or the government creates it. And that ends up as debt somewhere. Now, for a long time, for 30, 40 years, we had
113. 13:32Speaker 3: the government reducing its debt to GDP. But that was only possible... with the private sector increasing its debt. And
114. 13:40Speaker 3: so when we see the government step back, someone else has to step forward. When the government reduces its debt, the private sector has to increase its debt.
115. 13:51Speaker 1: Well, it happens if the government do this, they reduce the debt and the private sector doesn't step in. It's not a very rosy picture.
116. 13:58Speaker 4: No, what it means is that our economy contracts.
117. 14:00Speaker 2: Is there a real risk of that?
118. 14:02Speaker 3: Well, certainly it's done that a couple of times in the last three to four years.
119. 14:06Speaker 1: But we're talking economic growth at the moment. We're talking green shoots. We're talking everything in the next term coming right.
120. 14:11Speaker 3: Green shoots. I love those green shoots. They're always coming.
121. 14:14Speaker 3: You can always see them from a distance. And then when you wait and you wait and then it turns out to be brown shoots.
122. 14:19Speaker 2: It's an illusion.
123. 14:20Speaker 4: Yeah.
124. 14:21Speaker 3: And this is a real thing. The Treasury has forecast this growth to come for a long time. It's been wrong.
125. 14:28Speaker 3: And there's a reason it's wrong. Because it assumes that the consumers and the households will do what they did
126. 14:37Speaker 3: several times between 2000 and 2020. Yes, they could do it back then because they could borrow more and house prices were rising. Now they can't. They're a bit skint
127. 14:47Speaker 3: and house prices are falling. So there's no one to step up.
128. 14:51Speaker 2: But surely Treasury, they're not idiots, right?
129. 14:54Speaker 1: These are financial experts and they're... I don't know if you're agreeing with me or not there because your face is saying something else.
130. 15:03Speaker 3: I certainly think that they are very professional and they work very hard and they use a particular set of models.
131. 15:09Speaker 2: Okay, so they're using modelling from the past.
132. 15:13Speaker 4: Those models are wrong.
133. 15:13Speaker 1: Okay.
134. 15:14Speaker 3: So the problem is they use so-called dynamic stochastic general equilibrium models. But actually, I'm saying, and there are quite a few people around the world who are now saying,
135. 15:23Speaker 3: these models don't work, particularly when you have a... effectively a balance sheet recession, and you have a fundamental shift
136. 15:33Speaker 3: in consumer behaviour, and you don't really understand how the economy works. And this is the problem for a lot of people when they think about the economy.
137. 15:43Speaker 2: Are you suggesting that Treasury don't understand how the economy works?
138. 15:46Speaker 3: I'm saying that Treasury haven't kept up with the changes in how our economy has worked, and they have a mental model which says an economy is full of consumers
139. 15:56Speaker 3: and businesses and who respond to things like interest rates and the exchange rate.
140. 16:02Speaker 4: And that's true. That does happen.
141. 16:05Speaker 3: But what they haven't taken into account is this issue of when the government steps back, the private sector has
142. 16:12Speaker 3: to step forward. And they assumed rightly between 2000 and 2020 that they would. But that was six years ago.
143. 16:21Speaker 3: And they've been wrong for the last four years.
144. 16:30Speaker 5: Just please accept one thing. You make these arguments out when you can't pay for anything, not just super new at it. You can't pay for proper schooling. You can't pay for proper pharmaceuticals. You can't pay for the health
145. 16:41Speaker 5: system now, $ 32, $ 33 billion. Everything we've got is under enormous strain now because the economy is not running properly.
146. 16:49Speaker 5: Why don't they address the fact that they can't do it, get out of the way, and let somebody else have a go?
147. 16:55Speaker 1: The other sort of thing we have to talk about when you're talking about tight budgets is New Zealand super, right?
148. 17:01Speaker 1: Because that's sort of the elephant in the room here.
149. 17:04Speaker 1: It's another major pressure on government spending. Means testing would probably fix that, but no one is moving to means test.
150. 17:13Speaker 1: Is that because it doesn't make economic sense or is it because the parties just don't want to alienate their older voters?
151. 17:20Speaker 4: It's because Winston Peters is alive. Right. And will stay alive forever.
152. 17:25Speaker 2: I think he will.
153. 17:26Speaker 4: That's right.
154. 17:27Speaker 2: I think you're right.
155. 17:28Speaker 3: He's the unhealthiest looking healthy man on the planet. As he said just yesterday, I'm not going to betray the
156. 17:40Speaker 3: old people. He's talking about himself as well. And he is saying, I won't let it happen. And that has been a constant for the last 25 years in New
157. 17:50Speaker 3: Zealand politics. Winston Peters will not allow that to change.
158. 17:55Speaker 3: And while he is in a position to be a kingmaker, that means it won't change. And when you look at the promises in front of the electorate this time around,
159. 18:05Speaker 3: Labour is not promising a change in the retirement age or means testing.
160. 18:09Speaker 4: Neither is National, certainly not New Zealand First.
161. 18:12Speaker 3: In fact, neither is the Opportunity Party or ACT is a bit more interested in changing the retirement age. But bring in means testing, that's a whole different kettle of fish.
162. 18:21Speaker 2: Would means testing solve a lot of our issues?
163. 18:23Speaker 3: It depends where the means testing was done and how it was done in connection with other types of taxes.
164. 18:31Speaker 3: The difference now is that, and it's one of the reasons why it's going to be so difficult to get the economy growing normally, is that the government, if you've
165. 18:41Speaker 3: got this preset path to reduce the overall size of government from 32% in GDP to 30% in GDP, you're
166. 18:49Speaker 3: having to overcome... natural growth in government spending from an
167. 18:55Speaker 3: ageing population and because of the pre-cooked superannuation rate, which
168. 19:02Speaker 3: is set at 66% of the average wage. And that means that You have to work that much harder to put the sinking lid on the other parts just to
169. 19:13Speaker 3: make up for the growth coming from New Zealand superannuation.
170. 19:16Speaker 2: Spinning plates.
171. 19:17Speaker 4: Exactly.
172. 19:18Speaker 3: But a couple of the plates you have to keep thumping down on the rest of spending. That's why, you know, the government has proposed, or the National Party has proposed,
173. 19:28Speaker 3: you reducing benefits for people who've been unemployed for more than a couple of years, you know, getting people off
174. 19:36Speaker 3: the benefit who, in theory, voluntarily gave up their jobs.
175. 19:43Speaker 3: Labour has not said they would reverse, for example, removing the teenagers' unemployment benefit. And if you look at Labour's
176. 19:51Speaker 3: history from 2017 to 20, before COVID, it was doing exactly the same sinking lid thing that National was doing.
177. 19:59Speaker 3: That's why Jacinda Ardern was not able to fulfil her promises earlier. and actually do what the Welfare Experts Advisory
178. 20:07Speaker 3: Group recommended with benefits. And child poverty improved a bit, but not that much. And it's been reversed since because
179. 20:15Speaker 3: the current government has made changes in not just payments for food grants and special needs grants, but also the
180. 20:26Speaker 3: amount of money going into disability. The growth of that has been restrained. And there looks to be more that's going to happen there. It's a brutal exercise when you've
181. 20:38Speaker 3: got a slow-growing economy and one part of your spending is growing much faster than economic growth. And it has to be addressed if we're going to continue with the
182. 20:49Speaker 3: current tax structure we have. And that's why you're seeing others talk about the need to bring in other types of taxes to help pay for it in.
183. 20:56Speaker 4: The long run.
184. 20:57Speaker 1: Or no new taxes as one party is trotting out consistently.
185. 21:02Speaker 1: So it's your position that both National and Labour are relying on economic growth to help improve the government's finances, but that the policies that they're putting out there may well,
186. 21:13Speaker 1: in fact, prevent the growth that they're relying on?
187. 21:15Speaker 4: Exactly.
188. 21:16Speaker 2: Because it's self-defeating.
189. 21:16Speaker 3: And the trouble is, this time around, for four years now, prices have been flat or falling, and they're falling again.
190. 21:23Speaker 3: And that's the difference this time around. Everyone assumes that we'll get back on the horse, but actually, while the Reserve Bank is limiting growth, lending into the housing market,
191. 21:35Speaker 3: while homeowners have lost confidence that they're going to see another boom in house prices, that fundamental nature of our economy,
192. 21:46Speaker 3: until it changes and we start doing things differently, for example, we start investing in a lot more real businesses, we actually put a proper tax on the growth of land
193. 21:56Speaker 3: values under people's own homes, we're not going to see a shift. And while we're laboring under this housing market
194. 22:05Speaker 3: with bits tacked on, it's brutal on the way down.
195. 22:08Speaker 4: It feels great on the way up.
196. 22:10Speaker 3: It's like the worst type of roller coaster, you know, wee, and then you throw up on the way down.
197. 22:15Speaker 2: Bernard, you're like the Grim Reaper coming in here. It doesn't sound like good news.
198. 22:18Speaker 1: I've never seen such a happy Grim Reaper, but it doesn't seem like very good news. And I mean, how, you know, if both parties are sitting at a place where it's like, much the same as we've got now,
199. 22:30Speaker 1: and we just carry on and cross our fingers and hope for the best, what is going to encourage people to get out and vote?
200. 22:37Speaker 3: Well, that's a really good question because MMP has created this situation where it's very difficult to make fundamental change in the settings of our political economy. So let's try
201. 22:49Speaker 3: a capital gains tax. We've been trying that for 15 years.
202. 22:52Speaker 3: Let's try and change the super settings. We've been trying it.
203. 22:54Speaker 3: We just cannot seem to do it because MMP gives a veto power to a relatively.
204. 23:00Speaker 4: Small group, you know, anyone with more than 5% of the vote.
205. 23:04Speaker 3: And for the last 20 years or so, that veto power has been exercised very aggressively by Winston Peters and more recently by ACT. But one thing it's very difficult
206. 23:15Speaker 3: to do is you can stop new things from happening.
207. 23:18Speaker 3: You can stop things from changing, but actually starting something new when you've only got 5% of the vote or even 20% of the vote, is tough. You need one
208. 23:28Speaker 3: of the major parties with that 30%, you hope, or more of the vote to actually choose to change as well.
209. 23:36Speaker 3: And we haven't seen that in substantial ways since MMP started.
210. 23:42Speaker 3: And I think that's one of the drawbacks of MMP.
211. 23:44Speaker 3: It makes it very difficult to have a fundamental big shift in the way you run the economy when normally,
212. 23:54Speaker 3: under first-past-the-posts, You only needed 35, 40% of the vote and then you could do it. I actually think the bigger issue is that more people need to understand and
213. 24:04Speaker 3: maybe we just need more time to work out that this housing market with bits tacked on is not going to change by itself.
214. 24:13Speaker 1: Bernard, thank you very much for your time. It's going to be a very interesting few weeks in the lead up to the election, a very busy time for you, but we appreciate you making time for us.
215. 24:20Speaker 4: Cheers.
216. 24:20Speaker 5: Thanks.
217. 24:23Speaker 2: And tune in for another look behind the headlines tomorrow.