The early pronouncements from the newly installed New Zealand government suggest that the country is in for a lengthy period of policy drift. Jacinda Ardern’s unlikely elevation to the New Zealand prime ministership brought with it an interventionist policy agenda with a focus on redistribution. These priorities, alongside an apparently limited understanding at senior levels of government of the fundamental drivers of productivity growth, suggest the country faces a real risk of a steady erosion of living standards.
Last September’s election in New Zealand stands as a warning that competent economic management will not be sufficient to guarantee electoral success in the face of popular demands for curbs on immigration. In an unexpected result, the incumbent center-right National Party led by accomplished, if wooden, former Finance Minister Bill English was unable to form government following an 11.8 percentage point surge in support for the opposition Labour Party.
Despite the National Party outpolling Labour by 44.4 percent to 36.9 percent, the proportional voting system in New Zealand resulted in minor parties, the Greens and New Zealand First, holding the balance of power in the country’s 120 seat unicameral parliament. With neither major party achieving a majority in parliament, leader of the anti-immigration New Zealand First Party, Winston Peters was gifted the role of king-maker and ultimately decided to swing his 9-seat voting bloc behind Labour.
Labour Leader Jacinda Ardern’s center-left coalition government is held in place by a power-sharing agreement with the far-left Green and nationalist New Zealand First parties. At just 37 years old, with a thin resume, Ardern became the unlikely 40th prime minister of New Zealand with veteran nationalist politician Winston Peters appointed to the equally improbable roles of deputy prime minister and foreign minister.
Immigration was a sleeper issue throughout the campaign, seldom mentioned explicitly but an obvious subtext to much of the electorate’s consternation around housing affordability and fraying public infrastructure. Opinion polling consistently showed around half of all New Zealanders believed the overall rate of immigration was too high, with only small minorities supporting an expanded program. In light of the immigration trends of recent years that should have been expected.
New Zealand is a small island country of 4.6 million people, a bastion of liberal democratic values on the far side of the world. The last four years saw the National Party preside over an unprecedented surge in net overseas immigration, skyrocketing from virtually zero in 2012 to a record level of 72,470 over the year to June 2017. Immigration alone led to a 5.7 percent expansion of the population over this period. On a per capita basis, the pace of immigration in New Zealand is running at around five times that of the legal intake of the United States.
Housing supply restrictions in combination with surging net overseas immigration led to strong upward pressure on house prices, which rose in excess of 40 percent over the last four years. Research by the Reserve Bank of New Zealand shows immigration has large effects on the residential property market, estimating that a 1 percent increase in population leads to an 8 percent increase in house prices.
Demographia ranks Auckland as the fourth least affordable housing market in the world, up one place from fifth last year and placing behind Hong Kong, Vancouver and Sydney. Auckland house prices are ten times average household incomes and the rate of national home ownership has fallen to its lowest level in 1951.
All of which is before considering the infrastructure pressures that have become apparent as a result of rapid and unplanned for population growth. That complacency on immigration policy became the Achilles’ heel of an otherwise competent and incrementally reformist government is unsurprising.
Layered on top of the rapid intensification of immigration inflows, housing affordability has also been noticeably affected by cashed up foreign investors. In common with property markets in many English-speaking countries on the Pacific Rim, New Zealand house prices have been pushed higher by hot money from wealthy Chinese investors looking for safe havens abroad to park their wealth and potentially secure residence.
Whereas these pressures in Vancouver led to a 15 percent tax on foreign investors, New Zealand is proposing an outright ban on purchases of house by foreigners, with Trade Minister David Parker stating the measure is necessary to “protect New Zealanders against some of the excesses of global capitalism.”
Immigration was one of the few major points of difference between the National and the Labour parties during the election campaign. The incumbent’s promise of business as usual and a record pace of overseas arrivals contrasted markedly with a Labour commitment to reduce annual net overseas arrivals by between 20,000 to 30,000 people, in addition to cracking down on student visas for poor quality educational programs. New Zealand First were promising to go even further, proposing to shrink the intake to just 10,000 per annum in total.
At a basic level the electorate’s response was not hard to understand. The modest reform legacy from nine years of the National Party had a positive yet marginal effect on people’s standard of living but that dividend was swamped by the dramatically reduced housing affordability and urban congestion that accompanied their immigration policy.
Labour cannily, yet subtly, tapped into the political angst around immigration and then managed to cobble together a potentially fractious political coalition to scramble into government. To be sure, Labour’s electoral success was also bolstered by a suite of populist new spending measures, funded in part by scrapping National’s planned income tax cuts.
Measures to woo voters included the planned construction of 100,000 new affordable homes over the next ten years, the abolition of fees for university students and a range of new welfare payments.
It was not entirely clear what New Zealand’s improbable new prime minister would offer in terms of leadership beyond her election commitments. A communications graduate with no real world experience, Ardern’s first job was as a political staffer to then New Zealand Prime Minister Helen Clark. She has also worked for former Opposition Leader Phil Goff, as well as a spell in London as a low-level bureaucrat in Tony Blair’s Cabinet Office when he was British prime minister.
Young and photogenic, Jacinda Ardern presents as genial but insubstantial. The media labeling her sunny yet vacuous political persona the “Jacinda Effect” throughout the campaign, anodyne enough to escape serious public scrutiny and not sufficiently interesting by way of policy convictions to scare the horses.
After her election, Ardern proudly declared that the market had “failed” when it comes to housing the poor, remarks that were unfairly portrayed by the media as suggesting she believed capitalism had failed. Perhaps more telling of Ardern’s true political instincts was her presidency of the International Union of Socialist Youth less than ten years ago where she liberally used the word “comrade” to describe her fellow travelers.
Business confidence tanked following the change of government and represented a resounding vote of no confidence in Labour’s policy agenda. Sentiment crashed to a level not seen since the financial crisis and has only partially retraced a fraction of those losses.
Similarly, the New Zealand dollar came under pressure in the wake of the election as currency markets weighed the implications of Labor’s interventionist economic policies and hostility to foreign investment. International investors are justifiably wary of heightened political risk in New Zealand.
The opening months of the Labour government have seen policy announcements focused on the implementation of core election promises and the commencement of review processes.
Amongst these measures are an array of new welfare benefits, one year of free university education for school leavers and the ban on foreign home buyers. The minimum wage is in the process of being hiked more than 25 percent until it reaches $20 an hour by 2021, with the first of these increases scheduled to be introduced in April. New Zealand has also adopted a zero carbon emissions target for the year 2050.
Of particular concern is the absence of credible detail on the government’s economic strategy in a recent landmark policy speech by Finance Minister Grant Robertson. In an address to the Productivity Commission, Robertson acknowledged New Zealand’s economy’s stagnant productivity growth – flat over the last five years by some measures – but failed to outline policies that would have any meaningful impact in terms of improving that performance.
Instead there was mention of inclusive growth, a just transition to a zero carbon economy and Treasury’s new Living Standards Framework against which the government would frame its first “Wellbeing Budget” in 2019.
There was also confirmation that the government’s dirigiste impulses are in fact deeply rooted. It is a measure of how far New Zealand has veered to the left and away from mainstream economics that the finance minister openly remonstrates that we must “move beyond the tired and dangerous idea that we can simply leave the response to market forces to decide how New Zealand fares in the future world of work.” The government’s expenditure of $3 billion on its Provincial Growth Fund, a regional infrastructure program that includes planting 1 billion trees, was provided as example of how “the state needs to be an active participant in how we shape the future of work.”
Another arm of the government’s economic strategy involves ramping up expenditure on research and development from 1.3 to 2 percent of GDP over a period of ten years. There is no detail on how this will improve productivity but it will involve government providing subsidies for private sector research. The 2 percent target was included in the coalition agreement with New Zealand First and doubt remains over the extent to which it is achievable, or even wise in the event it can be reached.
These ideas are leagues away from the discipline and intellectual rigor of the reform era of the 80s and 90s that delivered a dramatic improvement in the living standards of New Zealanders. During this period tax rates were cut, industries were de-regulated and the size of government was shrunk. These supply-side reforms seem obvious in retrospect and are a major reason why New Zealand is ranked third in the world for Economic Freedom by the Fraser Institute.
There should be genuine concern about the policy direction of the Ardern government, particularly given the extent to which the current trajectory could deteriorate in light of the absence of a coherent framework for its policy thinking. Jacinda Ardern is an accidental prime minister, riding high temporarily on the rapturous reception from a gushing media that ushered her into office. The burden of office is likely to prove less accommodating and the likelihood of policy missteps is heightened given the poor fundamentals of the government at senior levels. The more interesting question is whether those mistakes will give rise to any meaningful political accountability in an environment of diminished interest in sound policy.
Burchell Wilson is a consulting economist with Freshwater Economics