Opinion & Commentary

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Land of the long white cloud faces bad weather

Luke Malpass | The Age | 24 November 2011

SINCE 2008, New Zealand has been led by former investment banker John Key's National Party. The party campaigned on growing New Zealand's economy and encouraging individual enterprise. However, three years on, what exactly has the Key government achieved?

The challenges facing New Zealand are substantial. Over the past decade, government spending has doubled from $NZ34.5 billion ($A26 billion) to $NZ70.5 billion, a real increase of 57 per cent. Core government spending is up to 35 per cent of GDP, while the government's overall share of the economy is 45 per cent (well, actually 49.9 per cent this year if the earthquake costs are included), a full 10 per cent higher than in Australia.

In the meantime, this massive level of government involvement in the economy has not created a happier, healthier or more

Indeed, this great spending spree, begun under the former Clark government and continued by Key, actually disguises the fact that the real economy (the so-called tradeables sector) has been in recession since 2004-05. All the while the non-tradeables (government) sector has grown apace, meaning a large tax burden and upwards pressure on interest rates and the NZ dollar.

For New Zealand, a nation so heavily reliant on exports, this is a rather bad cycle, as Australian exporters know all too well. The high dollar has become such a large political problem that the opposition Labour Party has promised, if elected, to totally revisit the Reserve Bank of New Zealand Act and inflation targeting.

When New Zealand officially slid into recession in early 2008, the real economy had actually been in recession for a full three years. As revenues dropped, the deficit skyrocketed to $NZ18 billion, or 9 per cent of GDP, this year. Although half of this is a result of the Christchurch earthquake, it is still $NZ9 billion, or 4.5 per cent. This compares with a paltry 1.5 per cent in Australia.

The challenges facing New Zealand's new government, whatever its composition, are of a different order of magnitude than those facing the Gillard government. And all these challenges (except the earthquake) are basically the same as they were in late 2008, when the Key government was elected.

So how are the prospects for a reforming government after this election? Slim, it would seem. Prime Minister Key is literally the most popular politician in the Western world, with a consistent net job satisfaction rating (approval minus disapproval) of 52 to 58 per cent for the past three years. Compare this with Julia Gillard and Tony Abbott at minus 21 per cent and US President Barack Obama at minus 4.3 per cent.

Politicians are not often popular for making big economic reforms and Key has largely refrained from doing so. Indeed, unlike Australia, ''reform'' is basically a political swearword in New Zealand. There has been a little rebalancing of the tax system (income and company tax rates down, GST up) and industrial relations law has been made slightly more flexible. He also has the advantage, which should not be understated, of not being a lifetime pollie, or Helen Clark.

Indeed, along with his policy timidity, Key's political style is the opposite of the Gillard government. Instead of regularly making inane announcements, his government quietly gets on with implementing its modest promises and plans. Instead of repeating infantile slogans, Key answers questions, and admits error or ignorance.

In this modest vein, the election campaign promises a shake-up of the welfare system and partially privatising four state-owned power companies. Despite passing an emissions trading scheme, the government is watering it down as the international outlook worsens.

Unfolding international events will likely dictate the political climate and therefore the nature of political leadership and economic reform. While most polls predict a National Party majority, New Zealand's MMP electoral system means that Phil Goff's Labour Party could form government with a grab bag of Greens, Marxists and Hansonites. That, however, is unlikely.

While it has been a nice change having a moderate and popular PM, the internal logic of New Zealand's economic and fiscal challenges will dictate unpopular action from whoever becomes the next prime minister. It is of a different scale to Australia, but with the same basic challenge. Whether Key, if re-elected, has the bottle, remains to be seen.

Luke Malpass is an analyst with the New Zealand policy unit at the Centre for Independent Studies. His latest report, The Decade Long Binge: How Government Squandered Ten Years of Economic Prosperity, was released by CIS last week.