National needs to toughen up – whether it’s before or after the election.
The great flaw of economics is it can never develop a computer model or algorithm to take account of human behaviour – least of all that engendered by politics. The day two global credit ratings agencies downgraded New Zealand, the 
Government behaved as though a double downgrade was no worse than the KFC Double Down: not good for you, but one or two won’t put you in hospital. If we all ignored the unpalatable, it would cease to be a menace. Helpfully, around that time, Tonga beat France, so it would have been bad manners not to party on. Then Dan Carter’s groin gave us something serious to worry about.
There are no econometrics to factor in self-deluding human aphorisms, either, such as it’s an ill wind. Voila, the New Zealand dollar began to plunge, partly on the strength of the downgrades. That means enhanced returns on our already seemingly gold-plated dairy produce, and more viability for our lifeline, the export sector. And it means dearer imports, so less temptation to buy the naughty luxuries that got us into this Double Down phase in the first place.
Wot, us worry?
Unfortunately, despite Prime Minister John Key’s dauntless “relaxed” motif, there is still plenty to worry about – not least the possibility that our four major banks may also be downgraded. That’ll make bank lending more expensive, on top of the interest rate spike already expected by the start of next year. For all that the Government is downplaying the downgrades’ likely impact on mortgages, it is another significant upward pressure on top of what is already quite a long queue of upward pressures.
Let’s just pause for a gallows laugh to remember that at least the productive sector won’t be much affected by this. Business borrowing has slowed to a trickle because turnover and confidence are so wretched. So that’s something to be thankful for, isn’t it?
And anyway, all that’s just local. We’re still braced for unknowable Chinese, American and European ructions to discombobulate global capital flows still further. Soon there might not even be any capital flows. Just a couple of years ago, capital dried up altogether for a spell, forcing the Reserve Bank to step in and tide our banks over. The world is in uncharted territory here. Another time, the financial gridlock could be longer than just a few weeks. What then?
In a sense, that’s a pretty pointless question, because there’s not much our or indeed any Government can do about such an eventuality. Even the immediate question of our sovereign credit rating is out of our hands.
The agencies identified our private borrowing as among the biggest negatives, at 150% of GDP. David Lange, Helen Clark, Jim Bolger, John Key and even that all-time repository of blame for every handcart to hell, Sir Roger Douglas, couldn’t force us to borrow all that money, nor could any politician force us to pay it back. Sure, they all ran policies that didn’t prevent us from leveraging ourselves senseless. But then again, Sir Robert Muldoon actively curtailed our personal financial freedom so we couldn’t be greedy – and he left the economy in worse shape than any of the above.
Although we are now starting to repay debt more quickly, we’re still borrowing and spending at a lively pace, too. A certain amount of all the above activity is essential for economic growth, but it’s hard for the Government to force us to achieve the right balance – or even determine what the right balance is.
On top of that, no politician could have predicted or prevented the Canterbury earthquakes, the billowing cost of that being another major factor in the downgrade. The bittersweet fact that the Canterbury rebuild is one of the few growth factors this economy can rely on in the medium term goes to show how beset this economy is.
Strike three is the fault of our governments: the structural imbalance of the economy. Our current account deficit is still horrible, and state spending still way out of whack. Even after all the state spending and job cuts, we’re on course to run a worse Budget deficit before we achieve surplus. This is the culmination of decades of state empire-building and the lack of resolve on the part of the present administration to take unpopular decisions.
Trouble is, even when governments implement tough measures, they still take years to feed through the system and do any good. Human behaviour again. We’re not seeing the much-touted rebalancing away from housing sector investment yet, despite the crackdown on real-estate tax benefits. It seems you only have to whisper “Auction!” in a Parnell cafe to reignite the Auckland property stampede.
And as Labour discovered in championing a capital gains tax, even that would take a decade to bear fiscal fruit.
The Government’s response to the downgrades has been pure showmanship: a) pretend it’s nothing personal, and, heck, we half expected it; b) point to all the measures we’ve already taken to address the agencies’ concerns; and c) frantically deflect attention onto private-sector debt by faffing around with KiwiSaver enrolment policy.
Well, we could hardly expect ministers to prostrate themselves and admit they’d failed miserably on the brink of an election campaign, and with the country bickering besottedly over whether Piri should come off the bench, or Izzie go in at No 10.
But the agencies’ report does rather underline the fact that from here on, the Government’s only choices entail having us sink further down the ratings tables, or lowering New Zealanders’ living standards and curtailing our financial freedoms. Either it gets a whole lot more aggressive in chasing households away from debt and towards savings and investment, or we’ll still be having these humiliating encounters with global ratings agencies in 20 years’ time (possibly in Chinese).
The low-hanging fruit are still Labour’s past election pork-barrel fillers: the Working for Families tax credit and the interest rate forgiveness on student loans. National has had a timid go at both, but on past smiley form, Key could never countenance revisiting them before this election.
But, as the Government rustles up a few campaign stocking-stuffers like the KiwiSaver auto-enrolment, it should be nerving itself to set up a mandate for bolder moves after the election. (That is always assuming the polls aren’t all hopelessly wrong and that Phil Goff doesn’t run on and score the try that finally gets us the William Webb Ellis Cup back.)
National has achieved a solid and at times logic-defying popularity, despite what on paper is a pretty poor economic and fiscal record. Partly this is because the overwhelming majority of our woes are not National’s fault, or much within its power to mitigate any time soon. Outside forces, from natural disasters to global meltdowns, have become so frightening and disempowering that putting energy into blaming our tiny domestic government seems pretty pointless. Key is easy to like, so a majority of us have chosen to like him and trust him. National has avoided capitalising fully on this popularity in its first term by not doing anything tough, and perhaps harvested from this risk-aversion the prospect of an especially comfortable win this election. But this really is the last chance for taking the tough decisions. Either National nice-guys its way through this campaign and pays the price for springing the tough moves unheralded next term or it puts the tough stuff on the agenda now. It has already defied political gravity by putting state asset sales on the agenda (and given the Coronation Street/MasterChef debacle, it could probably win more votes by offering to sell TVNZ, or even throw it in as a giveaway with the Crafar farms).
If you can get away with promising asset sales, you can probably get away with anything. And handily enough, National has alongside it the last word in ugly-tough governance models, the International Rugby Board. This malevolent dictatorship has menaced local traders, banned marriage proposals, squelched bagpipers and even ventured into the body cavities of players to impeach unauthorised mouthguards. Now it is saying it may even dispense with the All Blacks.
When, in a couple of weeks, the IRB’s reign of terror ends, a new-look nasty National could only seem a blessed relief.