Monday, February 26, 2024

Division is the real economic threat

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Cameron Bagrie weighs in on the new year’s outlook and the top issue facing the nation.
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The picks are in, and migration, inflation and fiscal policy are the three big issues for New Zealand in 2024 according to economists, as reported by the NZ Herald.

I’d put division at No 1 – and addressing it does not look easy.

The economist fraternity picks are the obvious ones through a conventional lens. Migration impacts housing, worker availability, inflation and infrastructure. Inflation siphons money out of pockets and higher costs hit business profitability. Restrictive monetary policy to tame inflation slows global growth, which impacts commodity prices. 

Fiscal policy faces a delicate balancing act, wanting to return to surplus, not crunch the delivery of services too much, address infrastructure shortfalls such as roading and deliver tax relief at the same time. Government-driven compliance adds to costs.

I will be watching infrastructure, an area where you can scalpel savings in the near-term, but under-investment eventually bites. 

The National Party’s track record on infrastructure is not good. I recently spoke to a teacher about education capital funding under the previous National Government. They only realised what they’d lost five years down the track.

If we are serious about the economy, building a better future, we need to own up, acknowledge and address division. Division is economically and socially corrosive.

The battles include young vs old, homeowner vs those aspiring, haves vs have-nots, landlord vs renter, rural vs urban, Māori vs non-Māori, respect/disrespect for the law and business owners vs workers. Division and a new government brought protests in December 2023, following protests against the previous government. I suspect there is a lot more to come in 2024.

The NZ election result was notable for the diminished vote for the political centre and growth of the political periphery. The two mainstream political parties captured around 65% of the vote, a sign the “centre” lacked vision and ideas.

“Fixing” migration is easy in comparison to bringing an economy and society together. To alter migration numbers, you just change the immigration settings or criteria.

My eyes are on the policy platform of the new government. The government continues to double-down on tax relief, a populist policy as opposed to a substantive one.

Uniting NZ is going to require astute leadership and a good policy. Good policy is not always the economically pure one.  A former minister of finance once told me the third or fourth best policy option was often the best one. It will stand the test of time and deliver certainty across the election cycle.

Living standards are built on an economic base. The past few years have seen NZ swing too far towards wellbeing, forgetting the economic base, as ideology ruled with limited appreciation of the destructive impact of adding costs. We cannot fly completely the other way, “fixing the economy” and letting social challenges lag, which is now a risk. No political party appears to get the balance right. Why index benefits to inflation yet superannuation to wages?

There is a gap in the political landscape.

We should be able to agree on the importance of kids and education across the political spectrum. Education is the foundation of the future. One in five Māori and Pasifika students attended school less than 70% of the time in the third quarter of 2023. Imagine work attendance of 70%.

Equality or equity of opportunity needs to be a strong focus. Māori and Pasifika kids do not get the same opportunity across education, housing, or health. Addressing inequities requires more funding.

NZ cannot turn the dial on global emissions but is prepared to play its part as a global citizen. The finger continues to be pointed excessively at farmers, though. Maybe (tongue in cheek) we need the urban equivalent of a farm management plan. Climate change is everyone’s responsibility, not just the major emitters.

The world is fracturing, and geopolitical tension is rife. Commodities are being used to exert pressure in conflicts such as in Ukraine.

NZ is hitching our wagon more and more in the United States’ direction. That potentially risks relations with China.

A divided world is not good for global growth or trade.

The coming year is notable for the huge number of elections around the globe, including in the US, Taiwan, Indonesia, the European Parliament and India. More than 60 countries go to the polls, around half the world’s population. We need real leaders, not populists. Unfortunately, the political periphery is gaining momentum.

Globally, rules are being challenged by exercising power. The economics of trade is being supplanted by security in trade, especially for food, energy and technology. That could provide opportunities for NZ. Onshoring, near-shoring and friend-shoring are replacing offshoring and globalisation as managing risk takes precedence over efficiency.

This is a world where supply shocks have been and will continue to be a regular feature. The latest pausing of shipping through the Red Sea, diverting around the Cape of Good Hope, adds to shipping costs. The past years have seen a “rolling maul” of supply shock after supply shock. 

Navigating division will be challenging, both locally and globally. It will require deft leadership and substantive policy, not populism policy. Eyes are on global elections and the policy prescription in the 2024 Budget.

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