New Zealand's appetite for innovation
Incremental, not radical change for centrist coalition
by David Skilling in Singapore
Tue 31 Oct 2017
A new New Zealand coalition was sworn in last week, led by Jacinda Ardern's centre-left Labour party. This administration replaces the centre-right National-led government that ruled since the end of 2008, though National remains the largest party in parliament.
The government inherits an economy that has begun to soften after a strong run over much of the post-financial crisis period. There are signs that some key drivers – including record-high levels of immigration, strong international tourism flows, and surging house prices – are starting to weaken. The annual pace of GDP growth in the second quarter of 2017 was 2.5%, down from more than 3% in 2016.
The government has signalled a range of policy changes, including tighter restrictions on immigration as well as constraints on foreign purchases of real estate. There are several practical constraints, such as consistency with trade agreements, but these policies may contribute to a more marked economic deceleration.
Some commentators, particularly in the international media, say the election result represents a policy reversal of sorts in New Zealand, which is one of the more open, flexible and deregulated economies in the world. There has been some disquiet in markets about the potential for change. The New Zealand dollar has been sold off sharply since the coalition government was announced.
There is certainly an appetite in the new government for a more interventionist approach in some areas – from affordable housing to regional development and research and innovation. But it remains centrist in an international context, and much of what is in the coalition agreement is within the mainstream, even if it differs in nature from the previous administration.
As one marker of this, the government remains committed to the existing fiscal policy. Although it intends to spend more than the outgoing government, this is to be done in a way consistent with fiscal sustainability. Labour plans to run operating surpluses and to reduce net public debt to 20% of GDP over the next five years. This fiscal discipline is partly motivated by a sense that capital markets would sanction a departure from the fiscal norms which developed over the past 25 years in New Zealand.
The government announced it will resume contributions to the New Zealand Superannuation Fund, a sovereign fund established to part-finance the looming public pension obligation. The fund has been one of the best-performing vehicles in the world for the past several years.
There is likely to be more innovation in terms of monetary policy. New Zealand was a pioneer – in 1989 – in establishing an independent central bank with an explicit price stability target. This model has worked well in reducing inflation, and is broadly accepted. The exact phrasing of the policy targets agreement has been changed a couple of times – to change the band from the original 0%-2% to 1%-3%, and to add some wording around employment and economic activity as secondary goals.
Labour party officials say they want the underlying legislative mandate broadened to include explicit reference to full employment alongside price stability as the stated goal. They want a broader decision-making process, and propose adding some external members to the Reserve Bank's governing committee.
These changes to the Reserve Bank, and the broadened legislative mandate, are likely to be made in a manner consistent with international experience, rather than charting a fundamentally new approach. Practically, this seems unlikely to lead to major change. The Bank will remain independent, the proposals do not depart from the international mainstream, and it is hard to see how the Bank could have operated policy in a more accommodating fashion over the past several years. Indeed, a more flexible set of arrangements could help a small economy central bank respond better to an uncertain set of global economic and monetary conditions.
There will be a process of policy change in New Zealand. But this is likely to be incremental rather than radical. While other economies contend with rising political populism and greater partisanship, New Zealand remains a relatively centrist polity.
David Skilling is Director of the Landfall Strategy Group, a Singapore-based economic advisory firm.
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