Nicola Willis: Growing the economy without spending

Stats NZ’s final data release for the year revealed the economy has been shrinking at its fastest rate in three decades. While this may not be a very Merry Christmas, there is still hope for a Happy New Year.

Treasury, the Reserve Bank, and most economists expect growth to resume in 2025 as interest rates fall. Consumer spending should pick back up and cheaper credit should make business investments more worthwhile. 

But while private New Zealanders open up their wallets, the Government will continue to tighten its belt. Core Crown expenses are predicted to fall from almost 34% of GDP in 2025 to 31.5% by the end of the decade.

This would be enough to balance the books—if you ignore annual losses at the supposedly self-funded Accident Compensation Corporation—and halt net core Crown debt at 45%.

But Finance Minister Nicola Willis told Interest.co.nz this wasn’t her top priority. 

“Our view is you can never ignore sensible fiscal policy, and it's irresponsible to indebt future generations to an extent that they won't be able to have the services that we have today,” she said in an interview.

“But at the same time, you also need to make sure that you're maintaining today's services, that you're keeping the foundations for productivity, and that you are ensuring that your measures make sense—not just in the short term for coloring the books and making them look pretty—but will actually generate a sustainable basis for growth in the medium term”.

Many left-leaning critics of the Finance Minster would like to see greater Government investment to support the growth forecasts next year. They worry a withdrawal in spending will hamstring the recovery and leave the economy less productive in the future.

It may surprise you to hear that Willis agrees with them. She says it is “factually incorrect” to accuse her of austerity, as the Coalition’s fiscal policies are still stimulating demand.   

“We have a government that is actually continuing to increase its overall levels of spending, both in absolute terms, but also as a proportion of the economy.  And actually, the fiscal impulse will be positive.”

“But the point that we are making is this does need to unwind over time, and so we've set out a path of gradual fiscal consolidation, which we think is the responsible way to go”.

She says policies which deregulate the economy, open New Zealand up to more foreign investment, and crack down on uncompetitive industries will be more important to future growth than fiscal stimulus. 

Banking is one of these uncompetitive sectors in which she wants reform. She's already told Kiwibank to raise $500 million and the Reserve Bank to put more weight on competition when setting regulation policies, and is more than willing to go further. 

“When I read through the Commerce Commission report on our banking sector, it couldn't have been any clearer to me that we have a major problem,” she said.

“I have put the banks on notice and made it clear that if they want to do more of their nice talk about how they're going to be really good … that won't wash with us. They need to be acting or we will take further action, and there are a lot of options for what we can do there”.  

She’s open to charging banks a special levy or tax, like in the United Kingdom and Australia, which recognises they benefit from an implied Crown guarantee and earn very high risk-adjusted returns as a result. Big banks beware!