Luxon said he'd grow the economy. Is he keeping his promise?

Or was it a promise that no prime minister could keep?

A year has passed since Luxon & Co. opened shop, and there have been mixed reviews – some of the most cutting come from the right.

Before the 2023 election, Mr Luxon told us glibly that he’d “grow the economy”, which sounded weirdly Muldoonist. I thought the days of centrally managed economies had ended in 1984, as neoliberal doctrine said that governments should step aside and let markets do their thing. But there’s been a global pendulum-swing back towards protectionism and industrial policy lately, so maybe he had something new to offer, beyond just getting the country “back on track”.

But first let’s look at some basic indicators in his government’s first year.

The NZ economy shrank. It was down -0.2% in the year to June 2024. And yet the population grew by 1.2%, so the average Kiwi is worse off economically.

On the bright side, the consumer price index (inflation) rose only by 2.2% in the year to September, down from highs of over 7% during 2022. The “cost-of-living crisis” was a major election issue, and inflation is coming under control, followed by lower interest rates. Good news. But a lot of that work gets done across the street in the independent Reserve Bank. The government’s repeal of a few words about employment from the Reserve Bank Act were over-hyped and made no difference.

The bad news is that unemployment has been rising, up to 4.8% in September, mirrored by a decline in the employment rate from 69.8% in June 2023 to 67.8% in September 2024. People working in the media, the state sector and elsewhere will be well aware of lay-offs and the scarcity of jobs. But unemployment is not (yet) at the levels seen post-GFC.

Meanwhile, Stats NZ reports: “The 133,000 migrant departures in the September 2024 year are, provisionally, the highest on record for an annual period.” Many Kiwis are leaving in search of jobs.

In its Budget 2024 update in May, the Treasury was predicting “net core Crown debt as a percentage of GDP rising and expected to peak in the year to June 2025 at 43.5% before gradually declining to 41.8% by June 2028 as the outlook improves”. That was based on an optimistic expectation of a return to economic growth of “1.7% in the year to June 2025 and averaging 2.9% over the final three years of the forecast”.

Growth or no growth, Luxon will face the 2026 election needing to explain why there’s been no return to Budget surpluses, and why net debt is still above a self-imposed ceiling of 40% of GDP. Furthermore, there’ll be much public dissatisfaction about cuts in spending.

When I raised this uncomfortable prospect with finance minister Nicola Willis (in September’s North & South), she replied that she’ll be honest about it and tell the people “there’s no magic money tree at the bottom of the garden”. That wasn’t very informative, let alone inspiring. I was reminded of John Key who once pulled Labour’s ponytail by saying, “There aren’t little pixies at the bottom of the garden printing cash”. Would you agree that they sound rather patronising when they talk like that?

Naturally those on the left won’t be pleased with the Luxon government’s performance, but those on the right may well ask why they can’t manage their own budget.

Among the harshest critics of the Luxon government are right-wing commentators in the conservative NZ Herald.

Matthew Hooton (paywalled) wrote: “Bereft of a deep understanding of the New Zealand economy and its recent development, Luxon had nothing to offer but some modest yet unaffordable tax cuts and a belief his mere election might motivate an economic boom.” Hooton accuses Luxon of a lack of self-awareness and of using language that “resembles a cheap self-help book”. For the country’s good, Luxon should “accept he is completely out of his depth”. Ouch!

Robert MacCulloch (paywalled), professor of macroeconomics at the University of Auckland, lists 10 key points on which finance minister Nicola Willis is not getting the results needed. He concludes that she’s “a Sir Bill English-type, a steady-as-she-goes, old-style, conservative Nat.” (He has a point, as Willis did work for Key and English.) But the world has moved on, and “new thinking is required”.

Richard Prebble, a former Labour minister and then Act Party leader, joined the fray. Citing a speech by the Secretary of the Treasury, his gloss on the situation was blunt:

“In plain language, the chief economist is saying we are stuffed. The recession is worse than expected. The Government is spending more than it is earning. Government debt is predicted to go from near zero in 2008 to over 100% of GDP by 2048. There is no improvement in productivity.”

Whether your loyalties lie with labour (and hence you want higher real wages) or with business (and profitability), then the underlying problem is a lack of productivity growth. Any government can help or hinder this, but what exactly they ought to do about it is where the political arguments really take off. Often it’s politically easier to do as little as possible, as Key showed us.

Luxon & Co may point to initiatives under the fast-track legislation as evidence of how they’re kick-starting the economy. But MacCulloch is having none of it: “National’s trumpeted Fast-Track Approvals is nothing more than a rejig of the Fast-Track Approvals process Labour enacted when in office, although with a lessening of environmental checks, something the Party has been reluctant to admit.” And the lessening of environmental checks is exactly what annoys many on the left, so National cops it from both sides.

So far, the polls are suggesting that the three-party coalition government would, on a good day, survive another election. If that happens, it’ll be largely because middle-NZ doesn’t like the look of the alternative coalition, rather than a ringing endorsement of the incumbents. Labour’s 2023 defeat could partly be put down to a wider post-Covid mood-swing that sacked numerous incumbent governments around the world. But the present coalition could hang on for a second term, if only by the fingernails.

In the election campaign, Luxon was saying he’d “grow the economy”, as if it were a tree he’d water every day – except perhaps on Sundays. So far, however, he can’t say there’s anything like the economic recoveries that Bolger and Key bragged about.

In 2026 Luxon will be like: “I led you down the garden path and – look! – there really is no magic money tree”.

But grown-ups already knew that. Luxon may have sold you a lemon. If the economy grows, it’ll be the result of millions of hard-working people pulling their weight, not the result of Luxon’s cargo-cult incantations. On the other hand, those people who still feel poorer due to a lack of opportunities will focus their discontent onto “the government”. And, if there’s little or no growth, the business community could turn against him too – although they wouldn’t want to make much noise, in case they precipitate a change of government in 2026.

In two years I may look back and say I spoke too soon – as other critics did. There’s still time for the “mojo” that Luxon said the country had lost to do its come-back.

“Got my mojo workin’, but it just won’t work on you.”

Muddy Waters

Nikki Kaye

I was saddened to learn that former MP Nikki Kaye has died of cancer at the age of 44. Nikki was our local MP in Auckland Central, and she was evidently a rising star in politics. This is a great loss for the country.