Nicola Willis faces fuel-crisis budget reckoning as diesel pain spreads – Fran O’Sullivan

THE FACTS

Nicola Willis must be tempted to declare force majeure and say all bets are off when it comes to raising taxes, cutting expenditure and selling assets.

Willis’ Budget projections are already blown out of the water as the impact of the Iran fuels crisis deepens.

Neither she nor her boss, Christopher Luxon, can, or should, sugarcoat this.

All options including removing existing cost of living tax relief for higher-income earners and cutting expenditure should be on the table for the May 28 budget.

The challenge they face is gaining popular support for realism when the Prime Minister, in particular, has spent the last two years opining he came into politics to mount a turnaround and to get the economy “back on track”.

It’s a difficult time for the coalition partners.

National, in particular, ran an election campaign in 2023 promising to restore economic certainty amid cost‑of‑living relief.

That hasn’t occurred.

The time for mindless political sloganeering has long passed.

Debt has exploded and tough choices need to be made.

In a phone call shortly after official figures revealed New Zealand’s economic growth had effectively flat-lined in the December quarter, Willis was philosophical: “Let’s be blunt. This is not good. This is not good for prices. This is not good for growth …There are a range of scenarios, but none of this makes it easier for New Zealand.”

Daily official industry engagement is now standard; a formal roundtable with the major fuel importers yesterday had been prioritised to inform the paper Willis will take to the Cabinet on Monday seeking approval for next steps.

“I think the humility that I have going into this – that at times, was absent, I think, from the Covid response – is recognising that fuel importers, distributors and users know more about the global and domestic fuel system than our officials ever will,” she said.

Willis is not over-egging this.

Major businesses did feel shut out by Dame Jacinda Ardern’s Government during much of the Covid pandemic in an environment where the politicians and officials made it clear they knew best.

The “podium of truth” dominated. Business’s reality-based solutions were kicked into touch.

Those that did finally gain access to the “9th floor” of the Beehive, where Ardern, Grant Robertson and Chris Hipkins ruled over the pandemic response, were told make any word outside the tent and their access would be blocked.

The fuels crisis is affecting major New Zealand corporates.

Logistics companies like Mainfreight and Move, major supermarket chains like Foodstuffs, Woolworths and the wider food distribution ecosystem, face escalating diesel and freight costs.

Fonterra and other major dairy exporters are affected. So too, meat companies like Silver Fern Farms which had previously enjoyed buoyant prices.

Escalating fuel costs hit on-farm operations, transport to processing plants, and shipping to global markets. For Air New Zealand, jet fuel pricing is quickly feeding into route economics and ticket prices.

Choices are having to be made against a background where margins are being eroded. The upshot is logistics firms may have to absorb some diesel spikes and exporters have to decide how much of rising freight and fuel costs they can wear before global competitiveness suffers.

Retailers and manufacturers also face fresh input cost pressures.

ANZ, ASB, BNZ and Westpac are nudging lending rates higher in anticipation of a more protracted inflation fight.

Take Air New Zealand for instance, where the board had previously announced a reset.

The company will inevitably be weighing various scenarios on cash flows, debt covenants and possible refinancing amidst higher transport and energy costs, including second‑round effects on wages and finance costs if inflation stays stickier for longer.

New Zealand is majority dependent on imports of fuel from refineries in Southeast Asia, Singapore and South Korea.

But those nations are also traditionally dependent on crude oil out of the Middle East which is also being disrupted. Fuel rationing and a move to lower-grade fuels is inevitable if this crisis endures.

Prioritising freight and export supply chains over discretionary petrol use might be economically obvious; but it’s still politically risky if not communicated well and implemented with care.

Talkback radio obsesses over petrol prices. But Willis is clear that diesel is the real pressure point. Diesel is up about 45%, versus more than 20% for petrol, and it is also the refined fuel that has so far globally been the most impacted by these disruptions.

Let diesel prices rip and you bake higher costs into food, building materials and freight; intervene too crudely and you distort markets, undermine climate settings and risk blowing the fiscal position.

Willis has not yet shown her full hand on how far she is prepared to go – whether via targeted relief for freight and primary industry, or more aggressive regulatory moves.

But the hard choices are obvious: who gets fuel first, and on what grounds? Freight vs private motorists; export‑linked production vs non‑essential domestic consumption. These are not just technical questions.

Put this to one side.

I put it to Willis that there was an opportunity to position New Zealand as a “safe haven” during this crisis (something that Kiwi businessmen like Sir Rod Drury advocated to Ardern during Covid, to no avail).

Her response was instructive.

She pointed to New Zealand’s renewable‑heavy electricity mix as a strategic asset.

“We are actually at a relative advantage compared to some developed countries, particularly Europe and the UK, in that our electricity supply is largely renewable and will be into the future.”

For investors, including those eyeing data centres, large-scale batteries, hydrogen, or further processing of steel and fertiliser, that’s a serious proposition.

In a world of recurring hydrocarbon shocks, countries with reliable, relatively affordable green power look more attractive – if they can get their consenting and overseas investment regimes out of the way.

A Government that has championed fast‑track consenting now has to show it can move quickly on bankable, consented projects – the recent steel firm announcement in the Waikato is a good example.

The demand for Golden Visas has also escalated.

“This is not a time to panic. It’s a time to be prepared,” says Willis.

Looking through to the post-crisis environment should be part of this.

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