Nicola Willis: Inflation vindication; impatient for growth

Saturday, 19 October 2024

When the consumer price index came back into its target band on Tuesday, Finance Minister Nicola Willis was clearly relieved and feeling justified.

When Willis took over as National’s finance spokesperson in late 2021 she successfully spent two years bludgeoning Labour with inflation, each price rise and interest rate hike more ammunition.

But ever since National announced its tax policy in August 2023, accusations that it would lead to even more inflation had dogged the Government, right through to, and beyond, the May Budget this year.

Five months after the Budget, Stats NZ this week confirmed that the official cash rate was back in its target band - and easily - clocking in at 2.2%.

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“It was the theme of Chris Hipkins’ Budget speech, that we were irresponsibly reducing tax that would fuel inflation and lead to more price increases, and that has just been conclusively disproven,” Willis says.

“As we always said, it was very boring, but it was true, that if you fund tax reduction with reprioritisations and savings on the other side, then they are fiscally neutral and will not create an impost on inflation. And so it is.”

Changing the narrative

The tax cut-inflation argument is now moot. Inflation, which is expected to drop further, has led some bank economists to call for a 0.75 drop in the central bank’s interest rate at its last meeting of the year in late November.

Willis claims an overlooked point in the Budget was that $23 billion saved by changing, and reprioritising, spending. That wasn’t cash taken off the bottom line (which increased) so much as redirected into other areas. That drive for savings is the reason for redundancies in the core public service - last estimated at 6000 roles - which has hit the capital hard.

But Willis wants to turn the story from one of restraint, constant cuts and fixing cost blow-outs, to one of growth.

“I think we've put the foundations in place, and now we need to really focus on growth. I am conscious it's still pretty tough for a lot of people in the economy. There's a lot more work for us to do, but we're on our way.

“But I'm conscious this is not something that is going to be a massive revival overnight, it will happen progressively.”

Another touchstone has been the increased outflow of New Zealanders abroad, to Australia particularly. While there was a net migration gain of 82,000 in the year to May 2024, outward migration hit a record 138,000 - the highest since 2012.

Willis says preventing that is the whole reason the Government wants to grow the economy, and says she keep a close eye on the fact that the wage gap is about 30% on some measurements.

“We've got to make sure that we've got an offering here that's better. And part of it is also people saying that this is an economy with a great future, with good prospects, that they can have good jobs, that they can have good services, that they can rely on.

“It's almost the raison d'etre. I mean, why else do you grow an economy, other than to make this a great place to live?”

Trying to generate that growth is now the driving force behind the Government’s reform plan, which includes schools, fast-track consenting, tax cuts and micro economic reforms in areas such as building supplies and consenting.

The economy shrank 0.2% over the past year, per capita GDP shrank by 2.4% up to March and real gross national disposable income - a measure of New Zealanders’ purchasing power - fell by 3.6% over the past year.

These figures, and the challenges facing the country, have given Willis an appetite to make changes.

“We have felt from the electorate a much greater appetite for boldness and for being pretty directive In some of the changes that we make.”

Overall she thinks that the time for aggressive economic reform is right.

“I think what I see is that New Zealand in this moment in time is positioned differently than it has been from the past, because of where we stand and sit relative to other countries.”

A humbling reality

The election was now over a year ago, and much has been done. Willis says that some days, “We can make good policy changes. We can fix this bit here and that bit here, but there are some things which are massive, which remain outside our control.

“And I've been really humbled by that, because I've had days where the forecasts come through and are updated and they're not what I want to hear.

“I've had days where I find, you know, that Health New Zealand, despite us increasing its budget significantly, is not sticking to its budget, and so that's going to hit what we want to do for the health system.”

There has been plenty of tough and controversial decisions, which will bring political heat on for a long time yet: fast track consenting, paring back plans for Dunedin hospital and putting a commissioner into Health NZ among any others. The speed of Budget cuts have hit the public service, Government consultants and the bottom lines of companies such as Air NZ.

But the hardest decision of all? iRex. It’s an issue which has not yet been resolved and will present a genuine political test.

“I think I will always remember the decision that we made as a Cabinet to decline funding for the iRex ferry project. That was difficult.

“We never thought it would be easy, but we saw something that was out of control.

“We went into that with open eyes, but we knew that it was the responsible thing to do.”

Public sector performance plans

Willis says she is cognisant of what she called the “significant demands” for schools, the health system and police to have more resources. But, she says, “we can't just keep picking the pockets of New Zealanders to do that”.

“The last government used a lot of fiscal drag, essentially taxing people more by stealth in order to fund those uplifts, and our commitment is to keep finding areas where we can reprioritise and make the taxpayer dollar work harder.”

In the next week, the Government will get a first set of “performance plans”. in which each agency will present responsible ministers with a snapshot of what they expect to spend over the next few years, including wage and other cost pressures, or legal issues.

“You know, we've got the votes and the appropriations and the budgets, but working out actually how much of this is going on staff, how much of this is going on programs that are contracted out, was actually quite challenging in many cases.”

The purpose of this, Willis says, is to give ministers options so they can “look across your agency spend, where can you see areas where the spend is no longer matched to priorities, or whether you can shift things around”

The plans will then be tested by Treasury and involve some “pushing back when they’re not great”. .

But while relatively happy that the path for a smaller fiscal footprint has been achieved - the books are projected to be back in surplus in 2028 - and that inflation is back in band, economic growth will now be the focus, Willis says.

The political hard basket

“I am really alive to the risk any finance minister faces that they become so focused on managing the books - which is important and interesting - that they lose sight of the fact that the books are a whole lot easier to manage if you grow the economy faster.

“The conversation I pretty regularly have with Treasury is, hey guys, we can keep talking about this $30 million which is interesting, but actually, let's talk about how we grow the billions of dollars, because that's where our influence can be great, and which, when you have a growing economy, everything in the books looks better. You’ve got way better choices and options.”

Productivity is a recurring theme for Willis, and remains the Government’s big challenge.

Barring a productivity boost following reforms in the 1980s and 1990s, low productivity is a problem successive finance ministers have struggled to fix.

“I wouldn't say that I'm someone who's come in here saying that that I've put all humility to the side, and every challenge will now be easy because the right person is in the seat.

“[But] what is also obvious to me is that some of the challenges that have held back productivity have been put in the political too-hard basket for too long.”

She lists reforming education, and liberalising New Zealand’s restrictive foreign direct investment regime.

Getting investment and hitting competition

“I think that conversation has changed around the country,” she says.

“People recognise that if we want to get richer, we're not going to do it just selling to ourselves and using our own capital.

“If people want to come here and put their money into creating great New Zealand jobs and great New Zealand businesses, I want them to come. And we shouldn't be crossing our arms and saying, ‘Well, it's a privilege to invest here, and we're not sure we like you’. We should be saying, here's the welcome mat. Come and help us grow our economy for the benefit of our people.”

There are other areas, like competition, that Willis cites.

But overall, the message is clear. One year on from the election, Willis is feeling a sense of urgency about what needs to be done.

“I am more impatient, and more reform minded.”