Iran war: Conflict fallout hits NZ economy - and exposes cracks in Government’s response

Sunday, 29 March 2026

Watching the price of fuel has become a national past time

Vernon Small is a former journalist and Labour government adviser

OPINION: The impact of the conflict in the Persian Gulf, sparked by the US and Israel attack on Iran, was never going to be restricted to short-term fuel price rises, however quickly Donald Trump and the Iranian leadership stop shouting and shooting.

But as the war drags into its second month, the much larger and broader impact on economies, particularly those in Asia but also our own, is starkly coming into focus.

Some countries are cutting working weeks to four days, rationing or imposing other restrictions such as shop opening hours

The warning bells are sounding about the dangers of stagflation - rising prices as growth goes backwards – though always with the proviso that the depth of the crisis will depend on how long the conflict lasts.

Closer to home, as the Government outlines how it might curb demand, the risk that fuel-fuelled inflation will go over 4% is now very real. Growth will inevitably be slowed.

Westpac economists are tipping the economy to shrink significantly (by 0.4%) in the June quarter, although they have stopped short of predicting a recession. (The June quarter result will be reported in September so it will be the last before the November 7 election, magnifying its political impact.)

Cutting fuel excise tax would send the wrong signal

They see growth of 1.9% for the year, down from 2.8% in their previous estimates, with unemployment increasing to a peak of 5.6%, house prices falling almost 1% over 2026 and sharply weaker confidence.

“Those headwinds will not be significantly offset by the Government’s support package targeting lower income households,” according to the Westpac analysis.

They are right. A one-off $373 million would have little effect on demand. Nor would it have much impact on inflation.

In theory those risks fall to almost nothing because the package is being funded from the Government’s allowance for new spending. So effectively it just displaces other potential Government spending, leaving a near-neutral net effect on the economy.

However, politics.

Just as the fallout from the crisis was never going to be restricted to the impact of rising oil prices, nor will the Government’s quick and limited relief package, centred on a $50 a week boost for some 143,000 households, be the end of the assistance Kiwis will be crying out for.

But whatever the fiscal or monetary policy justification, the package leaves more than 90% of households receiving nothing. That includes more than half of those households with children facing material hardship, because beneficiaries will receive nothing.

The choice to focus on low- to middle-income families in work, but leave beneficiaries out, smacks of the age-old conservative instinct to distinguish between the deserving and undeserving poor.

The Government’s argument that those in work face the extra costs of getting to work or getting the kids to school, so warrant more help, is hollow.

Petrol prices don’t care whether you are working or not, or if you are driving to work or to the supermarket.

Equally threadbare is the argument that beneficiaries (and superannuitants) will get a cost-of-living increase from April 1 whereas those in work won’t.

The April 1 adjustments are backward-looking, compensating for cost increases before the current crisis (though there will be an adjustment in April 2027 that will consider the impact of fuel prices).

The assertion those in work don’t get an increase on April 1 – so are more in need of the $50 boost - is sophistry. Adjustments to wages, either through collective bargaining or otherwise, do not conveniently fall on April 1 but to suggest in a blanket way that those in work will otherwise get no compensation for the increased fuel price inflation is wilfully misleading.

And remember, the increased costs will flow through the whole economy, affecting food and all other costs, not just the higher price paid by those burning petrol on the way to work.

Of course, politically the Government had to be seen to be doing something.

It’s understandable Ministers did not want to cut fuel excise, even though it would better tie the help to the costs that individuals incur.

Slashing the excise would be expensive and would not target need. Perversely, it would also encourage fuel consumption by lowering the price at a time when shortages and the spectre of rationing are looming.

With its fiscal wriggle-room constrained by its earlier tax cuts, the burden of the Covid-era debt and the near certainty that its Budget deficit will worsen as the economy takes a hit from the Iran war, it was understandable why the Government went low on the assistance package.

Given the warnings from rating agency Fitch and a speech by Treasury’s Struan Little highlighting the risk of prioritising short-term assistance over the long-term cost of extra debt, it was their expected response.

It is difficult to construct a relief package that is equitable, responsible and affordable – and Labour hasn’t offered anything meaningful either. But that is what people expect of those they elect.

Saying you can’t help everyone with every impact of the conflict doesn’t win Ministers a “get out of criticism free” card for their political choices, especially as unemployment and economic conditions worsen.