How the Iran conflict just blew up NZ’s economic recovery
Sunday, 5 April 2026
Vernon Small is a journalist and former adviser to the Labour government
OPINION: Round about the time the Artemis II moonshot left Earth on Thursday, Treasury released the state of the Government’s books.
It was a report that came from another planet.
As at February 28 – by otherworldly coincidence the very day the U.S. and Israel started bombing Iran – things were not looking too shabby.
The deficit at $7.2 billion was running $1.9 billion better than forecast back in December, and net debt was marginally lower than expected.
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Of course, Operation Epic Fury has changed all that. But Treasury’s interim data provides a useful base from which to measure the impact of the Iran conflict on the fiscal position … not to mention the epic level of fury Ministers must be feeling at having the improvement in their books and the nascent economic recovery cluster-bombed in election year.
Finance Minister Nicola Willis has not shielded where the blame lies: “Operation Epic Fury”. Prime Minister Christopher Luxon has similarly expressed grave concern about the impact of the war on New Zealand. Their first instinct may be to not provoke President Trump, but they are correctly reading the New Zealand room.
On Wednesday we will see the first official measure of the economic impact, when the Reserve Bank releases its monetary policy review. If the trend set by bank economists (and tentative data from Treasury) is any guide, it will make grim reading. Uncertainty may be the best we can hope for.
Recent confidence surveys and economists’ assessments are universally bleak. And while they are caveated by the length of the conflict, they are generally agreed that if a ceasefire is miraculously agreed tomorrow, and tanker traffic through the Strait of Hormuz resumes, the hangover will last for many months – probably into 2027.
In short, confidence is down, inflation will be up, the peak of unemployment will be higher than previously expected and growth will be hit, with the economy shrinking in the best-case scenario in only one quarter (the three months to June) so no official “recession”. Interest rates were already creeping up.
Willis has confirmed growth will be crimped but will not release Treasury’s current thought on inflation because they are not yet crystallised into forecasts. But she has confirmed the worst-case scenario is higher than the 3.7% cited just a few weeks ago. With Australian inflation heading to 5.5% (from a current level much higher than our 3.1%) the NZ rate must surely head towards the mid-4% range, and probably higher.
It’s easy to extrapolate from that to a lower tax take, higher costs, more social welfare cheques and a widening budget deficit.
So far, Ministers have taken a parsimonious or responsible approach – choose your side – to extra spending to alleviate the impact of the conflict on businesses and household budgets. ASB estimates the latter are facing cost increases of $55 a week, made worse by the oil shock.
The Government has opted to target its cash response, giving low- and middle-income households with children $50 a week (costing $373 million but funded from the existing allowance for new spending) and lifting the mileage rate for care workers to help offset their higher petrol bills. It is avoiding (for now) heightening anxiety and has focused on increasing supplies and storage capacity rather than measures to reduce demand.
That response springs from an aversion to even more borrowing, and a determination not to take the Covid-era stimulatory route it has criticised so loudly in hindsight.
By comparison, Australia – which has also eschewed “Covid-style measures” - has taken a more universal approach to cost pressures. It has halved fuel tax, cut road user charges on heavy vehicles, offered interest-free loans to businesses and provided free public transport in Victoria and Tasmania. The Albanese Government has also called for greater use of public transport and for fuel restraint. Australia faces greater challenges than New Zealand on that score because, despite being an oil exporting nation, its fuel stock reserves are relatively weaker than ours.
It remains to be seen if Luxon and his ministers can maintain their targeted response in the face of wide-spread cost pressures, struggling businesses, more expensive fertiliser and a possible recession.
There were few clues of a changed approach to the Iran conflict in this week’s Cabinet reshuffle, but there was one.
Luxon’s move to strip the energy portfolio from Simon Watts and give it to Simeon Brown does signal a change of tack over the $1 billion-plus liquefied natural gas terminal in Taranaki.
Watts has been a strong advocate of the terminal, designed to provide a back-up when renewable electricity generation is short, and he continued to insist it was going ahead even as Luxon and other ministers this week signalled a rethink and Luxon said he would make the final call.
On Tuesday, in the media scrum before the House sat, there was the unsustainable sight of Luxon and Watts three metres apart, surrounded by two groups of journalists, delivering clashing views on whether a terminal was all go, or was under significant review.
At the Downstream energy conference in Wellington on Wednesday, less than 24 hours before he heard he had lost the energy job, Watts – in what looked like either subordination or obstinacy - was still arguing for the terminal and that the decision had been delegated to him and two other ministers. He said the Iran conflict changed nothing because the initial capital expenditure was the same and the long-term cost of gas on the international market has not changed much, and he had advice to that effect.
On Planet Watts the only concession to a review was that the terminal would never have gone ahead unless it stacked up. But it does stack up.
But in his first interview, re-treaded energy minister Brown’s said the Government would be re-looking at the case for the terminal before taking the next step, because “everything had changed” with the Iran war.
In an energy crisis, where exposure to the supply and price of fossil fuels is an issue, and where the cost of fuel is piling extra costs on top of rising electricity prices pushing up inflation across the board what is the last thing you want on the launch pad?
An LNG importing facility funded by a tax on electricity users.
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