New Zealand’s growth problem wears a blue uniform

Sunday, 17 May 2026

Police have been angered by the latest pay offer

EDITORIAL: If ever there was a sign of just how average the New Zealand economy is and just how tight the nation’s finances are, look no further than the latest police pay negotiation.

At the time of writing, the Police Association says the latest offer from Police is a paltry 0.6%, for constables rising to 2% if competency targets are met.

Meanwhile, inflation is running at over 3% and has only dipped into the Reserve Bank’s 1% to 3% target range for a short period in 2024/25 since the central bank let inflation out of the bag during Covid-19.

Police said negotiations are ongoing and that the organisation would not be commenting.

But the police situation is a microcosm of what is going on across the rest of the economy.

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Real growth per person has stood still for five years, while nominal growth has been poor as well. After Labour pumped borrowed cash into the economy, annual GDP growth hit 4% in the June quarter of 2023 but has been heading south basically ever since. It did rise slightly at the end of last year, but annual growth to March was a paltry 2%.

Low growth is bad at the best of times. But it is doubly bad for a Government with an inherited structural deficit, hoping to grow its way back to a balanced Budget rather than deliver swingeing cuts. Lower growth means lower tax receipts, less money for Treasury coffers and all the decisions that flow from that.

The country simply is not prosperous enough to afford all the things it wants. While scarcity is the constant problem of economics, New Zealand is now confronting it in a particularly acute way with a baby boomer demographic cost crunch now hitting.

Politically, there are traditionally two big workforces you do not want to mess with if you are a Government: cops and nurses. And a 0.6% offer very much looks like messing around. It is a competitive labour market and there are literally nine other police forces in Australia that Kiwi cops can move to. Some have already been advertising here.

Police, of course, need to operate within the funding given to them by the Government.

From the Government’s point of view, it will not want to set any sort of pay precedent in police that might then be replicated elsewhere in large, union-dominated industrial negotiations.

This is even more pressing in an environment where inflation is set to spike again thanks to the war in Iran. One of the biggest things the Reserve Bank will be fighting against is the possibility of embedded inflation expectations.

Effectively, that means that after a period of high inflation, annual price rises of 4% to 5% start to become normalised and expected. At that point, squeezing inflation out of the economy becomes even harder.

But the politics of this are brutal for a Government that has talked repeatedly about reprioritisation and moving money from back-office bureaucrats to frontline workers and cops on the beat. Last Budget pumped $480m in for four years to cover a shortfall of funding in support for extra cops

This year — and the updated number will be revealed in the May 28 Budget — the Government is expected to shell out $149 billion on core Crown expenses in 2026 and more than $153.4b in 2027. While the revised operating allowance means those figures may end up slightly lower, that is still an increase, in nominal terms, of 2.9%.

Based on that, if even the most competent cops are getting only 2%, they will be receiving less than the general increase in government spending.

The Government will continue to say this is an operational matter and an ongoing negotiation that ministers do not want to get involved in. But it will ultimately land at Christopher Luxon and Police Minister Mark Mitchell’s feet.The Government will almost certainly take the politically necessary steps to sort that out before the election.

In the end, though important, this is not really about what beat cops and their managers end up getting paid.

It is about how hard things become when there is no meaningful economic growth, you are running a budget deficit, and another bout of war and oil shock-induced inflation starts flushing through the economy.

That is the Government’s biggest challenge. And it is not yet clear there is a reform agenda capable of overcoming it.