(Bloomberg) — New Zealand Prime Minister Christopher Luxon can look forward to falling interest rates fueling an economic recovery in 2025 after a turbulent first year in office featuring a likely recession, widening budget deficits and tensions over race relations.
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“Our first job has been to beat inflation and we’re starting to make some good progress,” Luxon said at a Bloomberg event in Auckland on Friday, adding his government’s policies were working hand-in-hand to support the Reserve Bank of New Zealand’s price battle. “That means tighter fiscal policy.”
“Now with the monetary and the fiscal policy settings working together to keep inflation low and stable, we actually want to shift our focus to the next job which is rebuilding New Zealand’s economy and New Zealand’s growth engine,” Luxon said.
Data yesterday showed gross domestic product shrank in the second quarter and many economists and the RBNZ tip a contraction in the three months through September, which would deliver a second recession in less than two years.
On Friday, Luxon spoke about improving productivity and living standards by improving the quality of education, boosting infrastructure spending and removing red-tape, encouraging investment in science and technology, including AI, and expanding New Zealand’s ties with the world.
He also said the country will continue to explore economic opportunities with the US, whoever wins the election, New Zealand’s leader told Bloomberg Television in a separate interview.
“We need to continue to strengthen our connections to the world,” Luxon said. “A rapidly rising Asian middle class is a win-win for New Zealand.”
The RBNZ’s decision last month to begin easing monetary policy earlier than previously indicated has stoked expectations of an economic rebound ahead. Business confidence has jumped to a 10-year high and consumer sentiment has also lifted as analysts anticipate further declines in the Official Cash Rate over the next 18 months.
“People are lifting their heads now that that rate cuts have actually been delivered but it will take some time,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “It takes a good nine to 18 months for rate cuts to really feed their way through the economy. So growth will be a bit more loaded into the back half of next year and then into 2026.”
Luxon, whose first year in power ticks over in late November, needs some good news. Unemployment is rising and a record 81,000 Kiwi citizens left the country in the 12 months through July seeking better jobs and incomes overseas. Meanwhile, the government is facing mounting anger over its deteriorating relationship with indigenous Māori.
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New Zealand’s economy was shrinking in the second half of 2023, when voters ousted the previous Labour government and gave Luxon’s National Party the mandate to form a center-right coalition with the New Zealand First and ACT parties.
Spending Cuts
The economic slump has extended into this year under the weight of high borrowing costs and as the new government made deep cuts to public spending, including firing thousands of civil servants.
Luxon has defended the cost cutting, saying the government had become too bloated, and pledged that essential front-line services won’t be affected. He argues the savings have enabled more targeted investment in areas like cancer drugs, while also allowing him to deliver the income tax relief for low and middle-income earners that he campaigned on.
The tax cuts were the centerpiece of a mid-year budget, but the price to pay was higher debt, a deficit widening to 1.7% of GDP next year and no prospect of a return to surplus until 2028. Scope for future spending has also been squeezed, making upcoming budgets challenging.
Alongside a fiscal repair job, Luxon has also been faced with a raft of political challenges as he delivers the pledges agreed on by the three parties that make up his coalition.
The government has reversed a ban on offshore oil exploration and outlined a pro-mining approach championed by New Zealand First lawmaker Shane Jones that has put it on a collision course with environmentalists. Its pro-farming stance — including a review of methane reduction targets — has raised the ire of climate advocates.
Perhaps of greater concern for Luxon is the reaction to policies that critics see as “anti-Māori.”
Māori are aggrieved that Luxon will not stop the ACT Party leader David Seymour introducing legislation to define the principles of the Treaty of Waitangi, the 1840 agreement between tribes and the British Crown that is considered the nation’s founding document.
Seymour says the way the Treaty is being interpreted gives greater rights to Māori on the basis of race, which he has compared with apartheid in South Africa.
Māori Tensions
But critics are scathing of what they see as an attempt to undermine a greater voice for Māori after decades of discrimination that has resulted in them being over-represented in poverty and crime statistics. This has led to public protests, petitions and heated rhetoric that Luxon has found difficult to defuse.
The government has also abolished the Māori Health Authority, which was established in response to poorer health outcomes among Māori, and reversed moves that gave greater prominence to Māori language.
“All the stuff that has been done looks like a concerted assault on some of the progress that has been made over the last 40 years,” said Richard Shaw, politics professor at Massey University in Palmerston North. “If there’s significant disunity or civil disobedience or conflict, quite a lot of that is going to stick to Luxon and to his party.”
Under the coalition agreement, National agreed to support the first reading of Seymour’s law, allowing it to be open to public scrutiny at a parliamentary committee. It will not support the legislation beyond that stage, meaning it cannot proceed.
Despite the challenging year, Luxon has slowly built his support as preferred prime minister, raising it to 28% in August from 23% in April, according to a Verian poll for Television New Zealand. National has 38% support — ahead of the main opposition Labour Party on 30% but unchanged from election night.
–With assistance from Swati Pandey, Ben Westcott and Ainsley Thomson.
(Adds Luxon’s remarks in a Bloomberg event.)
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