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Global macro & geopolitics from a small economy perspective

Some politics is local

David Skilling
24 September 2017

In Saturday’s New Zealand election, the incumbent National-led coalition government looks to have won a fourth term. The official vote count is still to be finalised (it currently stands at 46%/36%), and coalition negotiations will have to take place. But this was a relatively clean result given that, until perhaps the last week or so of opinion polls, this looked to be an unexpectedly close race.

To an external audience, that this election was looking competitive may seem strange. New Zealand has grown strongly through the post-crisis period, with low unemployment, a fiscal surplus, and soaring asset markets – including house prices. Perhaps it should have been as exciting as today’s German election.

There are some local factors that explain this. First, recent New Zealand governments have lasted for a maximum of three terms (a total of 9 years); winning a fourth term has proved elusive. The second factor is the strength of the opposition. Despite this historical precedent, National seemed likely to win comfortably because the opposition parties were failing to inspire. But in a last-minute leadership change, Labour appointed a young, charismatic leader who was able to attract significant support. However, National’s arguments – and record of economic management since 2008 – were enough to win the day.

But not all politics is local. Some of the policy themes that emerged in this election reflect debates underway around the world. To be sure, this was not a small country version of Macron v Le Pen, but the New Zealand election debate usefully illustrates some emerging political pressures.

First, there was a general demand for change. Although the New Zealand economy has performed well in the post-crisis period, there was a sense that growing divides needed to be addressed. And even in a contest between two relatively centrist parties, there were clear policy differences on issues such as migration, housing and tax. In particular, there seemed to be a strong generational split. The rapid rise in house prices over the past several years as well as a changing labour market, have had major distributional effects (even though the youth unemployment rate remains relatively low).

This demand for new approaches can be seen elsewhere in the victories of Mr Macron and Mr Trudeau (and Mr Varadkar in Ireland). Several years on from the crisis, there seems to be a growing market for new policy ideas – to address a wide range of emerging issues, from housing affordability to the impact of new technologies on labour markets. In New Zealand, the government was seen to have sufficient new ideas.

The second theme is changing preferences on international engagement. New Zealand has a long history in the vanguard of trade liberalisation, at the WTO and in negotiating FTAs around the world. It was a founding member of the P4, the precursor to the TPP negotiations which commenced in 2008. This trade policy approach has commanded bipartisan political support in New Zealand, being championed by successive governments.

But this support has been fraying. Last year, the opposition Labour Party broke with tradition to vote against TPP in the Parliament. And in the campaign, Labour committed to renegotiate New Zealand’s commitments in the TPP to allow them to restrict foreign purchases of residential real estate. The potential coalition king-maker, New Zealand First, is also opposed to TPP.

There were also election debates about imposing tighter controls on migration. This is new territory for New Zealand – and partly a response to the magnitude of these flows. But that these debates are occurring even in small open economies like New Zealand that rely on international engagement is another marker of changing attitudes towards globalisation. I don’t interpret this as a demand for a reversal of globalisation, but for a measure of national discretion over how globalisation is managed – particularly on flows of labour and capital, which can have deep distributional consequences. This more managed approach can be seen elsewhere, notably in some current debates in Europe.

Third, questions are being asked of the macro policy framework. From the late 1980s, New Zealand pioneered the introduction of new monetary and fiscal policy institutions. The Reserve Bank became independent in 1989 with a mandate focused on policy stability, a model followed by several other countries. On fiscal policy, a legislative framework was established that committed governments to fiscal sustainability and established high levels of transparency.

There is bipartisan support for the fiscal framework, with the major political parties committed to discipline on fiscal balance. This has worked well, and is a core reason that New Zealand is in fiscal surplus with net debt tracking down below 20% of GDP. But changes to the Reserve Bank’s mandate were proposed, to introduce a greater focus on employment as well as price stability. For the most part this is not wild stuff, and I don’t think it would have large substantive effects, but it is part of a broader international trend of questioning some of the foundations of the macro policy orthodoxy of the past few decades.

Overall, this election at the bottom of the South Pacific will not shake the world in the way that other recent elections have. But the policy debates in New Zealand point to emerging pressures that have equivalents in many developed countries. Around the world, there is a high degree of policy fluidity – extending from monetary policy to foreign trade and investment policy.

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Twitter: @dskilling