Liam Dann: Tax cut victory for Nicola Willis and reminder NZ is still a wealthy place

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A tick from rating agency Fitch was good news for Nicola Willis, seen here speaking at a women in local government gathering on Wednesday. Photo / Laura Smith
THREE KEY FACTS
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
New Zealand has an “advanced and wealthy economy”. Surprise!
This is an unpopular opinion, I know. We’re a nation of worriers and another column about how the economy is going to hell in a handbasket would probably be more of a hit with many cash-strapped Kiwis.
But these are not my words. The reminder that we are still an “advanced and wealthy economy” comes from the international credit rating agency Fitch, which delivered its verdict on the nation’s fiscal outlook last week.
Because New Zealand is highly indebted and relies on foreign capital to plug the large and ongoing gap between what we spend and what we earn, the verdict of rating agencies is crucial to the stability of New Zealand’s economy.
Three matter: Standard & Poors, Moody’s and Fitch.
They deliver report cards with grades that determine the level of risk associated with investing in an economy. That risk level directly impacts the cost of borrowing for that nation – ie the interest rates we pay.
It was also, given all the controversy about whether the country could afford tax cuts this year, a verdict on National’s first Budget and its fiscal management since taking office.
In June research group BMI – owned by Fitch Group (which also owns Fitch Ratings) – lowered its real GDP growth forecast for New Zealand for 2024, saying “weak growth in the first quarter indicated that the domestic macroeconomic environment may be facing more challenges than anticipated”.
That sparked speculation that we might be at risk of a downgrade.
But, despite all the concerns Fitch Ratings affirmed New Zealand’s rating at AA+ last week. That’s the second-best rating available after AAA.
AA+ is the same rating as Fitch gives the US. It’s one notch better than Ireland or Taiwan and two notches better than France, the UK or South Korea.
Okay, those nerds across the Tasman have an AAA rating. But if we want to get there we’ll need to do something radical like finding enormous mineral deposits or adopting a compulsory savings regime.
For the time being, getting AA+ affirmed with a “stable outlook” is a good result.
It is a victory for Finance Minister Nicola Willis, who copped a lot of flak over National’s tax cut policy – much of it from fiscal conservatives on the right of the political spectrum.
I was one of those who questioned why we were delaying a return to surplus to cut taxes now. I also took issue with National’s line that the cuts would not contribute to inflation.
The party’s argument was that tax cuts were neutral because they were fully offset by spending cuts.
I still have a quibble with that. National was ignoring the possibility that it might have made the same amount of spending cuts without delivering tax cuts. That was an economic choice it could have made. It would have put more significant downward pressure on inflation and got us out of deficit sooner.
Politically, though, it wasn’t a choice for National because it had made a very big promise about tax cuts on the election trail.
For National, the tax cuts exist in a universe where they are inseparably entangled with spending cuts – like quantum particles.
Because they are the Government, for practical purposes we all have to live in that universe now.
And within the parameters of that universe, the Fitch report is vindicating – it’s a victory for Willis. National’s numbers added up.
Fitch said the AA+ reflected its view that the Government’s commitment to return to surplus “will stabilise and then reduce government debt/GDP in the medium term”.
It has more faith in New Zealand’s political leadership than many local commentators do.
“Long-standing commitment to prudent fiscal policies across New Zealand’s political spectrum is evidenced by multiple episodes of large, sustained fiscal consolidation in recent decades,” Fitch said.
“The incumbent National Party has emphasised fiscal responsibility, but the previous Labour Government also announced some consolidation measures in its pre-election fiscal update.”
So the Fitch report is also something of a vindication for former Finance Minister Grant Robertson.
His handling of fiscal policy has been condemned with a great deal of hyperbole by many. Fitch wasn’t interested in any of that.
Fitch noted that “macro-financial risks arise from high household debt and a high current account deficit, in the context of already-high net external debt”.
But it said the risks “are manageable” assuming sound macroeconomic management.
That is to say, (as usual) it is our private debt, lack of savings and our exposure to property prices that represent the biggest risk to our future financial stability.
So, good. They’re not sugarcoating it.
New Zealand can’t afford to be complacent about debt or its current account deficit, its low levels of productivity or developing new industries to generate international revenue … all that stuff.
We face ever-diminishing returns if we coast on our good fiscal reputation, the fortunes of commodity markets, interest rate cycles and property booms.
These things won’t solve our structural problems. But if we’re lucky they might provide enough breathing space for us to deal with them.
New Zealand is an advanced and wealthy nation and we want it to stay that way. We need professional worriers to remind us where we’re faltering and where we are overheating.
But the external view we get from agencies like Fitch offers an important reminder of the advantages we still have. We need to make the most of them while they last.
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