Kiwi News and Views

Our current fiscal settings promise that we will eventually face a public debt explosion. A major cause would arise from the aging population. Is there anything we can do?

It has long been known that the ageing population would create future fiscal pressure. It was quantified in the first (2006) Treasury long-term fiscal projection and has been confirmed in every subsequent one. It is not simply that with relatively more elderly, the cost of New Zealand Superannuation rises markedly faster than GDP. The elderly also require more public healthcare and related social support much of which is today funded by others.

For the record, the just released 2025 Treasury Long-Term Projection calculates that given the current expenditure and revenue settings net debt would amount to two years of GDP in 2065.* Of course, the true figure is not that precise, but the order of magnitude is probably right. Whatever the ratio is, it will be acceptable to those expected to lend the debt to the government. Fundamentally, the current fiscal settings are not sustainable. A major contribution to the blowout is the aging population.

Despite the 2006 warning, very little has been done to address the challenge. Michael Cullen introduced Kiwisaver, a semi-compulsory earnings-related second-tier top-up on NZS but it will do little to reduce the fiscal pressure.

He also instigated the New Zealand (aka Cullen) SuperFund, in which the government invests financially now with the intention to draw down the fund as a bulge in the proportion of elderly comes through. Subsequent National Governments have not always paid into the fund in the way that Cullen intended.**

Meanwhile, the public remains impervious to the danger of a fiscal crisis. They seem to dismiss the challenge because they think it will not happen in their lifetimes. A consequence of Dornbusch’s law? Since the crisis takes longer to arrive than you think, you ignore it; when it  happens it will be faster than you thought and you will be very angry at no one taking preventive measures (but not angry with yourself). Today’s young-uns may wake up one day to find we are (or the world is) in an economic and financial crisis which requires their retirement prospects to be ‘unexpectedly’ and severely curtailed.

What to do? The first option is to do nothing and hope that action will have to be taken after we are dead, with the cost of our sloth falling on younger generations – that has been the approach of recent decades.

The second option would be to Americanise the pension system – to abandon NZS as it was originally conceived and is understood today, replacing it with an income- or means-tested minimal income support for the poorest and leaving everyone else to fend for themselves. The Treasury tried to do this with its proposal in the 1997 referendum. Although fronted by Winston Peters, the scheme was neoliberal as set out by Roger Douglas in Unfinished Business. It was rejected by a huge majority (92.4%) of voters. I suppose it could be imposed without popular consent but that seems unlikely so I won’t critique it.

Treasury has also proposed that the level of NZS be indexed to prices rather than wages with the effect that the elderly would not share in any rise in material prosperity. (It was a part of the 1997 scheme.) Such price-indexation was imposed on benefits in 1991. The outcome was increased hardship. Whether it would be politically acceptable is for others to decide. (The Treasury is not unknown to advocate policies which it knows are politically unacceptable.) The change would give a little short-term relief to fiscal pressures, but would not resolve the longer-term pressure.

The indexation shift is likely to be a part of the resolution response to any Horrendous Fiscal Crisis (HFC). There would also be endings of various concessions (e.g. health, social support and transport), and the introduction of incomes- and/or means-testing. (Means-testing involves an assets test.) The winter energy supplement would be high on the abolition list. This is an ugly scenario – essentially an Americanisation – over which we would have little control.

That leaves two options (or both). One (the fourth in this list) would be to raise the age of entitlement. I have long been an advocate of this policy although I originally arrived at it from an equity rather than fiscal perspective. It seemed to me that as longevity increased and as those in later working age groups – the pre-elderly – became more robust, it did not make sense to give them the same state support as when the New Zealand pension system was first formulated in 1898.

I was impressed by the raising of the age of eligibility from 60 to 65 which Ruth Richardson (then Minister of Finance) and Cullen (then Opposition Spokesperson on Finance) agreed to in 1992. Well-signalled, small, incremental steps, with a provision to cover those unable to work and in hardship. Why stop at 65? Why not continue the process until some reasonable age of eligibility is reached? I suggested that might be where expected longevity would be 17 years. In 1898 that the expectation of a 65-year-old was 13 years; today it is 20 years. We do not expect to reach an expected longevity until age of about 72. Were we to adopt immediately the Richardson-Cullen process raising age of eligibility 3 months every year, we would not reach 72 until 2041. (For further detail see here and here.)

I am not arguing here for reducing the scope of the modern welfare state. Rather, I favour adapting it to changing circumstances. (Once, a single woman was eligible for the pension at the age of 55; I leave you to list the changing circumstances which made that archaic even if originally it was a humane policy.)

The National Party proposes raising the age of eligibility to 67 some years away. (I leave you to judge whether that is politically courageous or timid.) It was ruled out in the coalition agreement with NZF. It leaves the danger that one morning during an HFC, those who are 64 will wake up to find they will have to wait another two or more years before they become eligible for NZS.

The fifth option would be to claw back the incomes of the well-off elderly more than the current income-tax system (with its low top rate) does. There are potentially big gains here. On the two occasions a government tried to impose a clawback (it was called a ‘surcharge’), the public outcry was such that it backed down.

Which seems to leave us with the first option, to do nothing and wait for the HFC to do it to us.

Let me make a small suggestion which would give some flexibility for future change. Set up a special tax code for NZ superannuants. Let’s call it ‘G’ for golden oldies. (I suggested a parallel code for families with children here.)

Initially, it would have exactly the same tax regime as the existing one. Only those joining the scheme would be required to use the G code – current superannuants would not. An important reason for leaving them alone is that one cannot trust those designing the G-code to make transferring to it simple. But also it provides more certainty to the existing superannuants that their entitlements will not be undermined. Both reasons would reduce the initial antagonism to the new G-scheme.

In the long run though, the G-scheme could be changed with tax rates on upper incomes increased relative to ordinary tax rates – a clawback. (I could give a lot more detail if there was any interest.) Thus we would have an arrangement which could be used to progressively, flexibly and incrementally address the challenge of the aging population, rather than wait for the HFC to do it for us.***

* Note for Geeks. The public debt-to-GDP ratio will not be 200% as was widely reported. It may be 200% years. What separated out the good mathematicians in my class from the rest, was that the former knew they had to keep their units consistent. If you didn’t, you made egregious mistakes. Debt is a stock measured in dollars (say), GDP is a flow measured in dollars per year (say). In which case the Debt-to-GDP ratio is dollars divided by dollars per year, so its unit of measurement is ‘years’. You may think this does not matter but I have seen discussions in considerable confusion because the participants were not distinguishing stocks from flows. Part of our clumsy response to the Asian Financial Crisis of 1997 arose from the Reserve Bank not understanding this elementary mathematics.

** The economics of the Cullen fund is complicated. It requires distinguishing between the situation for a person from the situation for the economy as a whole where feedback loops are so much stronger. Do not make the ‘fallacy of composition’, which ignores these feedbacks. It led to a lot of faulty analysis during the Great Depression and probably intensified it. The critical assumption is that the Fund can make a higher return on its investments than the costs of government borrowing.

*** I shall write about the role of immigration in a later column.

Jim Bolger was the first Prime Minister I ever interviewed. It was 1992 or early ‘93 at Massey University. He was in the second half of his first term and I was a 21- or 22-year-old student journalist. Bolger had already made most of the historic political choices that would define his leadership of the country – letting Finance Minister Ruth Richardson execute the mother of all budgets, going back on his promise to cut the hated superannuation surtax, and passing the Employment Contracts Act. He’d promised an end to the rapid, painful reform of Rogernomics and return to a more settled politics that suited his political temperament.

He had campaigned in 1990 with the promise of a “Decent Society”, a slogan that fitted him to a T but didn’t exactly fire up his party. Instead, his first two years in office were a tsunami of economic reform, a continuation down the neoliberal path laid by Roger Douglas and David Lange. After winning the 1990 election in a landslide, Jim Bolger had become a deeply unpopular Prime Minister. So I did the maths and asked him a confronting question. In essence, I said ‘You’re unpopular, but your party is still polling well and so’s Winston Peters. If you want National to win the next election, why don’t you hand over the leadership to Peters?”

I remember Bolger’s reply almost word-for-word after all these years. He stared hard at me and said, “You are a very naive young man who clearly knows very little about politics”.

Jim Bolger wasn’t afraid of expressing his opinion and even when he was facing the stormiest of political seas, he never lacked self-confidence.

Bolger was New Zealand’s 35th prime minister. The 11th longest-serving, from 1990 to 1997. A farmer Prime Minister, in the best New Zealand tradition, following in the footsteps of Coates, Massey, Forbes, and Holyoake. MP for the King Country (and KingCountry-Taranaki) for a quarter of a century, entering parliament at the dawn of the Robert Muldoon era, in 1975. He was a cabinet minister just two years later and after National’s 1978 win became Minister of Labour and Minister of Immigration. These were the days when big strikes were settled in the minister’s office. Bolger became a master of the ‘smoke-filled room’. Although his office negotiations were more famously concluded over a glass of whiskey. When I produced The 9th Floor in 2017 we called his episode ‘The Negotiator’ for good reason. In part because of his real politick acumen but also because in his second term he would begin some of the most consequential negotiations in modern New Zealand history. More on that later.

When Bolger came to office, he knew the economy and the majority government-owned bank BNZ was in bad shape. He didn’t, however, know both were on a precipice. As he told Guyon Espiner and me in his interview for The 9th Floor, our series of interviews with former Prime Ministers, it’s hard for anyone to understand what it’s like “being told the day you become Prime Minister, that the country’s broke”. It was the epitome of Harold Macmillan’s quote that the great challenge for a politician is “events dear boy, events”.  After a night of jubilation, he was called by Treasury officials on Sunday morning and summoned to a meeting. They told him the BNZ would need a $380m bailout, the government would need to borrow double that. Bolger’s fiscal plans turned to ashes before his eyes.

Leadership, to Bolger, was about being able “to see a little further” than most and to “see a different world”. And being able to bring people along on the journey. But his first term was about the here and now. So he decided to follow the advice of his Finance Minister, cutting benefits, removing the universal family benefit altogether, keeping the super surtax. It was a reluctant choice but, in his mind, the right one. The only one. A conservative by instinct, Bolger knew the public hates change and the best path is to get from the old stability to the new stability as quickly as possible. So he also introduced the Employment Contracts Act at speed, ending compulsory unionism and national award agreements.

They were decisions he never resiled from, but he certainly had second thoughts. In The 9th Floor interview, Guyon and I could hardly believe our ears when he embarked on a deconstruction of neoliberal politics and its impact on the poor.

“Do I believe the gap between those who have and those who don’t at the moment is too big? Yes. This is why we’re getting many revolutions around the world. The world has sat silent as they have pursued neoliberal economic policies … and in fact they’ve failed. They have failed to produce economic growth and what growth there has been has gone to the top”.

Guyon asked the question every New Zealander alive in 1990 was asking: “But you embarked on that model, did you not?”

History has come to view his hard economic choices more kindly, but it came at immense political cost for Bolger. With interest rates around 20% and unemployment around 10%, times were tough and voters turned on him. The reason I asked him the question I did that day at Massey was because his Preferred Prime Minister numbers fell as low as 8-9%. By the time we did The 9th Floor in 2017 he could joke about it. “They were the lowest in polling history… No-one will beat me.”

Perhaps Bolger’s greatest good fortune at the time was that as unpopular as he was, Labour was even more so. It was a divided party struggling with its identity in the wake of the Lange-Douglas years. Mike Moore launched a fierce campaign in 1993, but Bolger clung on after a hung parliament on election night, thanks for a few hundred votes in Waitaki. Bolger quickly signalled the tough medicine was done, sacking Richardson as Finance Minister and trying to steady the ship of state. He got the nickname ‘the great helmsman’.

Bolger always took himself and his work seriously. When we made The 9th Floor he was less than impressed that Moore, Prime Minister for just 59 days, would get the same treatment as him. But he was also incredibly realistic when it came to politics. He knew it was the art of the possible. He knew to pick his battles.

The battle he chose that became perhaps his greatest legacy was his commitment to honouring the Treaty of Waitangi. He dragged his party, cabinet, and voters to a new era of race relations that he was uniquely placed to introduce. As a farmer just out of Te Kuiti, he got to know a lot of Māori leaders in the King Country. As the son of Irish immigrants and a committed Republican who accepted the Order of New Zealand but never a knighthood, he empathised. He insisted New Zealand needed to “give up the colonial mentality”. He had a deep, personal hatred of racism. “I cannot abide racism. I cannot abide people judging others by the colour of their skin, their ethnicity or their culture… One of the great evils of world society is racism. The undermining of a stable world society is racism”. He pointed to Brexit and the first Trump election. “Tragically, this has a long history”.

Bolger, with his friend and ally Sir Doug Graham, began treaty negotiations with Tainui and then Ngai Tahu. They changed the relationship between the government and iwi and re-imagined race relations in New Zealand. It began with an act of political opportunism, when about 20% of the fishing quote came up for sale and the Bolger government decided to offer it to Māori. As was Bolger’s style, the settlements were often hammered out in his office with a mix of threats and compromise. But his approach to Māori-Pakeha relations was a fierce act of principle for Bolger and he’s now renowned for his foresight in treaty relations. He described as “absurd” the idea that New Zealand’s first citizens should be dispossessed of so much of their land and rights without any redress. He thought treaty settlements were a way of bringing honour back to New Zealand and that “if Māori do better, we all do better”.

I remember at the time that one of the most telling comments he made during our interview was that the treaty settlements that have flowed since the mid-1990s might not be “full and final” as per the legislation. As long as Māori dominate the bottom quartile of social statistics, Māori leaders will keep asking the question and keep pointing to the where that poverty began. He said they would be quite right to do so.

Despite never becoming truly popular or being embraced by voters. Bolger won a third term. He was the first MMP Prime Minister. He won the largest share of the popular vote in 1996 but New Zealand First held the balance of power. Bolger had sacked Winston Peters, his heir apparent, in 1991 over his continued criticism of the government’s economic policies. They’d become bitter rivals. But Bolger, the negotiator, knew a deal could be done. Labour would need three parties to form a coalition, National and New Zealand First could do it alone. Peters demanded the deputy prime ministership and a new role of Treasuer, senior to the finance minister. Bolger conceded. He told the story of a late night discussion with Peters where their colleagues drifted away through the evening until just the two men were left, putting ghosts behind them and agreeing a way forward. Tensions grew within the coalition however, and in December 1997 Bolger was rolled by Jenny Shipley. He harboured some doubts about MMP but thought it had acted as a safety valve, saving us from some of the turmoil and division seen in recent years in Europe and the US.

Bolger was as complex a mix of contradiction as any Prime Minister, probably more than most. Despite wanting to break the power of the unions, he thought they had become too small. He hated politicians promising to build more prisons and lock up more people as a solution to crime (“it’s demonstrably a cross on New Zealand’s record that we have so many people in prison“). And of course he led a strongly neo-liberal government and then railed against those policies later in life. He went on to be New Zealand’s ambassador to the US and feared that as early as Trump’s first election, the country was turning its back on democracy. Given his fondness for the country, he might not mind being remembered as something of a Jimmy Carter figure. While he led much longer, he will be remembered for his decent character and was more popular and respected after he left office than when he was in power. Once dismissed as “spud”, he has slowly moved up historians’ rankings of Prime Ministers as the years have gone by.

Bolger was a politician forged in the Muldoon years, a rural conservative who ended up leading a reforming government in spite of himself, a stubborn man who showed the political flexibility to survive three terms.

He was, undoubtedly, a proud New Zealander who loved and understood his country.

“One of the great ethos of being a New Zealander is fairness. And I’ve got a book in the bookshelf which is titled ‘Fairness or Freedom’. Americans talk always about freedom. Every sentence has freedom in it. We talk much more about fairness. And fairness was what I wanted. That every member of society had a fair opportunity to succeed, make progress, to look after their families, provide for their children and so forth.”

Bolger knew, even towards the end of his life, there was still much work to do to create the decent society he longed for. A decent society for all, even the newest New Zealanders.

“The biggest challenge in societies like is to welcome in others from different cultures and value systems, histories and religions and make them all feel New Zealanders,” he said. “You see, you could argue the challenge is to grow the economy by X percent a year or whatever, but it’s almost mundane by comparison. Therea re various ways you can do that. I think the sense of people feeling they are important in this society and [that] their lifestyle reflects that acknowledgement of that importance [is critical]. We have to listen more carefully to those who are left on the margins.”

New Zealand has ‘Scandinavian ambitions in terms of quality of life, but a US attitude to tax’: Lara Clark.

One of the most perceptive remarks about New Zealand’s fiscal tension was made by former British High Commissioner Lara Clark. She is no FIFO (Fly in-Fly out commentator) but made the assessment at the end of four years in Wellington; she is married to a New Zealander (a human rights lawyer) and she confessed that her husband and children supported the All Blacks in a test against England.

Until the mid-1980s, New Zealand’s aspirations were undoubtedly for a Scandinavian quality of life with high government expenditure and high taxation. Indeed, once it was common, and not unrealistic, to argue that the policies introduced by the First (Savage-Fraser) Labour Government led the world ahead of Britain and Scandinavia. But the roots of the vision go back to the nineteenth century.

Rogernomics began undermining the vision in the 1980s by cutting its high tax rates on the rich. Most obvious were halving the top income tax rate. But as fiscally expensive, and therefore as favourable to those on high incomes, was the ‘imputation’ of corporation tax so that it became, in effect, a withholding tax that halved the already reduced effective income-tax rate on dividends.

The net effect was that the top tenth increased their relative share of disposable household income from 20 percent to 25 percent, with a corresponding reduction for the other 90%. (The top 1 percent did even better.) There was no capital gains tax, despite even some Rogernomes seeing this as a logical extension of their changes. Given the economy was stagnating, some income groups had no increase in their real incomes for more than two decades. Child poverty doubled.

GST was introduced, reducing the net fiscal cost. Even so, there remained a long-run fiscal gap which was obscured by short-term timing flows. National’s Ruth Richardson faced up to the gap when she became Minister of Finance in 1990. She and Jenny Shipley, Minister of Social Welfare, savagely cut benefit levels and cut, or attempted to cut, in other areas such as education (e.g. student loans) and health spending (e.g. charging patients for staying in a public hospital), shifting costs onto households. Government spending promoting the quality of life became less generous.

The two described their measures as ‘redesigning the welfare state’. It was shifting its conception from a Scandinavian one, as set out by the 1972 Royal Commission on Social Security – to enable everyone to feel a sense of participation in and belonging to the community – to a minimalist American one – to enable everyone to sustain life and health.

I’ve never been clear to what extent the two – or other advocates of the change – understood the transformation. In all their writings I have seen, they fudge the issue. But as the High Commissioner implied, once committed to ‘American’ levels of taxation a society, becomes is forced to American levels of government spending with its very narrow vision of the quality of life. Hence the ongoing cutting back of social security entitlements.

The shift did not reflect a change in community aspirations although, of course, there was a minority who favoured a narrower role of the state. There was a more widely held view that state involvement in the economy had to be changed reflecting the increasing diversity and complexity of the economy but that it had to be, and could be, done without compromising the state’s involvement in the quality of life.

This left the fiscal tension that Lara Clark drew attention to. Given an American tax philosophy, New Zealand could not pursue a Scandinavia style of government involvement in promoting wellbeing.

Given the unwillingness to contemplate moving New Zealand’s tax regime from near the bottom to the middle of the regimes of affluent economies, I thought that it would be necessary for people to reduce their aspirations. Perhaps as the generations moved, younger ones, having grown up in Ruthanasia/Jennicide world of Richardson and Shipley would think it a norm.

They have not. It is true that they are becoming increasingly vague about the pre-Rogernomics policy framework (some of the social policy advisers to the recent Labour Government did not even understand the report of the Royal Commission on Social Security). But the ‘aorta’ still drives public policy pressures – ‘aorta do something about it’. (I’m trying to set out a reasonably value-free account in this column, but while personally I favour the ‘Scandinavian’ approach, compared to the centre of the population, I am more supportive of initially expecting reliance on self-initiative.)

So the tension remains. We resolve it in a similar manner to the Rogernomics Labour Government, by putting off the day of resolution by fiddling fiscal flows and commitments. The best example is our funding of support of the elderly (I shall write a separate column about that) but also we unsustainably depleting  natural resources while failing to maintain infrastructure and to invest in human capital. The result is a backlog of troubles, steadily building up a horrendous bill for future generations (supposing they don’t emigrate – that is another future column).

The trick then has been to resolve current fiscal tensions by charging future generations. I leave you to make the judgement whether this is moral but note my earlier caveat that future generations can avoid the charge by migrating. (I describe how this happened to Newfoundland and its consequences in Not in Narrow Seas: The Economic History of Aotearoa New Zealand.)

The tensions are nicely illustrated by Jacinda Ardern on the one hand vetoing any rises in taxation and on the other leading the passing of the Child Poverty Reduction Act. It aims to halve child poverty. Back to 1990, when child poverty was doubled to pay for the Rogernomics tax cuts. It is obvious, isn’t it? New Zealand cannot reduce child poverty to pre-1990 levels with American style tax levels? Hence the Ardern Government’s failure to make much of a dent on child poverty.

We cannot attain a sustainable Scandinavian-type quality of life while keeping the existing tax system in place. It is not a matter of just introducing a capital gains tax. That may increase tax revenue (and improve the efficiency of the tax system) but the additional revenue is negligible compared to what the Rogernomes gave away.

As a New Zealand citizen I have my own values – and I am happy to promote them in an appropriate venue. But as a New Zealand economist my task here has been, like Lara Clark, to confront the nation with the stark fiscal tensions it faces. Ignoring them means they will some day be resolved in a brutal way.

It even happens in New Zealand. Local autonomy suffers.

While Donald Trump may be democracy’s greatest political bully, he is not alone. It happens in New Zealand, not only in the offices of politicians and whips dealing with caucus. Cabinet ministers practise it in public, not least towards local government.

L ocal governments are legally required to forecast investment over at least ten years including the infrastructure necessary to meet additional demand, to improve service levels and replace existing assets. You probably think that is a good thing (although meeting the requirement almost destroyed my local council). Central government agencies do not have any such legal requirement;  the vast majority do not do it. The bully says, ‘you do what I say, not what I do’.

The contempt for local government is deeply embedded in the way we run the country. They are treated as handmaidens rather than independent agencies of government. The attitude is deep in our political culture with Parliament commonly overruling local preferences. It is not just the current government; the drive to centralise operates throughout the political spectrum. Among the centralising actions of the Ardern-Hipkins Government were to disempower localities in the management of their healthcare, polytechnic education and water as well as imposing Māori wards even where locals had already rejected them.

When in opposition, this government promised to reverse these actions – one of its few coherent policy approaches was to promise to reverse whatever the incumbent Ardern-Hipkins Government had introduced. While it has made some reversals, they have typically been partial and painfully slow.

Meanwhile, this central government has been willing to get into other stoushes with local governments. Take, for instance, the quarrel between the Minister for Housing and Infrastructure and the Auckland Council over local housing policy. A feature of Auckland Council is that it is getting big enough and politically strong enough to fight back, although because it is less united than a minister-sole backed by cabinet, it is not so even a fight.

The people’s Republic of Canterbury used to be bolshie, but the Canterbury earthquakes left it dependent on central government, which had all the funding. It will return to that more independent view.

The central government has two powerful weapons in any fight. It can change the law, ignoring whomever it wishes, and it has the funding, which it doles out to local government in return for acquiescence. The Minister for Local Government wants to take a proposal for capping local council rates to Cabinet before Christmas. The effect would be to further restrict what local governments can do, except where they can go to Scrooge central government and wheedle further funds out of them, giving central government even more control.

I don’t particularly like my rates rising, but I also want locally responsive cultural, environmental and social services. Those activities will be the first to be restricted if there is a rates cap, and my locality will be the nastier for it. Such matters are not easy trade-offs. But they are ones the locals should make, not bullies in Wellington.

Getting a new deal for funding localities is not easy, but central government is not even interested in trying. (Hence the grim joke that there is a ministry against local government in Wellington.) It would reduce its power to bully and we cannot have that, can we?

We are currently about to elect our local councils for a three-year term. There does not seem much enthusiasm for the exercise, in part because councils have so little power relative to central government. What happens locally over the next three years is likely to be far more influenced by central government decisions. I don’t know about yours, but my local candidates seem little interested in standing up to central government.

The issue of political bullying is wider than just local autonomy. There is increasing diversity on many dimensions – age, culture, gender, ethnicity, region, religion, sexual expression, taste … The traditional approach of ignoring the diversity and assuming we are all the same (and you will better bloody conform) is increasingly not working. To give the Rogernomics Revolution credit, it recognised the diversity pressures by handing over more decisions to individuals – to the market (although neoliberalism has little recognition that for the market to work well requires fair income and wealth distributions). However, it never recognised that there remains a need for lower-level collective institutions like local authorities and unions.

Once the paths of many MPs to Parliament were through local councils (or other collective mid-level institutions like Federated Farmers and unions). The apprenticeship gave them a connection with ordinary people. The Fabian roots of the Labour Party evolved from (English) local body activity. National once prided itself on its grassroots foundations – giving priority to selecting those candidates the electorate knew. Overseas, the evolution of Greens was founded on local activity, but New Zealand’s show little interest in local politics. (ACT is putting up a handful of candidates in these council elections.) Perhaps the lack of local input explains a number of eccentric – but not long-lasting – MPs.

Today the ambitious politician skips such formative experiences; they are more likely to have entered from having worked as political advisers in Parliament and then onto an MMP list. The traditional Saturday morning clinics have been delegated to paid underlings so that on this dimension also, the humble task of engaging with ordinary people is diminished.

Getting into power seems to make one a natural bully, forgetting that once the role of politicians in a democracy was to serve the people – all people, not just the ones who elected them (typically only a minority of the population – often a small minority). Nor was it to serve only the interests of the pressure groups which funded their election. Imposing one’s personal beliefs on the majority of the population was not a part of a modern democracy. Getting into power often involves the bully politician claiming to know things better than experts (although they rarely have the time to master the subjects). It can be an ignorance compounded by arrogance.

Trump is an extreme example of political bullying. American legal, political and social institutions seem unable to restrain him in the short term; whether they will be able to restrain his authoritarianism in the longer term is yet to be seen. In the interim, his attacks on localities, diversity, and knowledge and expertise are damaging the future of the United States – perhaps irretrievably. (He is certainly accelerating the decline of American global power.)

He is not unique – although his personality may be. There are other bullies, even here. Our bullying is usually not as vigorous, but it could evolve that way, especially if someone with a Trump-like personality got into power. New Zealanders need to stand up to any bullying but also to create and strengthen institutions which play their part in resisting it.

What the latest Statistics New Zealand GDP figures might be telling us.

Statistics New Zealand’s publication of GDP for the June Quarter got a lot of media coverage, some of which bordered on the hysterical. To say the figures demonstrated the country was ‘bankrupt’ is a nonsense. Bankruptcy is about debt. Not a single one of the 28 tables SNZ published measured the debt of the nation, so they cannot tell you anything about the nation’s solvency, even metaphorically.

Why the focus on the single GDP number, given that SNZ provided literally thousands of them (although they are all interconnected)? The data is largely irrelevant for those who already know what the problem is: say Nicola Willis or Grant Robertson – or perhaps, as in the case some years back when a Rogernome argued the economy does well when the All Blacks do, we should blame it all on Razor Robertson.

It is never simple to know what is going on. First, how reliable is the estimated decline? There will be revisions. (The released tables are littered with ‘R’s indicating that estimates released in the past have been revised – but not by much. They have to be, unless either new information is ignored or we wait until all of it is in – we’d have to wait over a year.) I doubt that future revisions will be sufficient to reverse the conclusion that the economy contracted in the June 2025 quarter.

Why did the economy contract? Not that long ago the expectation was that the economy would turn the corner by June. If it has, the turn has been downward.

One answer is that it has been in contraction since September quarter 2022. That shifts the question to why we are in a long-term recession. (Here is my most recent discussion.)

Focusing on the last year, SNZ offers a breakdown of production by industrial sector and by types of expenditure which allows us to more than express hysterical shock.

SNZ reports 16 industrial sectors. It would be tedious to go through each, even if we stuck to comparing just two time periods. With three exceptions, all the industrial sectors have been struggling (contracting or growing less than the population) recently. Primary industries have  been growing but not booming – as has healthcare and social assistance. The only sector with strong growth has been rental, hiring, and real estate services. The big takeaway has to be that the construction industry is down substantially.

The expenditure sectors tell us something about who businesses are selling their reduced output to. Per capita private consumption expenditure fell 0.3 percent in 2025 June on a year earlier, while general government consumption fell 0.2 per cent. (Local government expenditure has grown strongly, hence higher local body rates.)

It is not possible from the published accounts to explain why household expenditure was weak because the tabulations don’t give the transfers (direct taxes and benefits) between households and government. We know that unemployment is up and real market incomes are falling, but without knowing those transfers we cannot assess to what extent households are raiding their savings and going into debt.

We know that the falling government expenditure is from a deliberate decision by the government to cut its spending (major exceptions are on education and healthcare). Thus the falling production of the professional, scientific and technical, public administration and arts and recreation sectors where government funding is important. The expenditure of nonprofit organisations serving households fell dramatically, probably because the government has been more successful at cutting its funding to them than cutting back on its own activities.

The rest of the world purchases of New Zealand output are reported as exports of goods and services. Exports and the associated sectors have been strong in recent times. There was a falloff in the June 2025 quarter that some attribute to Trump’s tariff policies. His first increases were only implemented in early April; it will take time for their effects to work through. The worst may yet be to come.

Firms are cutting back on their investment, so gross fixed capital formation is down. We saw that in the construction sector, and it will be a source of the manufacturing sector decline since it supplies building materials. The record is that residential building has been falling since 2021 and business investment since 2023, both before uncertainty from Trump’s erratic policy became evident.

The Reserve Bank began hiking nominal interest rates in 2021 and by 2022 they were back to the levels of the 2010s, after having been kept low during the Covid crisis. Interest rates have since been coming down. Even so, they are still higher than the late 2010 levels.

You may have expected from government announcements that capital formation should be lifting rather than falling. However, none of the ‘think big’ projects have got under way and many of the announcements seem to be repackaging older commitments rather than initiating new ones. The government’s freedom to increase public investment is limited by its ambition to get its borrowing and debt levels down.

Business closures seem unusually high. It is possible that we are going through a structural change. That certainly seems to apply to Auckland’s and Wellington’s hospitality industries, although reporting may be exaggerating by focusing on closures and giving less attention to new openings. It may be that our CBDs are contracting, as you would expect in Wellington with the government reducing its public sector – but thus far not by much. If so, why also Auckland? The post-Covid increase of working from home may be a factor. If there is a CBD structural change, landlords may be reluctant to reduce their rents, which would increase the number of empty shops.

More puzzling are the closures of large businesses in the regions – especially those processing local resources such as fish, foodstuffs and trees. Some changes amount to consolidation, relocating the operation elsewhere (which is little consolation to the locals). But there has to be a concern that something more fundamental is going on. One might hope the Minister of Economic Development and two Ministers of Regional Development would commission a report on what is happening – one which focused on the facts rather than sought superficial policy responses.

The focus of this column has been grappling with the facts rather than seizing one and attaching to it some unrelated political demand – like the country was bankrupt and ministers should resign. However, interpretation of facts is always in a framework of a theory; the one used here is the conventional wisdom. And yet the previous two paragraphs leave one uneasy; perhaps there is a more serious problem.

One of the SNZ tabulations compared New Zealand’s GDP change in the year to June 2025 with a selection of other (affluent) economies. It showed that New Zealand’s contracted in the last year while all the others expanded; typically, New Zealand was at least 1.5 percentage points behind. Hence the unease. Perhaps our structural economic policies are quite wrong, or perhaps the future of the New Zealand economy is bleak, irrespective of the quality of the policies.

Big Corporations Are Not What We Think They Are

John Kay has been widely described as ‘one of the greatest economists of our time’. He is well grounded in economic theory and has taught it. He is rich with practical experience, both as a consultant and a corporate director, which he melds shrewdly with the theory. He writes precisely and charmingly. And he is not constrained by the inertia of the conventional wisdom. I particularly liked his books on Obliquity, Other People’s Money and Radical Uncertainty (the latter he wrote with Mervyn King) where he pushes economists’ thinking forward– the conventional wisdom will eventually follow.

His latest book, The Corporation in the 21st Century, is even more challenging. A warning though. The publishers subtitle, ‘Why (Almost) Everything We Are Told About Business Is Wrong’, is misleading. Kay is explicit that he is writing about mega-corporations rather than conventional businesses. The standard paradigm still applies for most of those we know, work for and purchase from. The book, however, makes a compelling case that there is evolving a quite different sort of business, typically associated with products we may love, but whose producers we hate.

That is almost the title of the book’s first chapter which, initially, I found had a strange theme. Kay cites a recent legal case in which an investor sued Goldman Sachs for not following its ethics and values statement which begins ‘our client interests always come first’. The investment bank defended its case in court by arguing that the code was puffery and that no reasonable person would regard it as a statement of fact on which they might rely. The argument was supported by the US Chamber of Commerce and various other business peak associations. The US Supreme Court sided with the argument. Apparently, you should not trust what businesses tell you. Kay cites other instances with similar conclusions. 

(Kay does not explore the common notion that a successful economy depends on trust, although he has an acerbic ‘the 2024 meeting at Davos adopted its theme “Rebuilding Trust”. Well it might.’ Perhaps that will be in his next (fourteenth) book.)

The purpose of the opening chapter seems not only to express moral outrage, but also to frame the book: don’t believe what business tells you. What then are you to believe? Who then are you to believe?

Kay’s book is so rich in insights and examples that it is difficult to summarise. Basically, his message is that the features of corporations we are familiar with are no longer dominant. The archetypal business of the Industrial Revolution was a steelworks or a textile mill. Subsequently, the model was extended to embrace new technologies such as automobile production.

However, business went beyond that, nicely illustrated by the evolution of General Motors, which transformed from a company which made cars to a finance corporation which used its cars to secure its lending to consumers.

This rising role of finance in the modern economy is one of the major transformations of the modern era. Kay cites the case of the Halifax Building Society, once the largest mortgage lender in the world, whose board he was on – he left before it collapsed. For more than a hundred years it was a mutually owned organisation. It was converted to a shareholders’ company, became merged with the Bank of Scotland and crashed with it in 2008 under the impact of bad loans and inept money market trading. (One employee was fined £500,000 for reckless conduct.)  Kay thinks the rot set in before the demutualisation saying:

“I trace the beginning of the decline to an earlier board decision to establish Treasury, which managed day-to-day cash balances as a profit centre in its own right. … Trading in short-term money market instruments is essentially a zero-sum game – one party’s gain is another’s loss. So what was the source of the trading profits that not just our company, but every company in this business, claimed to make? The experienced bankers would shake their heads at this naivety. If they deigned to answer the question at all, it was to say that our traders were uniquely perceptive and prescient, although it was difficult to remain convinced of that once you had met them. The fantasy that sustainable earnings could be achieved through a sleight of hand was dispelled by the 2008 crisis – and was a principal cause of it.”

So the financial gains were a kind of Ponzi scheme in which the traders used a valuation of their assets unconnected with tangible assets or the actual future flow of income to give the impression that they were all making money. It came crashing down in 2008. But we never learn and, no doubt, the same thing is happening today. Mind you, those involved in the dealing make a mint during the boom, which is ultimately paid by the losses suffered by depositors, shareholders and taxpayers when the crash occurs.

When will the next crash happen? I can’t tell you. Dornbusch’s Law states that crises ‘take longer to arrive than you think, but then happen faster than you thought’.

Yet we are only halfway through the book (and have already skipped a lot of interesting ideas). Its second half moves on to explore another of Kay’s central themes. ‘The value of production today lies in the ideas rather than the stuff – think of pharmaceuticals or smartphones.’

A startling illustration is Amazon, a two-trillion-dollar company, which reports holding assets which are less than a quarter of that. Most of its buildings and the like are leased property which it does not own. ‘The key point is that Amazon has virtually no [tangible] assets akin to the Carron ironworks, the rail line from London to Bristol or Henry Ford’s River Rouge complex.’ Most of the limited assets its owns are financial. Trillion-dollar Apple has a similar story. It does not make computers, distribute them or sell them. It coordinates these activities.

Kay argues these companies are more typical of the modern mega-corporation. The core ideas in his book – collective intelligence, radical uncertainty, disciplined pluralism, relation contracts and the mediating hierarchy – lead to a quite different account of the organisation of the firm from how the standard economic theories and the law characterise it.

That discussion is for another venue. In fact, this book is a work-in-progress. It will take us a long time to work out its implications. Sometimes he gives the impression he may not fully understand himself. That is the nature of revolutionary tracts.

The concluding chapter, ‘After Capitalism’, is an indication of just how revolutionary Kay’s thinking is. I am not sure that is the right way to think about this era. Capitalism has transmuted greatly in the two centuries since the Industrial Revolution.

Observe that ‘capital’ has two different meanings. Kay is pointing out that in the evolving era, physical capital appears to be less significant. But financial capital remains significant, as this book and some of his earlier ones argue. Symbolically, Trump’s cabinet is stacked with billionaires.

And if financial capital remains politically powerful – the golden rule of those who have the gold make the rules – what if it is all a Ponzi system? Gee willikers.

Do we need bigger multipurpose government mega-departments?

Restructuring seems to be the fashionable management practice whenever faced with a challenge. (Eminent health economist Alan Maynard’s caaled it ‘redisorganising’ citing Petronius Arbiter in Satyricon: ‘we tend to meet any new situation by reorganising, and what a wonderful method it can be for creating the illusion of progress while actually producing confusion, inefficiency, and demoralisation.’

Yet the restructurings continue (until the demoralisation ends?). They are reminiscent of a cargo culture, with the expectation that eventually a magic spell will succeed. It every new senior generic manager commences with a restructuring it surely implies that the structure which the outgoing chief executive left behind was inadequate. In turn, their structure will suffer an upheaval, presumably with the same implication.

Currently the Public Service Commission is considering reducing the number of government departments by merging them. But what is the evidence of the effectiveness of the mega-departments which bring a diversity of activities under the same chief executive?

Anecdote there is. The Lambton Quay view – the term for the discussions by Wellington insiders – rarely has a generous word to say about the Ministry of Business, Innovation and Employment – a department of diverse miscellaneous affairs (it has twenty ministers). Promised synergies have not appeared. For instance, the various divisions of what was once the Department of Labour have not articulated a coherent approach to labour market policy.

The other great example of a miscellaneous affairs agency is the Department of Internal Affairs (DIA). It also gets few plaudits from Lambton Quay. We have one study, which I report in chapter 17 of In Open Seas, of what happened when Archives New Zealand and the National Library were forced to rejoin the DIA in 2010.

No justification was given for the mergers. The most likely one was that the State Services Commissioner thought he had too many chief executives reporting to him – about forty. There may be a similar reason for the current proposals to reduce the number of government agencies.

The DIA’s subsequent stewardship of Archives New Zealand has been far from impressive. (Nor has it treated the National Library well.) Following the amalgamation, Don Gilling, a retired professor of accounting with considerable public sector accounting experience, found that the DIA was raiding the funds allocated by Parliament to the two to prop up its other activities. One understands the challenges faced by an underfunded department but this was thwarting Parliament’s intentions. How did the department respond to Gilling? It rejigged its accounts, making them less transparent so it is no longer possible to do a Gilling analysis.

You may think that the public record is a trivial part of overall government, but it is central to accountability. Without protecting it, the Official Information Act (OIA) would be neutered. A requested document which the executive did not want to be revealed could be legally destroyed.

That accountability of government is but also true for past ones. When legislation was first passed to provide for investigating Treaty of Waitangi grievances, it applied only to contemporary issues. Later it was extended back to 1840 and has worked well because of what is available in the public record, even though the record is not perfect as the tattered remnant of the document of what was agreed at Waitangi reminds us.

The executive loathes accountability and, as we saw with the DIA accounts, will do its best to neuter attempts to apply it. A nice illustration, reported in In Open Seas, was that in 2019 the DIA deliberately manipulated the official information process to prevent the public obtaining a document before their policy decision was made so the public assessment could be ignored. (pp.214-8)

(The DIA manipulations enabled it to overrule the three ministers directly involved – the Minister of Internal Affairs, and the associate ministers, the Prime Minister and the Minister of Finance – a reminder on how powerful a department can be against weak ministers.)

So how to downgrade the use of the public record for accountability purposes? The DIA is increasingly merging management of Archives New Zealand with the National Library’s, claiming that they are both heritage institutions. (I leave you to explain why they are not in the Ministry of Culture and Heritage.)

The consequence is that the constitutional role of the public record is downplayed. We should not undervalue the significance of the state’s heritage responsibilities but accountability must be the priority in a democracy. After all, dictatorships are jealous of their heritage too; they distort them to reinforce their authority.

Whatever the intrinsic constitutional interest in this example – for democrats it must be high – the illustration shows that mergers do not always work. As mega-departments become multipurpose it becomes easier for managers to avoid a purpose they don’t like or find too difficult. If they don’t like accountability, they redirect the activity towards heritage; if labour market policy is too difficult then fragment those who ought to be dealing with it.

One of the major reasons we have separate departments despite their appearing to be in the same area is that they have different roles and purposes. Merge them and the roles and purposes get fudged. It was right to separate out the Ministry of the Environment, which is a policy agency, from the Department of Conservation, which manages the state’s environmental assets. Fuse them and both jobs will be done badly.

MPs have often been supine when their ability to maintain accountabilty is threatened. Recall how they happily passed the 2020 Public Service Act even though it reduced their ability to hold government agencies accountable. Will they be as complacent this time?

Reducing the number of the chief executives is not the only option. Before the 1989 State Sector Act, there was a panel of commissioners each of whom were responsible for a set of departments.

Without evidence to demonstrate that mega-departments work. It’s all unthinking reaction. Almost certainty the proposed mergers will further reduce the executive’s accountability to the public. The confusion, inefficiency, and demoralisation will continue.

With his ‘I have the right to do anything I wanna do. I’m the president of the United States.’ Donald Trump is echoing Louis XIV who may have said ‘L’état, ce’est moi’ – ‘I am the state.’*

The founding fathers of the American constitution were mindful of the authoritarian streak in English royalty; some had even claimed a ‘divine right of kings’ with unconstrained power. Charles I had made such a claim and had been beheaded. That led, several decades later, to the 1688 Bill of Rights which constrained the sovereign (it is now a part of New Zealand law) and the political writings of John Locke which were influential in the founders’ thinking when they were designing the constitution.

So they designed the American constitution with the fear of a Trump-like president (their equivalent of the sovereign) in mind. They assumed that the counterbalances from Congress and the Supreme Court would mean that a president would never try to abrogate the rule of law to the extent that Trump has. (Test it where it is ambiguous – yes.) What they perhaps did not appreciate was that the checks and balances would respond slowly and a determined president could do many things before they became binding.

I do not think it is likely that we could end up with a Prime Minister who would overrule our laws when it suited her or him. Even so, we should be concerned about the executive having unrestrained power.

From our perspective, Robert Kennedy Jnr, Trump’s secretary of Health and Human Services, may be more relevant. Thus far he has not broken the law.(One restraint may be that he is a registered attorney with law degrees from two respected universities. He has even less background in the discipline of healthcare than I have.) But he has had a surprising amount of discretion within the law.

It would be easy to dismiss Kennedy as unique to America, where he is both rich and has a high public profile from his family. (His father, also Robert Kennedy, was assassinated while running for president.) When Kennedy was running for president in 2023, Trump considered him such a threat that he was offered the health secretaryship in return for his support. So he is a kind of coalition partner in the Cabinet with only a little public support. Sound familiar?

Kennedy is an acknowledged vaccine sceptic. I avoid a discussion on this view here (but read David Isaacs’ Defeating the Ministers of Death, although it finishes before the Covid pandemic, alas). Even so, during his Senate confirmation hearings he said, ‘I’m going to empower the scientists at HHS to do their job and make sure that we have good science that is evidence based … I’m not going to substitute my judgment for science.’ (my italics)

Yeah right. Since coming to power Kennedy has cut back funding of medical research, discouraged vaccination programs and either directly, or indirectly by his behaviour, laid off administrators with acknowledged expertise in the area. Illustrative of his approach, he is cutting $US500m of research funding for mRNA vaccines, claiming that they ‘fail to protect effectively against upper respiratory infections like Covid and flu’. Had he fulfilled his promise to the Senate he would have directed the research to pay more attention to investigating this alleged failure. (My understanding is that vaccines rarely fully protect, but their enhancement of the overall quality of life more than offsets any failures. Settling the balance is an evidence-based research exercise.)

Kennedy has similarly intervened in other medical areas. Further detail would only reinforce the central issue: to what degree can a cabinet minister pursue some policy very distant from conventional understandings, when the politician has no mandate for the pursuit? That Trump is tacitly supporting Kennedy’s policies by not sacking him or reining him in, is not a satisfactory answer. It is not simply that Trump has only a limited mandate (about a third of registered voters); even that majority of that minority probably did not vote for these particular policies.

Do we observe some New Zealand Cabinet Ministers pushing personal policies with a Kennedy-like lack of attention to the evidence? Would they do so further, were they not restrained by checks and balances? As a British Lord Chancellor said, a parliamentary system is an ‘elected dictatorship’. Our dictatorship is restrained by the requirement of having an election every three years. In those thirty-six months the dictator-politicians are also subject to formal and informal checks and balances. Without them, as Trump’s ignoring of them in his first eight months well illustrates, a politician can do a lot of damage. On the other hand we expect our political leaders to lead and object to eunuchs who do nothing. It is a delicate balance.

The Coalition Government is currently putting to a referendum the proposal that New Zealand extends its three-year electoral cycle to a four-year one, thereby extending the dictatorship and weakening a key mechanism which holds our politicians accountable.

The ACT party has reservations about this power increase and suggested that we should support the four-year term if there are more checks and balances. Theirs was a grudging concession along the lines that if electoral accountability is reduced, parliament would make minor changes to strengthen the checks and balances. It has since withdrawn it; ACT has offered no alternative.

Surely the change should be the other way round. Politicians would acknowledge that the checks and balances on the executive are weak and need strengthening. They would make changes to increase their accountability. Having done this, they would then ask for a four-year electoral term.

As Trump and Kennedy demonstrate, the likelihood of politicians reducing their power belongs to the ‘yeah right’ basket.

* Another parallel with the Sun King is that Trump appears to have similar golden tastes redecorating the White House.

Appendix: Some Ways to Strengthen Accountability

1. ‘Officers of Parliament’ – the Auditor General, the Commissioner for the Environment and the Ombudsman (who is also Official Information Officer) – have accountability roles similar to MPs but with more resources and expertise. There are others with similar roles – a list is here – but because they are based in government agencies and subject to them, they are less able to hold the executive to account. They should be made officers of parliament.

2. Properly fund the Ombudsman’s office so that challenges to the executive’s Official Information restrictive decisions can be dealt with more quickly.

3. Strengthen the ability of select committees to challenge the executive. (The ACT proposal attempted to do this.)

4. Make the public accounts more transparent so they make using them for accountability easier.

5. Reduce the power of parties relative to voters by having list MPs appointed to Parliament on the basis of those who obtained the most electorate votes but did not win their seats, thereby increasing the independence of MPs. (Like the way Samoa tops up the number of women MPs.)

6. Further limit the power of those with finance to fund parties.

7. Make political lobbying more transparent.

8. Give local authorities more independence (which also means more financial independence).

With his ‘I have the right to do anything I wanna do. I’m the president of the United States.’ Donald Trump is echoing Louis XIV who may have said ‘L’état, ce’est moi’ – ‘I am the state.’*

The founding fathers of the American constitution were mindful of the authoritarian streak in English royalty; some had even claimed a ‘divine right of kings’ with unconstrained power. Charles I had made such a claim and had been beheaded. That led, several decades later, to the 1688 Bill of Rights which constrained the sovereign (it is now a part of New Zealand law) and the political writings of John Locke which were influential in the founders’ thinking when they were designing the constitution.

So they designed the American constitution with the fear of a Trump-like president (their equivalent of the sovereign) in mind. They assumed that the counterbalances from Congress and the Supreme Court would mean that a president would never try to abrogate the rule of law to the extent that Trump has. (Test it where it is ambiguous – yes.) What they perhaps did not appreciate was that the checks and balances would respond slowly and a determined president could do many things before they became binding.

I do not think it is likely that we could end up with a Prime Minister who would overrule our laws when it suited her or him. Even so, we should be concerned about the executive having unrestrained power.

From our perspective, Robert Kennedy Jnr, Trump’s secretary of Health and Human Services, may be more relevant. Thus far he has not broken the law.(One restraint may be that he is a registered attorney with law degrees from two respected universities. He has even less background in the discipline of healthcare than I have.) But he has had a surprising amount of discretion within the law.

It would be easy to dismiss Kennedy as unique to America, where he is both rich and has a high public profile from his family. (His father, also Robert Kennedy, was assassinated while running for president.) When Kennedy was running for president in 2023, Trump considered him such a threat that he was offered the health secretaryship in return for his support. So he is a kind of coalition partner in the Cabinet with only a little public support. Sound familiar?

Kennedy is an acknowledged vaccine sceptic. I avoid a discussion on this view here (but read David Isaacs’ Defeating the Ministers of Death, although it finishes before the Covid pandemic, alas). Even so, during his Senate confirmation hearings he said, ‘I’m going to empower the scientists at HHS to do their job and make sure that we have good science that is evidence based … I’m not going to substitute my judgment for science.’ (my italics)

Yeah right. Since coming to power Kennedy has cut back funding of medical research, discouraged vaccination programs and either directly, or indirectly by his behaviour, laid off administrators with acknowledged expertise in the area. Illustrative of his approach, he is cutting $US500m of research funding for mRNA vaccines, claiming that they ‘fail to protect effectively against upper respiratory infections like Covid and flu’. Had he fulfilled his promise to the Senate he would have directed the research to pay more attention to investigating this alleged failure. (My understanding is that vaccines rarely fully protect, but their enhancement of the overall quality of life more than offsets any failures. Settling the balance is an evidence-based research exercise.)

Kennedy has similarly intervened in other medical areas. Further detail would only reinforce the central issue: to what degree can a cabinet minister pursue some policy very distant from conventional understandings, when the politician has no mandate for the pursuit? That Trump is tacitly supporting Kennedy’s policies by not sacking him or reining him in, is not a satisfactory answer. It is not simply that Trump has only a limited mandate (about a third of registered voters); even that majority of that minority probably did not vote for these particular policies.

Do we observe some New Zealand Cabinet Ministers pushing personal policies with a Kennedy-like lack of attention to the evidence? Would they do so further, were they not restrained by checks and balances? As a British Lord Chancellor said, a parliamentary system is an ‘elected dictatorship’. Our dictatorship is restrained by the requirement of having an election every three years. In those thirty-six months the dictator-politicians are also subject to formal and informal checks and balances. Without them, as Trump’s ignoring of them in his first eight months well illustrates, a politician can do a lot of damage. On the other hand we expect our political leaders to lead and object to eunuchs who do nothing. It is a delicate balance.

The Coalition Government is currently putting to a referendum the proposal that New Zealand extends its three-year electoral cycle to a four-year one, thereby extending the dictatorship and weakening a key mechanism which holds our politicians accountable.

The ACT party has reservations about this power increase and suggested that we should support the four-year term if there are more checks and balances. Theirs was a grudging concession along the lines that if electoral accountability is reduced, parliament would make minor changes to strengthen the checks and balances. It has since withdrawn it; ACT has offered no alternative.

Surely the change should be the other way round. Politicians would acknowledge that the checks and balances on the executive are weak and need strengthening. They would make changes to increase their accountability. Having done this, they would then ask for a four-year electoral term.

As Trump and Kennedy demonstrate, the likelihood of politicians reducing their power belongs to the ‘yeah right’ basket.

* Another parallel with the Sun King is that Trump appears to have similar golden tastes redecorating the White House.

Appendix: Some Ways to Strengthen Accountability

1. ‘Officers of Parliament’ – the Auditor General, the Commissioner for the Environment and the Ombudsman (who is also Official Information Officer) – have accountability roles similar to MPs but with more resources and expertise. There are others with similar roles – a list is here – but because they are based in government agencies and subject to them, they are less able to hold the executive to account. They should be made officers of parliament.

2. Properly fund the Ombudsman’s office so that challenges to the executive’s Official Information restrictive decisions can be dealt with more quickly.

3. Strengthen the ability of select committees to challenge the executive. (The ACT proposal attempted to do this.)

4. Make the public accounts more transparent so they make using them for accountability easier.

5. Reduce the power of parties relative to voters by having list MPs appointed to Parliament on the basis of those who obtained the most electorate votes but did not win their seats, thereby increasing the independence of MPs. (Like the way Samoa tops up the number of women MPs.)

6. Further limit the power of those with finance to fund parties.

7. Make political lobbying more transparent.

8. Give local authorities more independence (which also means more financial independence).

What are the economic and political implications if the New Zealand economy stagnates for five and more years?

Prime Minister Christopher Luxon told Morning Report that ‘We’ve got the worst recession* we have had in 30 years’. (Observe, he could have said ‘since the Rogernomics Stagnation which finished 30 years ago’, but some things may not be mentioned in public.)

One takes it that he is referring to assessments like Treasury’s 2025 Budget Economic and Fiscal Update which reports a three-year downturn from September Quarter 2022 ; although my impression is that everyone has become even gloomier since May. Treasury then did not expect the economy to reach the September 2022 per capita level again until September 2027 (a year after the next election). Treasury expected the decline to bottom out about now. But the return to growth is slow and if the Treasury is right, the economy will grow at about its earlier rate, with a track about 8 percent lower than in the past. That would mean it has lost about five years of economic growth in this ‘recession’. We are not having a business cycle fluctuation.

One can fiddle around with these figures, but the basic story would remain unchanged. Luxon is talking about a long recession; although he does not give an explanation as to why it is happening. (He mentions ‘the Covid hangover with all the extra spending’ but that simply brings the ‘recession’ forward; it changes neither its shape nor existence.) His promise to ‘fix the economy’ is without much explanation either. As my In Open Seas observed, trying to fix something without understanding what went wrong is a common approach in New Zealand.

There have been five great stagnations in the last 160-odd years. Excluding the Rogernomics one, which was unique to New Zealand and probably reflected policy incompetence, the other four were all associated with global stagnations, although excessive borrowing may have intensified the experience here. It turns out that currently most of the countries whose macroeconomics I monitor closely – America, Britain, China, the European Union, France, Germany, Japan, Russia – are struggling (as are many others). Germany, for instance, is beset with a recession and a not very robust governing coalition. (Holger Schmieding, chief economist of Berenberg, a German bank, said that the German premier, Friedrich Merz ‘is not an experienced politician, he acts more like a CEO’.)

Their difficulties could be – like New Zealand’s – attributed to the post-Covid unwinding compounded by the chaos that Trump’s tariff warfare is adding to the world economy, perhaps most by adding to decision-making uncertainty.

(A caution. We are only three years into this ‘recession’. While that makes it longer than a conventional business cycle. Treasury does not think it will last as long as our great stagnations.)

Observe that some economies currently in ‘recession’ were struggling before the Covid pandemic (in a way that New Zealand was not), tempting one to dismiss Covid as the underlying cause of the current difficulties but compounding them. What are those underlying processes?

First, leave aside China, whose astonishing growth phase seems to have come to an end. I am reminded of what happened to Japan, which also had an impressive growth burst which flattened out, leaving its economy struggling for decades. Warring Russia is also obviously a special case. The remainder are affluent economies.

I have discussed whether they are suffering secular stagnation. I shan’t go through the details; you can see them here and here. What is critical is that while affluent economies and their societies continue to evolve, it may be a different evolution from that with which we are familiar in the last two centuries.

So different that we are struggling to explain exactly what is happening. We need much more experience and data to be confident in our analysis. On the other hand, uncomprehending nostalgia tends to invoke the unthinking inertia of using a paradigm of the past. I am afraid that is what I hear from Luxon. I do not have a lot of respect for the policy thinking (if any) of the Ardern-Hipkins Government – and I have yet to be convinced that Labour in opposition is any better – but I credit them with trying to cope with evolving New Zealand even if they could not explain this to themselves.

Luxon campaigned on ‘back on track’ which was a return to the policies of the past with little recognition that things were changing. – not only in the economy. Morning Report headlined that he claimed that his government’s ‘policies were working to fix economy, raise living standards’, although how he was proposing to do so either does not appear to have been covered in the interview.

Obviously improving infrastructure, making regulation more effective and increasing trade opportunities are worthwhile, but they are not particularly related to the ‘recession’. (We may argue over increasing exploitation of depletables, as is Shane Jones’, ambition, but again the approach is not particularly about the ‘recession’.)  None explain why the ‘recession’ began in the early 2020s.

Luxon appears to be assessing the issue as being one of growth of GDP – the measure of market output – rather than wellbeing. Increased GDP is a goal welcomed by business because it increases profits – a lot of businesses are struggling at the moment. Moreover, increased GDP is associated with increased tax revenue, although it will also increase the need for additional public spending because of its downsides. Whether there is a net gain depends upon the degree to which the government responds to these expenditure pressures.

Indeed, the Coalition Government has reduced its commitment to the arts and culture, the environment (including reducing carbon emissions) and to public health, matters which the public will judge them on.

That political judgment occurs in just over a year’s time in the 2026 General Election. The indications are that the state of the economy – say, measured by the unemployment rate – will be a little bit worse than it was at the 2023 election but prospects may be improving, whereas in 2023 they were looking dimmer (and were made even dimmer by some of the actions the Coalition Government undertook).

However, the role of the economy in the election campaign may depend on the Labour Opposition – I doubt that a capital gains tax will be decisive either way, except perhaps to stiffen loyalists in either camp. Events over the next 12 months are likely to be more important. Key ones may be unpredictable. Ability to manage coalitions may be critical.

Even so, trying to understand and respond to our long recession will almost certainly involve our adapting overseas analysis for New Zealand’s unique circumstances. The affluent world may be entering on ‘secular stagnation’ as assessed by GDP. If so, we probably cannot avoid that fate either.

* Recession has various economic meanings. Traditionally, it referred to a particular stage in the business cycle but when the cyclical downturn is stretched out beyond the normal length it becomes something else, often called a ‘long recession’ (as occurred after the GFC) which may morph into a long stagnation (it did not in the case of the GFC). I have put recession in quotation marks to emphasis that Luxon and all are talking about a long recession where traditional business cycle analysis may not apply.