Kiwi News and Views

Monopsonies – dominant purchasers – need to be restrained as much as monopolies – dominant sellers. That is what pay equity is about.

This column is not about you-know-who. There are many other political bullies offshore; sometimes there are local ones, as when a politician attacks a group which cannot defend itself or a cabinet minister has a crack at local government. Nor is it a column about personal bullying such as at school, in social media or in the workplace – unacceptable though such bullying is.

Economic bullying occurs when an economic agent with market dominance imposes on others. Its most familiar form is the monopoly, the dominant supplier of some good or service which uses its position to extract ‘super-normal’ profits, often with a poor service. The alternative is competition, where there are sufficient alternative suppliers so the customers can go elsewhere. If there is insufficient competition, the state often intervenes to regulate the market competition. (Sometimes no business is dominant, but a handful of firms – of oligopolists – behave in a way which gives them a collective monopoly power to overcharge.)

However, this column is about a monopsony where the agent dominates a market by being the sole or major purchaser rather than being a monopoly seller. (The term ‘monopsony’ was introduced by Cambridge economist Joan Robinson, who would have been a Nobel economics laureate except for political reasons; prizes are not always awarded to the most worthy by a monopoly panel.)

The conventional monopsony is the business which employs workers for whom there is little alternative work. So just like a monopoly, it can increase its profits at their expense. The traditional means of offsetting such monopsony power is for the workers to unionise. The union is a monopoly with a countervailing power to the monopsonist. That is not a perfect solution, but it is better than leaving the monopsonist to exploit workers.

For various reasons, including changes to the law, unionisation is less widespread nowadays. Partly to offset this, there has been until recently a more active raising of the minimum wage, which is a floor price for labour.

The biggest monopsonistic employer is central government. It is sometimes the sole employer of an occupation, can be the largest employer by far, and very often its funding also sets remuneration rates in the private, local government and voluntary sectors. Among the affected occupations are those in education, healthcare, libraries and social work. Each is dominated by women (as Joan Robinson might have ironically observed).

This is not the same issue as equal pay, where women in the same job as men were discriminated against. In the above occupations, men working in them also have their working conditions depressed, which discourages them seeking careers there and so increases the concentration of women in the occupations. (Some 47% of female workers are in occupations where 80% or more of the employees are women.)

Note that there are occupations where the government is the direct (or indirect) remuneration-setting authority but it is unable to use its monopsony powers. Were it to treat doctors as it treats nurses, they would all move off overseas. Lower skilled women are less internationally mobile. A major issue is whether there are alternative employments to escape the monopsonist’s power. Many workers can leave an exploited occupation, but they lose using their – often socially valued – skills.

In this case the government is behaving just like a business, minimising its costs. Its benefit is not profit, but lower taxes. Taxpayers are the ultimate beneficiaries of the government using its monopsony power.

Should the government use its power to bully? That is a political decision. My impression is that the majority of the public says it should not, although many might not be as enthusiastic if they understood a ‘no’ meant higher taxation.

There has been legislation to offset the bully-power. In 2020 the Ardern-Robertson Labour Government amended the Equal Pay Act to replace the government using its monopsony to set wages by an alternative wage-setting process called ‘pay equity’, where remuneration is set so that there is similar remuneration between occupations in which different work is deemed to be of the same ‘value’. It is another irony that the Luxon Coalition Government has just repealed the pay-equity process (without even going through the select committee), using its monopoly power in Parliament to legalise using its monopsony power in labour markets. (Here is an example of application of the principle is the 2017 pay-equity deal for aged and residential care workers.)

Any comparison of the ‘value’ of different occupations is fraught with difficulties. To give a simple example, suppose the government was a monopoly supplier of oranges and used its market power to set their price. (The example is not quite a parallel, since one does not have to consume oranges – not as true for, say, healthcare.) Suppose it was decided that the government power to set the price of oranges should be replaced by pricing oranges to make them of equal ‘value’ to other fruit with the same characteristics. Except that there is no fruit quite like an orange. (OK, there are mandarins but assume that the government is a monopoly supplier of them too.) Any price-setting exercise is going to be complex and contentious.

It is even more complicated in the case of an occupation. The approach is to break down each job into components of efforts, skills, responsibilities and working conditions and compare each component with a job in the labour market where it is more competitive. The individual components in an occupation will be numerous and some will be unique or near unique. Sometimes the private sector comparison occupation seems weird but it may be only looking at a single component and other occupations will be used for other component comparisons. Then there is the complicated exercise of combining the individual comparisons.

Yes, the exercise is difficult but that is not a justification for the state, or any other monopsony, using its power to suppress workers’ wages, any more than a monopoly should be allowed to use its power to hike prices. That’s my opinion, anyway. I abhor all bullies.

Note. The Treasury estimates the fiscal savings from repealing the pay equity legislation is $1.8b in the 2025/26 fiscal year. That is sufficient to fund its Investment Boost initiative costing $1.7b and have a little bit over.

Perhaps the state of the economy is not as sound as we are being told.

There was an odd little story over the 2025 Budget, hardly worth relating except that it tells something about budget politics. The original invitations to the lockdown, the meeting which gives a preview of the budget to the media so they can prepare for the release of what is a complicated set of documents. (Lockdown rules mean their reporting is embargoed until the budget is delivered in Parliament.) However, the usual invitation was not extended to analysts – economists often based in organisations such as the NZCTU and NZ Initiative – who have the skills to dissect the budget. Perhaps there was something to hide or the government was trying to manipulate public understanding. There was an outcry and the government promptly backed down. The lockdown went ahead, much as it has done for forty-odd years.

Of course, a budget is a political document but it is founded on the Treasury’s independent account of the economy, Budget Economic and Fiscal Update (BEFU). They set it out without comment. The politicians try to frame perceptions.

Hence the minister’s description of the 2025 budget as being a ‘Growth Budget’. It is hard to draw that conclusion from Treasury’s economic forecasts. The economy seems to be in the recover phase of a standard cyclical recovery, but the economic track after is markedly below what it was before the current downturn – perhaps by 6%.

Distinguishing the upswing from the long-term trend is critical. Remember the distress of the Bolger Government when the strong upswing ended and the economy toddled along a low growth path? * (It was just before an election.)

Moreover, the Treasury projections do not see any catch up, and their projected labour productivity growth rate is about 1% p.a. which is below the long-run trend of 1.4% p.a.. (In every affluent economy I follow, everyone reports a lower productivity growth rate so the slowing may not be unique to New Zealand.)

Illustrating the difficulties of raising the growth rate, the minister highlighted the ‘Investment Boost’ policy, costing an average $1.6b year, which lifts the per capita GDP growth rate by .05% p.a. over the next five years (i.e. from 1.275% p.a. to 1.280% p.a.)  and by a similar amount over the following 15 years. In two decades GDP is expected to be 1% higher because of the new policy.

In fact, there are signals that the economy will struggle with even that projected growth rate. Much has been made of the government’s measures to boost social, housing, social and transport infrastructure. Without adequate infrastructure, economic growth will stall.

The Treasury projects that its property, plant and equipment (excluding specialised military equipment and cultural and heritage assets) will increase 11.1% in real (that is, excluding price changes) terms between June 2025 and June 2029. Real GDP is expected to rise 11.2% so the public sector investment is barely keeping up with, rather than driving, growth.

Even so, to fund this investment the government has had to restrain public consumption to outraged responses from those sectors which have suffered.

This investment adds to the net worth of the government. The Coalition Government has stated an ambition to keep net worth’s level near 40% of annual GDP. In June 2025 it is expected to be at about 39.9%, down from 43.2% in June 2024 and 45.3% in June 2023. For a technical reason, Treasury does not really forecast the ratio for June 2029 but I estimate it to be about 35.5%, well below its target ambition. **

That means that the government is still borrowing to sustain public and private consumption. (Public consumption directly, private consumption insofar as the government can raise taxes to maintain its public consumption ambitions.)

As a result, the net-debt-to-annual-GDP ratio remains high. It is currently 42.7%, which is higher than at any time in the last decade. In 2029 it is expected to be 45.5% of annual GDP. Contrast that level with the target of 30% (but I remind you I would accept a higher rate, were the government funding infrastructure). It is also moving towards the 50% ‘ceiling’ where it is thought lenders would get concerned. As the Minister has stated, such high debt levels leave little leeway to borrow to ease us through the next large shock. ***

The commentariat focused on budget winners and losers – as they always do. Little attention was given to the underlying issue that despite the government’s cheerfulness it had little room to manoeuvre – that there had to be serious losers. By highlighting them the commentariat obscured the main economic issue – the poor underlying economic performance and that it was not improving.

This column reports a gloomier picture of the state of the economy than the Luxon Coalition Government is trying to sell. But it is based on the professional judgments of the Treasury economists and accountants. Their forecasts will be near the professional consensus; the Treasury is just more expert, informed and detailed. Even if the government’s 2025 budget sales pitch succeeds, it may find itself struggling with the 2026 one, a few months before the next general election.

* Not only the government. One editor complained that nobody warned him of the distinction between cyclical recovery and long-term economic growth. Ironically, a few years earlier he had banned from his newspaper the economists who were already giving that warning.

** The Treasury does not adjust its forecasts of its assets for price increases, but it does for GDP. I have assumed that the asset prices inflate as the same rate as GDP.

*** Treasury’s draft 2025 Long-term Insights Briefing reports that the 2010-1 Canterbury earthquakes had an identifiable fiscal impact of 11.3% of annual GDP. For the 2020-2 COVID-19 pandemic it was 20.4%. The briefing gives no estimate for the 1996 Wool Price shock, nor the 2008-9 GFC shock.

While many of the world’s Christian religions seem preoccupied with personal issues that Jesus, their founder, barely touched upon, they must engage with economic issues too.

Robert Prevost, chose the name Leo on becoming the 267th Bishop of Rome – the Pope – in homage to Leo XIII (in office 1878-1903) who issued the 1891 encyclical Rerum novarum or the Rights and Duties of Capital and Labour. A foundational text of modern Catholic social teaching it covered the relationships and mutual duties between labour and capital and between government and its citizens, arguing there needs to be some amelioration of ‘the misery and wretchedness pressing so unjustly on the majority of the working class.’ It reflects the Church coming to grips with modern industrial society. While it rejected unrestricted capitalism, it affirmed the right to private property; while rejecting Marxism (unrestricted socialism), it supported the rights of labour to form unions.

Its theses have been developed by three further encyclicals, the most recent of which was John Paul II’s 1991 Centesimus Annus: The Centenary of Rerum Novarum. (See my discussion on the encyclical here.) Its publication coincided with the enactment of the Employment Contracts Act, which New Zealand’s Catholic bishops had already rejected as inconsistent with their Church’s teachings. (An even greater irony was that all three key politicians promoting the act – Jim Bolger, Bill Birch and Ruth Richardson – had Catholic upbringings.)

In 1986, a few years before, the United States Catholic bishops published a pastoral letter Economic Justice for All. Its thinking almost certainly impacted on Centesimus Annus. It certainly impacted upon Robert Provost, then working in Peru and America, who became a bishop in 1989.

It is a fascinating document for even a non-Catholic economist because it is grappling with issues central to how to organise an economy, applying the social teaching to a practical challenge. The letter was written at a time when the Reagan administration was implementing libertarian policies of laissez-faire capitalism, and it may be interpreted as a reaction to what was seen as hostility towards the Catholic Church’s teachings on social justice.

The letter was greatly influenced by American philosopher John Rawls, whose seminal Theory of Justice, has been described as the most important book on political philosophy written in the twentieth century. (Rawls contemplated becoming an Episcopalian priest. His analysis goes back to Immanuel Kant who goes back to Jesus’s ‘do to others …’)

The bishops say that they have not written ‘a blueprint for the economy. It does not embrace any particular theory of how the economy works, nor does it attempt to resolve the disputes between different schools of economic thought. Instead, the letter turns to Scripture and the social teachings of the Church. There, we discover what our economic life must serve, what standards it must meet.’

They set down those standards as:

1. (Every economic decision and institution must be judged in the light of whether it protects or undermines the dignity of the person.

2. Human dignity can be realised and protected only in a community.

3. All people have a right to participate in the economic life of society.

4. All members of society have a special obligation to the poor and vulnerable.

5. Human rights are the minimum conditions for life in community.

6. Society as a whole, acting through public and private institutions, has a moral responsibility to enhance human dignity and protect human rights.

The bishops go on, ‘In Catholic teaching, human rights include not only civil and political rights but also economic rights …. all people have a right to life, food, clothing, shelter, rest, medical care, education, and employment.

Here are some quotations (in page order) when they apply these principles:

‘Sustaining a common culture and a common commitment to moral values is not easy in our world …. One of our chief hopes in writing this letter is to encourage and contribute to the development of the common ground.’

‘Social justice implies that persons have an obligation to be active and productive participants in the life of society and that society has a duty to enable them to participate in this way.’

‘The obligation to provide justice for all means that the poor have single most urgent claim on the conscience of the nation.’

‘The Church fully supports the right of workers to form unions … to secure their rights to fair wages and working conditions. … Unions may also legitimately resort to strikes where this is the only available means to justice owed to workers. … No one may deny the right to organise without attacking human dignity itself.’

‘The Catholic tradition has long defended the right to private ownership of productive property. … Support of private ownership does not mean that anyone has the right to unlimited accumulation of wealth. Private property does not constitute for anyone an absolute and unconditional right. No one is justified in keeping for his exclusive use of what he does not need, when others lack necessities.’

‘The common good may sometimes demand that the right to own be limited by public involvement in the planning or ownership of certain sectors of the economy.’

‘The Church’s teaching opposes collectivist and statist economic approaches. But it also rejects the notion that a free market automatically produces justice.’

‘Full employment is the foundation of the just society. … We believe that 6 to 7 percent unemployment is neither inevitable nor acceptable. While a zero unemployment rate is clearly impossible in an economy where people are constantly entering the job market and others are changing jobs, appropriate policies and concerted private and public action can improve the situation considerably, if we have the will to do so. No economy can be considered truly healthy when so many … people are denied jobs by forces outside their control. The acceptance of present unemployment rates would have been unthinkable twenty years ago. It should be regarded as intolerable today.’

‘We find the disparities of income and wealth in the United States to be unacceptable. Justice requires that all members of our society work for economic, political, and social reforms that will decrease these inequalities.’

In summary, those who describe as Marxist the Catholic social teaching that Robert Prevost espouses are demonstrating their intellectual limitations.

I leave readers – and time – to judge to what extent Leo XIV promotes such sentiments but draw attention to a couple of issues which are yet to be addressed:

The bishops are largely writing about the US. How to apply their approach – and that of the encyclicals – to the whole world? (Recall Robert Prevost’s time in Peru.)

The bishops are largely writing about the present. How to apply their approach – and that of the encyclicals – to intergenerational equity and sustainability? (Appointed at the age of 69, Robert Prevost is likely to be in office in the 2040s.)

One hopes Leo XIV will have some responses.

Note: For my 1989 critique of Economic Justice for All – this column is an exposition – see here.

Should we pursue a ‘Golden Rule’ where any public borrowing for consumption is temporary?

This columnist is a fiscal conservative who is cautious about government borrowing for public consumption. I was not originally. The Keynesian model I first studied said borrow as much as is necessary to sustain demand. But the model was of a closed economy. In a small open economy, borrowing blows out through the external current account which can lead to painful interactions with overseas creditors. (Keynes was well aware of the issue. His macro-model was designed to show that even if there was no external sector, there could still be depressions. In his days the additional spending was often in investment in government businesses and infrastructure.)

As my thinking progressed, I realised that there was also a moral problem. We are not immortal. When we borrow for today’s consumption, we are leaving future generations with a debt they have to service. I am very uncomfortable with such a strategy.

Fiscal conservatism can be simplified to the ‘Golden Rule’ of fiscal management. It is articulated in various forms; one is that the government should not borrow in the long term for consumption. It acknowledges it may be necessary to borrow, or draw down reserves, in the short term for a crisis but in the medium term, say five years, it should repay the debt or rebuild the reserves.

Actually, the spirit of fiscal conservatism is not too different from Richard Thaler’s summary of observed human savings behaviour. (Thaler was awarded the Nobel Prize in economics for his research in behavioural economics.) His household rules were:

1. Live within your means. Do not borrow to increase consumption except during well-defined emergencies (such as unemployment).

2. During emergencies cut consumption as much as possible.

3. Keep a rainy day account equal to some fraction of income. Do not raid the account except in emergencies.

4. Save for retirement in ways that require little self-control.

5. Borrow only on the security of a real asset.

These rules are heuristic but they are near enough to optimal for practical purposes and are understandable and relatively easy to follow. You probably usually follow them.

The Golden Rule of fiscal management is also a near-optimal heuristic with the merit that it can be readily understood by the public. There are lots of nuances in its implementation which I have set them aside for this exposition.

Fiscal conservatism is not (neoliberal) Austerianism. It accepts that a country may want to spend a lot on public consumption – which Austerians may deplore – but argues that such spending must be offset by comparably high taxation (and other revenue), which Austerians deplore even more. It argues that the government can (and should) borrow, but only for investment which will benefit future generations, like on infrastructure for educational and healthcare buildings, storm, fresh and waist water and transport. Austerians think that such investment should be provided by the private sector. The record of the last four decades shows that strategy results in underinvestment.

The Golden Rule says that the current public debt target of the government is a muddle because it does not distinguish between debt arising from borrowing for consumption and debt matched by capital assets. Just suppose the government took the underinvestment in infrastructure seriously, deciding to address it by a major capital works program. Currently it would be thwarted by the public debt target even if the program met every criterion that commonsense advanced.

This is not an argument against the current accounting conventions, although the public accounts could be rearranged to present the fiscal situation in a more understandable way to the public. The government is required to present an Investment Statement at the end of the year. Hopefully it will be more transparent than last year’s.

What the Golden Rule approach is objecting to is the way the government states its debt track (as it is required to do by the Public Finance Act). Rather than state a debt target, it should state it was committed to the Golden Rule and that any necessary temporary borrowing to deal with a crisis (such as an earthquake) would be repaid in five years (say). Infrastructural investment program would go ahead as much as available resources allow.

It may be tinkering with this idea already. Last year’s Fiscal Strategy report said the government had a ‘net worth’ target. (It was 40 percent of GDP.) Net worth is the aggregate of public assets less public debt. Unfortunately, the statement has little explanation or analysis.

In particular, if the government’s net worth target is 40% of GDP and its debt target is 30% then it has a gross public asset target of 70%. (be warned; definitions are tricky here.) There is no exploration of what that currently means or whether the 70% target makes sense. But observe that if the government were to borrow more for infrastructure, both its gross assets and gross debt would increase by the same amount, so that net worth would be the same, although providing the investment was effective, the economy would be better off. Perhaps the government should replace the net debt target with a net assets guideline.

Borrowing is not free. The resulting debt has still to be serviced and that would come out of the consumption budget. Historically we followed a similar practice when overseas borrowing went into a separate ‘works’ account which funded public works (which in the old days included building power stations). The debt was serviced from the rising government revenue generated by the economic growth and development stimulus to which the infrastructure contributed.

When the overseas borrowing ran out – as it did in 1929 – the government promptly closed down its public works program, dumping its workers into unemployment. I recall this event not as a warning – it is very unlikely to happen today for a number of reasons, including the benign vision of Keynes – but to remind you that the pursuit of the Golden Rule being proposed here is an evolution of a practice which worked pretty well in the past, and is likely to benefit Aotearoa New Zealand in the future.

A major American study suggests they are not?

This column is about the white working class. In the US 2024 elections they mainly voted for Donald Trump. Had they voted with the white middle class, Trump would have lost the election with only 42 percent of voters instead of the 50 percent he actually won. (Because so many potential voters he only won 32 percent of all, Kamala Harris 31 percent and non-voter 67 percent.) The equivalent class may also be important in many other Western democracies including New Zealand.

I am going to analyse it by reporting on a remarkable study, Deaths of Disease, by two Princeton University economists, Anne Case and her husband Angus Deaton. (Deaton was the 2015 Nobel laureate in economics ‘for his analysis of consumption, poverty, and welfare’; his 2023 Economics in America: An Immigrant Economist Explores the Land of Inequality deserves a review in its own right.)

The study started off as a curiosity question when the two wondered why the suicide rate in the Montana county in which they were holidaying in 2014 was four times that of the New Jersey county which was their main home. Fortunately, they could pursue their question without having to get funding so they published their conclusions just a year later; had they gone through New Zealand’s clumsy research-funding system they would have still been waiting for permission.

Curiosity research often gets the researcher nowhere, but it can open up unexpected insights. Thus it was with this question.

Earlier I described the study in class terms. Official death certificates don’t record an individual’s social class. But American ones record their educational attainment. Case and Deaton divide the white non-Hispanics into those with a four-year college degree and those without, which is a not unreasonable proxy for class, and focus on the mid-life 45-to-54-year-olds. The white non-Hispanic working class made up about 38 percent of US voters, more than the corresponding middle class with college degrees (33 percent) or the others (29 percent) – mainly Blacks and Hispanics.

Initially the researchers’ concern was suicide but they broadened their study to include deaths from drug overdoses and suicides – the ‘deaths of despair’ – and pursued many other health and lifestyle measures to understand what was going on. Their repeated finding is that while the indicators for the White working class are worse than those for the White middle class, as one might expect, the working class indicators are deteriorating over time, whereas the middle class ones are stable or improving. This is particularly true for the deaths of despair, which almost trebled between 1995 and 2018 for the White working class but were stable for its middle class.

The effect is so strong that since 2000 US White non-Hispanic men and women (of both classes) in mid-life have experienced continual increases in mortality and morbidity, while US Blacks and US Hispanics, as well as all subgroups of populations in other affluent countries, show the opposite trend.

The researchers consider why. It turns out that White working class (age-adjusted) life satisfaction is also falling while that of the corresponding middle class is stable. (That for Blacks is rising – although as a rule the Black indicators are worse in level terms). So are their median earnings while those for the white non-Hispanic middle class are rising.

After a careful review of the available evidence, Case and Deaton do not attribute the deaths of despair to poverty, falling real incomes or increasing inequality. (This is especially surprising given Deaton’s expertise in poverty as the Nobel citation indicates; Case’s is in health and labour economics. I should not be surprised if Deaton is sceptical about those who cite rising inequality as the cause of everything going wrong but don’t understand the measure and provide no causal evidence.) They cite other groups, such as US Blacks, whose economic and health indicators are worse than for whites and yet they are showing gains.

Instead Case and Deaton argue that the ultimate cause is people’s sense that life is meaningless, unsatisfying or not fulfilling, and it lacks the basic economic security that makes these higher order feelings more likely. In particular, they suggest that working conditions for these people have deteriorated, citing technological change, globalisation and weakening unions.

I was reminded of a study of the determinants of why ex-prisoners lapsed back into crime. It was not only those that were unemployed but also those who had poor-quality jobs. Those with good-quality jobs with rich networks of workmates were much less likely to return to crime.

The research was first reported before Trump was on the serious political horizon and did not have had him or political voting particularly in mind. Yet, as the opening paragraph points out, it sheds some light on Trump’s support. It is an odd reversal that today the Democrats support clusters around the well-off and the Republicans seem to represent the working class (although the cautious might distinguish Trump from traditional Republicans).

It seems likely that the White non-Hispanic working class are consciously rejecting the Democrats, perhaps partly because the party is still dominant for other racial groups but also because the Democrats are so dominated by middle-class values and perceptions that they are not addressing the concerns of the depressed working class.

I am struck by how many diagnoses of the Democrats’s failure are supercilious about the working class – along the lines that the poor fools are persuaded by populism. Well yes, but the populist politicians are seemingly addressing their concerns, while the supercilious ignore them. That is not to say that the populist policies will effectively meet working class needs if they are applied. But at least it thinks it is being listened to.

Trump’s assault on the independence of US universities is an example. In my view the attack is politically motivated, aiming to undermine liberal democracy (also with long-term repercussions on US economic growth). But the white working class might well ask ‘what has Harvard ever done for me other than ignore my needs?’ (That is not quite true, but there is the ring of truth.)

Dos this American situation apply elsewhere? It is generally accepted that there is rising populism throughout the world and one can at least conjecture its success arises from its seeming to address the concerns of the marginalised, which are neglected by the elite. If you look at its account of democracy – which might be judged self-centred and self-satisfied – one might conclude that a benevolent dictator is attractive (although it is rare for dictators to remain benevolent – Pope Francis may be the exception). I was struck that many Brexit voters seemed to be saying ‘up you’ to the British elite, especially the London-based financial sector.

Does the situation apply to Aotearoa New Zealand? Talking about social class here is a bit like talking about sex in Victorian times. One doesn’t, even though it is a powerful driver of life. I am struck, for instance, how discussions on Māori socioeconomic status are really about a Māori working class, ignoring that there is a thriving Māori middle class, and that much of the analysis applies to the non-Māori working class. (This is not to ignore that there are particular Māori issues, just as the US has extraordinary challenges from its past – and consequently current – treatment of its First Peoples and Blacks.)

I suspect the politics of the working class is muted in New Zealand by MMP, with a number of parties vying for the populist vote. I leave you to judge to what extent the Labour Party is neglecting the working class but note that it still seems more dependent upon unions than the US Democrats. I cannot help wondering whether the success of gangs is because they give some meaning, life satisfaction and fulfilment to their members. I observe that international success, such as in sport, gives even the marginal a temporary meaning to their lives.

Case and Deaton think that there are no quick fixes to the sad state of the White working class. It is the result of decades of disadvantages; solving it will require patience and perseverance. True here (true for Māori). But we can do better, by paying attention to their needs.

There is an irony in Trump’s strategy. He pays attention to the working class in the way that the Democrats do not. And he thinks he is addressing their concerns by promising jobs in a manufacturing sector extended by border protection (although even if he succeeds, he overlooks that the majority of jobs and job growth in a modern affluent economy are in the service sector). Presumably, his hope – as foreshadowed by Orban in Hungary – is to use his successes to embed a hegemonic dictatorship.

Populism is a shallow philosophy but it works – temporarily anyway – at the ballot box. We threaten the viability of liberal democracy if we do not respond more creatively than currently.

The budget runup is far from easy.

Budget 2025 day is Thursday 22 May. About a month earlier in a normal year, the macroeconomic forecasts would be completed (the fiscal ones would still be tidying up) and the main policy decisions would have been made (but there would still be a lot of policy detail to be worked on).

This is not a normal year as Donald Trump zigzags from policy to policy. One shant be surprised if the macroeconomic forecasts are under major review right up to the time they go to press and, despite Prime Minister Christopher Luxon spending a lot of time overseas, there may yet have to be a major policy redirection. Expect the debt track to be modified even if the debt level will remain the government obsession.

For this is the most volatile budget buildup time that I can recall, as Trump’s volatility impacts on the entire international economy and financial system. For this is the most volatile budget buildup time that I can recall, as Trump’s weaving impacts on the entire international economy and financial system.

It is not just that it is already difficult to know the timing of the impact of the announced tariff increases, but Trump is promising more (or perhaps he isn’t). His (unpredictable) decisions will affect the latter part of 2025, which will impact on exchange rate and interest rates. If one knew for certain, one could make a tidy killing in the financial markets – I remain poor. Additionally, there is the impact of the tariff changes on exports and imports. Even international services seem to be affected.

Much of what is happening is captured in the notion of an international trade war. Minister of Foreign Affairs Winston Peters objects to the term; I think he is concerned that it may result in panicked attitudes, responses and policies. However, for the cool-headed analyst there are useful lessons from traditional warfare.

Warfare involves sacrifices. Fortunately, trade wars do not involve the loss of lives (directly) but they do involve the economic losses from reductions in output – even Trump acknowledges that (but he promises that won’t apply to the US in the long run – don’t bet on how long it will be).

Warfare outcomes are contingent. The British won the Battle of Waterloo against the French because the Prussians arrived in time. The Duke of Wellington said that ‘It had been a damned nice thing – the nearest run thing you ever saw in your life.’

There are retaliation decisions being made now by all sides which will alter the course of the trade war. We will know the good ones at the end. But the decisions – good and bad – are being made now.

Wellington also said, ‘My heart is broken by the terrible loss I have sustained in my old friends and companions and my poor soldiers. Believe me, nothing except a battle lost can be half so melancholy as a battle won.’

Yes, there may be victors, but no one wins a war except in the sense that the other side is defeated (which seems to be the Trump objective – cost irrelevant).

(A further generalisation is that wars accelerate technological innovations which flow on to civilian life. An example is how air warfare led to giant leaps in aircraft design; the Ukrainian invasion is likely to generate parallel development in drones. Not sure of that insight’s relevance here but keep it in mind.)

A world war changes the whole world order (as we saw after World War II). The outcome of an international trade war is uncertain. My guess is that the US will play a lesser role in the future – although that is not Trump’s intention. However, China may not play as great a role in the new world order as it hopes. Perhaps the lesson of not allowing anyone to be too dominant has been learned.

New Zealand’s objective has to be a world economic order based on the rule of law, which is more protective of the interests of small countries, in contrast to a world where bullies rule. Our contribution to attaining it is likely to be small, although Prime Minister Luxon is making an effort. He might recall – hardly anyone else does – that towards the end of his time as Prime Minister, Rob Muldoon got very involved in trying to resolve the international debt crisis – with little effect. New Zealand is too small to be significant. A return to a rules-based world economic order may be achievable but New Zealand may have more influence working with other small-economy nations than spending its time schmoozing with the biggies.

Many of the lessons from the warfare parallel belong to a longer-term time horizon and will not be important in framing the budget. Even so, the short-term impact of the trade war on exports, exchange rates, prices, and interest rates will.

Even if they were not, the 2025 budget would have been a challenge. The economy has been weaker than was expected a year ago. That reduces tax revenue and lifts some welfare spending which means that government borrowing is likely to be higher than the government wants. The effort to cut back government spending will continue although some of the big spending ministers – defence, health, housing, transport – are pressing for their portfolios to spend more.

The trade war need not be all bad news. The Chinese rejection of US soybeans may lift its demand for NZ foodstuffs, offsetting our marketing difficulties in the now more protected US markets. Or perhaps it won’t. Unable to export to the US, the Chinese may send us cheaper electric vehicles. But the gain may be offset by a lift in the NZ exchange rate.

International interest rates are expected to rise. As a net borrower internationally, New Zealand will suffer; that includes the fiscal position.

The rates have not been helped by Trump demanding the US Fed reduce them, and threatening to replace the Fed’s chairman. Whether he can or not is almost irrelevant. Financial markets are spooked, with the added complication that while the usual financial refuge during times of uncertainty is US Treasuries (government bonds), this time they are a source of uncertainty.

Whatever you think of our politicians, spare a thought for the Treasury accountants and economists preparing the budget. The technical issues require judgments beyond the call of duty. If I were one of them, I would probably be thinking that a mini-budget towards the end of the year must be an option – it need not be called that, of course – and that the May budget should be framed to give flexibility to cope in an exceptionally volatile world.

Four eighty-year-old books which are still vitally relevant today.

Between 1942 and 1945, four refugees from Vienna each published a ground-breaking – seminal – book.* They left their country after Austria was taken over by fascists in 1934 and by Nazi Germany in 1938. Previously they had lived in ‘Red Vienna’; ruled by Social Democratic Workers’ Party between 1918 and 1934, which had a brilliant record housing the population (but could be intrusive at the personal level). It never won over the countryside; hence the 1934 reversal.

Red Vienna was a world-leading centre of intellectual activity in architecture, economics, music, philosophy, psychology, science and sociology.** Contemporary thinking is still shaped by them. Other outstanding contributions came from Sigmund Freud, Erich Korngold, Marie Jahoda, Paul Lazarsfeld, Arnold Schoenberg, Erwin Schrödinger, and Ludwig Wittgenstein (and many other economists). Alas, it all fell apart with the fascist takeover, which was not only strongly anti-semitic but intolerant of dissent. Those who did not die (including in concentration camps), fled.

Hence the four refugees and the books they published, each of which was influenced by the writer’s personal experience.

Karl Popper’s The Open Society and Its Enemies was actually written in New Zealand. At the core of his thesis is that a totalitarian society led by people who have preconceived theories is unable to adapt to change. Implicitly, he is celebrating Red Vienna, which was an open society, and criticising what came after. His totalitarian societies are on the left as well as the right. The book juxtaposes Plato (i.e. Hitler) with Hegel (Stalin). If he were alive today, Popper might cite many current instances.

Friedrich Hayek’s The Road to Serfdom is not unrelated – he suffered from the rise of Austrian fascism too, although he was not a Jew – arguing that the abandonment of individualism and classical liberalism inevitably leads to a loss of freedom, the creation of an oppressive society, the tyranny of a dictator, and the serfdom of the individual. He especially condemned central planning which was popular not only in Stalin’s Russian but throughout the West. I doubt that anybody today supports the kind of central planning he was railing against but the theme of the dangers of empowering the state over the individual remains relevant.

Margaret Thatcher famously wrote: ‘the most powerful critique of socialist planning and the socialist state which I read at this time and to which I have returned so often since [is] The Road to Serfdom’. More moderate thinkers also found it valuable. Keynes wrote that ‘Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement’. although he did not think Hayek’s philosophy was of much practical use.

Joseph Schumpeter’s Capitalism, Socialism, and Democracy also bears the marks of his Viennese experience. It saw success of capitalism leading to a form of corporatism and a fostering of values hostile to it. The intellectual and social climate needed to allow entrepreneurship to thrive would not exist in advanced capitalism. There would not be a revolution. Capitalism’s collapse would come about as majorities voted for the creation of a welfare state and placed restrictions upon entrepreneurship, eventually destroying the capitalist structure.

That is not quite what happened. (Those who predict the future almost always get it wrong.) A quarter of a century after his death in 1950, there began a reaction against the welfare state, probably as a consequence of technological innovations from computing and the global net. But if the technological innovations slow down, Schumpeter’s thesis may become relevant again.

Central to Schumpeter’s analysis is that the political economy of society evolves. Denying that evolution, closed societies attempt to control it, slow it down and direct it into a dead end. Independently from Popper, Schumpeter is implicitly celebrating the open society, fearful that changing politics will close society down. (Which Western governments are currently attacking the viability of their universities?)

The role of the changing political economy is developed over a much longer period in Karl Polanyi’s The Great Transformation. It is the least known of the four books; perhaps it is the most insightful.

Polanyi’s thesis was invaluable to me when writing In Open Seas: The Economic History of New Zealand. Most of our ancestors who arrived in the nineteenth century had left societies which were already transforming market economies. However, as my book illustrates, Māori experienced the full transformation from pre-market to market society in situ. It was not only fascinating to describe it, but it alerted me to traces of pre-market and partial market behaviour in the immigrant population too. (For instance, small farmers were near subsistence until the arrival of refrigeration.)

Polanyi points out that pre-market societies were based on ‘reciprocity’, ‘redistribution’ and ‘householding’ (I would say villages/kainga) across personal and communal relationships. Economists might describe them as ‘multilateral’.

Industrialisation and the increasing extension of the state undermined these social tendencies, replacing them with formal institutions that aimed to promote a self-regulating market economy, fundamentally altering humankind’s economic relations. In particular the shift from the gift exchange economy to the commercial market one – the great transformation – reduced the importance of interpersonal relationships and anonymous exchanges became much more important. While the shift facilitated the specialisation which is a key element of raising productivity they also impacted on the wider human condition.

The focus on the exchange of goods and services through market-based price mechanisms creates bilateralism and contractualism does not always work – not everywhere. I am hesitant to say too much but I observe that the social work profession (in say, Oranga Tamariki) is torn between treating the child in the multilateral context of an extended whanau and in a one-to-one bilateral context. The tensions exist elsewhere. It is not uncommon to see a multilateral issue being resolved (or attempted to be resolved) with a bilateral solution. (The most common public evidence is in Māori protests, which are often about preserving communal entitlements.)

Polanyi goes on to argue that modern society (he calls it ‘Market Society’) is not the discrete combination of the modern market economy and the modern nation-state but a single human invention. Social protectionism is the natural response to the ‘free’ market attempts to separate itself from the fabric of society; it is a ‘double movement’. Like Schumpeter, he sees capitalism and the welfare state as integral in social evolution.

Soberingly, Polanyi argues that markets cannot be understood solely through economic theory. Rather, they are embedded in social and political logic, which makes it necessary for economic analysts to take politics into account when trying to understand the economy. (They don’t always.)

As in the case of Schumpeter, today’s world looks very different from the one Polanyi was writing about two decades before he died in 1964. But all four books contain a truth which gives an insight into today’s world and the one we are evolving into. The challenge is to use them for the foundation for its analysis. That requires an open mind.

* A fifth seminal book written about the same time by Viennese refugee Oskar Morgenstern (with John von Neumann) was Theory of Games and Economic Behavior but it is in a different area of economics.

** See Richard Cockett’s Vienna: How the City of Ideas Created the Modern World.

A modest attempt to analyse Donald Trump’s tariff policies.

Alfred Marshall, whose text book was still in use 40 years after he died wrote ‘every short statement about economics is misleading with the possible exception of my present one.’ (The text book is 719 pages.) It’s a timely reminder that any short analysis of Trump’s tariff initiatives is likely to be misleading and any long one will be so riddled with caveats that it will be impenetrable.

Over the period during which this column was drafted and checked, there were numerous developments in US tariff policy. It’s become a bit of a rolling maul in which it is not clear whether the man with the ball even knows which kind of football he is playing. The aim of this column is to set out some of the analytic issues which are likely to be relevant, irrespective of where the ball runs.

Who Ultimately Pays a Tariff?

Suppose the US imposed a tariff of 10 percent on New Zealand’s exports of casein to it. New Zealand producers could not pass the additional cost on because they are competing with other exporters. They would have to reduce their price to the US supplier; they would pay the tariff. Suppose instead, that the tariff was imposed on all external suppliers and there was no US production of casein. Then the tariff would be passed on to US consumers. In casein’s case, there is some US production so the burden will be shared between foreign producers and American consumers.

     The balance of the sharing will depend on numerous factors (and change over time) so we cannot tell. Trump sometimes talks as though the tariff will be borne by the external producers but his promise of a positive output response by American producers requires domestic prices to rise. Most commentaries, including the Fed’s (the US central bank), expect the US prices to rise so at least some of the tariff is to be paid by US consumers.

     (Hardly as an aside, at some point raising tariff rates become ineffective, because people just stop importing. The US rate on China is now 145 percent. China’s response is likely to be much more selective – and hurtful.)

Does that mean there will be American inflation?

The general view is that the price rises from the tariff will trigger further domestic price rises, so there will be some inflation. That probably means the Fed will raise its interest rates, which will impact on the world as a whole. We don’t know by how much.

What about the exchange rate?

There is a scenario which expects the US dollar to rise against other currencies. If that were to happen by 10 percent, that would offset a tariff hike of 10 percent (there are caveats). But US exporters would get a lower return. In effect they would carry the burden of the tariff. However, at the time of writing, the US dollar has fallen relative to other major currencies (much to everybody’s surprise). It’s not obvious why it has. Capital markets are fickle; they may be losing confidence in the US dollar as a safe haven. The effect of a fall in the US exchange rate is to add to inflationary pressures.

Why then are share prices volatile – all over the place?

They began falling when Trump announced his ‘reciprocal tariffs’ (more below), probably because investors were mystified by what he meant. Investors like certainty in public policy. They fell further after the more detailed announcement and then recovered a bit when he had the tariff pause.

     Falling share prices do not cause a recession. Rather, in this case they signal that shareholders expect a recession, probably because of an expectation that the tariff hikes and the resulting tariff war will cause a recession (or worse).                            

     This collapse was compounded by volatility in the bond markets, with interest rates rising. The danger they would cause a significant financial crisis enabled US Treasury Secretary Scott Bessent to persuade Trump to pause his more extreme tariff hikes (China excepted.) On is reminded of the remark of Clinton’s political adviser James Carville ‘I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.’

But wont the tariffs create new opportunities for capital investment?

That is Trump’s intention – in the US anyway. But the policy is so badly worked through, that businesses seem to be putting their investment plans on hold in the expectation there will be further developments. Among them are that Trumps’s tariff implementation is incomplete, not covering some countries* and products**; he is likely to have to change some of what has been announced; they may also change because of US legal*** and political**** developments. Moreover, many tariffed countries promise to retaliate while Trump counter-promises to escalate if they do. A prudent business will hold over its investment plans; how consumers will respond is more speculative.

(* Including Belarus, Cuba, North Korea, Russia.

** Including copper, oil, pharmaceuticals, semiconductors, wood products, and some minerals not available in the US.

*** Including that Trump is taxing without representation.

**** Including that Trump may lose much authority following the 2026 congressional elections.)

What about the (temporarily suspended?) reciprocal tariffs on top of the 10 percent?

They add to the complexity. And they certainly don’t make rational sense. I won’t go on about them but just add one further illustration. New Zealand exports more to the US than we directly import. (We were fortunate not to face a higher tariff because of this fact.) However, we indirectly import from the US by purchasing products from Australia which started off in America. Trump’s strategy focuses on bilateral exchanges and ignores that we live in a multilateral world.

Doesn’t the Trump strategy mean that since I run a deficit with my supermarket, I should charge them a reciprocal tariff?

Your parallel is bizarre enough to illustrate the underlying thinking. To extend it, you will ultimately pay the tariff levy, not the supermarket.

But I buy things from the supermarket because I want them.

Absolutely, and so does the US from the world’s ‘supermarkets’. That is because US consumers (and the American Government) choose to spend more than their revenue. Trump’s tariff policies are not doing very much to address the excess spending. Probably it will continue.

     One further complication is that Trump’s tariffs focus on goods exports and imports. They ignore services which the US exports more than it imports.

Why is that?

One reason is that services are hard to tariff. A customs officer can see a container crossing the border. But how to tariff an American tourist who buys services offshore?

     The other main reason is that Trump seems to have a fetish about manufactures (just as he has one about property). If so, it would be a very distorted view of the US economy where nowadays 70 percent of its production is services and 30 percent goods. It is almost as if Trump has not grasped that the world has changed since he was at university 60 years ago.

You seem very gloomy.

Most serious commentators are. The expectation is that the world is going into a Trump-induced recession – possibly a prolonged one – and that, when it comes out of it, the world economy in general and the US in particular will be less productive. The size of the downturn may depend upon whether the reciprocal tariffs proceed. But there is still the 10 percent general tariff and higher ones on aluminium, cars, steel and China (also on select Canadian and Mexican goods), plus the promised ones on the current omissions.

What does that mean for the Global Order?

That’s a future column but, briefly, rather than making America great again, Trump may be accelerating its downward slide.

Footnote: One of Trump’s Rose Garden statements was that with tariffs ‘we can be so much wealthier than any country, it’s not even believable’. That short statement may be correct.

While there have been decades of complaints – from all sides – about the workings of the Resource Management Act (RMA), replacing is proving difficult. The Coalition Government is making another attempt.

To help answer the question, I am going to use the economic lens of the Coase Theorem, set out by Ronald Coase who was the 1991 Nobel economics laureate ‘for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy’.

One form of the theorem is that providing property rights are fully allocated and transaction costs are zero, the ultimate use of a resource in a market economy is independent of how the rights were initially allocated. What the theorem means is that the final use of a piece of land will be irrespective of who initially owned it. So, the RMA (or whatever) will hardly necessary, if the underlying conditions are met.

I am not going to prove the theorem or explore its intricacies. The point for this column’s purposes is that it highlights the importance of property rights and transaction costs in the way that markets work.

That we should keep transaction costs to a minimum is a no-brainer (unless you belong to one of the professions which benefit from the litigation). The focus on the replacement to the RMA has been an attempt to reduce those costs and the time it takes to make a decision (which is another transaction cost). Many see the issue as clumsy administrative design but there is a deeper problem.

Who possesses the relevant property rights? We could, I suppose, compile a sort of doomsday book which listed all the property rights involved. That task would be impractically enormous. So, the law sets down a process to identify the property rights. It is an exercise which takes up time and money – transaction costs.

You may be surprised that the property rights of a resource are not well specified. Is not, for instance, a person’s house their castle with which they can do what they like? As minister responsible Chris Bishop said, ‘your land is your land, until you affect other people.’

Unfortunately the last five words complicate the issue. (I give an example as a footnote.) In practice there are restrictions on what you can do to your property because that may affect others. You may also have joined with your neighbours in challenging a consent on some local development. In effect, you are claiming a property right on the resource. One of the roles of the various hearings is to decide how valid such claims are.

The issue becomes even more difficult when the use of an environmental resource is the issue. Individuals may have strong views on these – perhaps some landscape is precious to them, perhaps it is a heritage building. Again, they are claiming what amounts to a property right.

A particularly difficult issue involves Māori claims of kaitiakitanga (guardianship, protection, stewardship) in their rohe. They are claiming a general property right. Traditionally a Māori community transferred ownership of some of its property, it never transferred kaitiakitanga. Today Māori insist they never relinquished it when their lands were involuntarily taken from them. I leave it to anthropologists, historians, the Waitangi Tribunal and the courts to decide what happened when the transactions were voluntary. (Many transactions were ambiguously ‘voluntary’.)

The current RMA recognises to some degree the implicit kaitiakitanga property right Māori hold in regard to resources. The identification and application of that right adds to transaction costs. As occurs when you attempt to restrict your neighbour or when you, in particular, and greenies, in general, make claims about the future of some environmental or heritage resource. (A further complication is that the sustainability requirements in the RMA give, in effect, property rights to future generations.)

Economists do not have any great expertise in the initial allocation of property rights. Indeed the Coase Theorem says economists interested only in efficiency do not need to. (Any insights they have on equity are shared with many other disciplines.)

Observe that an easy resolution to reducing transaction costs is to eliminate some of the property rights implicit in the RMA. That seems to be one of the changes in the Coalition proposals. And of course, if some property rights are eliminated then other ones are strengthened. It is a kind of privatisation – some people are to lose their property rights (or those they think they have) without compensation.

When the minister talks about ‘property rights’, he is referring only to private property rights, Collective ones are barely mentioned. Expect a lot of public dispute when the Coalition proposals are progressed.

To put the issue in a wider context. One of the ongoing features of economic change over the last few centuries is the replacement of community processes and decision-making (and hence property rights) by individualistic ones. Economics has a theory which suggests that this change increases material output (say, measured by GDP), although the redistribution consequences may be judged inequitable. You will find echoes of this theory in the Coalition’s defence of their resource management proposals. (Recall Keynes’ practical men and women being unwitting slaves of defunct economists.) One of the features of the Coalition’s economic management is the prioritisation of material output over the wider notion of wellbeing that the Ardern-Hipkins Government was pursuing.

As this column has argued, material output is not the same as community wellbeing. It is a political choice which public policy pursues; the Coalition Government knows its answer.

Footnote: As in the case of healthcare, RMA reports focus on failure and rarely mention successes. I did exactly this when I reported that a friend’s elderly garage was munted by an earthquake. He wanted to demolish it so that it did not crash onto a neighbouring property. The consent took a long time. (Fortunately, an earthquake in the interim did not do the demolition, despite it having no consent.) My friend was irritated by the clumsiness of the procedure. But the bare fact he wanted to demolish the garage could disguise a range of other scenarios which affected his neighbour negatively. (I leave your imagination to write the comic novel.) How was the consenting authority to know? And if there was no ‘consenting’ process, how were neighbours to obtain redress if their interests were damaged?

New Zealand’s economic development has always been a partnership between the public and private sectors.

Public-Private-Partnerships (PPPs) have become fashionable again, partly because of the government’s ambitions to accelerate infrastructural development. There is, of course, an ideological element too, while some of the opposition to them is also ideological.

PPPs come in so many different forms that it is tedious to characterise them all. Some of those forms have been used in the past. For instance, the First (Savage-Fraser) Labour Government wanted to accelerate house building to catchup from the housing deficit caused by the Great Depression. It turned to Fletcher Building. (There was even a – rejected – proposal to nationalise the company.)

More recently, the Third (Muldoon) National Government arranged for various companies to develop projects to utilise its energy surplus (including its gas from the Maui gas field). Think Big failed because when the new businesses came online, the world price of oil had fallen and was only about a third of the level that the investments had assumed. Even worse, the Government had given guarantees so that it took the downside risk of low oil prices. It cost taxpayers a fortune.

Those guarantees were secret. That cannot happen today because the law now explicitly states that to be legally valid, any government guarantees must be reported to Parliament. (They are listed in the government accounts as ‘contingent liabilities’.)

Even so, the Think Big failure remains a reminder that a PPP are often about sharing future risk (such as cost overruns, unexpected events – such as delays from Covid lockdowns – and uncertainty about future demand, prices and costs of borrowing). A nice example was the broadband roll out where, in effect, the government accepted the take-up risk, which the private sector was not prepared to bear, but was able to ensure the construction risk remained with the private sector.

The private sector is never enthusiastic at taking on these risks but neither should the public sector be. Trying to cover all these uncertainties is why a PPP agreement often ends up hundreds of pages long.

PPPs were popular in Europe about a quarter of a century ago. Members of the EU were required to constrain their government borrowing to 3 percent of GDP. However, the definition of what was government borrowing did not include the implicit borrowing that occurs under a PPP. It was like your bank asking for a list of all your debts but ignoring anything bought on hire purchase.

New Zealand’s public accounting does not allow such elementary lapses. The public accounts include an item covering the government exposure to PPPs. Here is a list from Note 17 of the Financial Statements of the Government of New Zealand as at 30 June 2024.

• Transmission Gully State Highway   $1,392m

• Puhoi to Warkworth State Highway $1,157m

• Waikeria Corrections Facility            $1,045m

• Education Assets                                  $   934m

• Auckland South Corrections Facility $  373m

• Auckland Prison                                     $   350m

• Total public private partnerships     $5,251m

Of that total, $3.6b still has to be paid by the Government to the private sector and the liability is included in total New Zealand public debt.

So PPPs are not a means of off-balance sheet borrowing. As the Government’s New Zealand PPP Framework: A Blueprint for Future Transactions states: 

     ‘PPP procurement should not be categorised as a financing tool. While the PPP model utilises private finance in support of achieving these enhanced outcomes, spreading infrastructure related cash flows through project finance arrangements is not the purpose of PPP procurement (if it were, this outcome could be achieved more efficiently through general Crown borrowing to finance infrastructure needs). 

     ‘Having private capital at risk for delivery performance offers significant benefits by creating stronger commercial incentives. … With “skin in the game,” they are motivated to prevent performance or availability failures, ultimately enhancing overall accountability and reliability …

     ‘PPP will not be appropriate for all projects. It should be considered alongside a suite of  other procurement and delivery options, all of which will have pros and cons depending on unique project characteristics. 

I guess there is a bit of leeway about what is meant by ‘enhanced outcomes’. For instance, there is much grumbling about how quickly the road surfaces of Transmission Gully have deteriorated (some are already being replaced). What seems to have happened is that in order to meet their construction deadlines and avoid lateness penalties, the contractors skimped on the sealing. However, the contract arrangements require them to maintain the road for some decades, so the resealing is at their cost, not the public’s.

The Transmission Gully contract would be a fascinating case study on how PPPs work, much more use than, say, various studies of British PPPs, which have often proved to be costly disasters through poor management (and are regularly cited by opponents as examples of the dangers of PPPs). There is a Transmission Gully Post-Construction Review from which we can learn lessons. Unfortunately, the contractors and the government are in dispute so it says is not comprehensive. That there is such litigation is a reminder that PPPs can go very wrong.

So PPPs are not a solution to New Zealand’s infrastructural woes. They may make a contribution. But that contribution does not include getting around the debt targets we have set ourselves – hire purchase is out.

There is a European view that those governments who could do PPPs successfully did not need them. In contrast, those who needed PPPs had little chance of successfully pulling them off. Which category do you think New Zealand is in?

PPPs require careful management. We may have some people in the public sector who have the necessary skills and experience but they will not be able to handle all the projects which the government is keen to progress. Using the insufficiently skilled and inexperienced will lead to the kind of disasters that occurred in Britain. Like the sign on so many roadworks, ‘proceed with caution’. But you still roll the vehicle carefully forward.

Note. It would help public discussion and understanding to provide a supplementary account to the main government accounts which set out the government’s infrastructure balance sheet (including its size and the debt which might be attributed to it), and the changes over time. Personally, I would be much more comfortable about the government increasing its borrowing if I knew that it was borrowing to upgrade infrastructure.

Further Reading. The following may be useful

NZ Government: New Zealand PPP Framework: A Blueprint for Future Transactions.

Public Sector Vol 40:2 has a number of articles on PPPs

Craig Rennie: When should you use a PPP? – A bluffer’s guide.