By Joel MacManus

Copyright thespinoff

Hindsight is 2020, and that was five years ago, writes Joel MacManus.

There’s nothing the government wants more right now than interest rates cuts. It’s the entire economic strategy: hope that new Reserve Bank governor Anna Breman slashes rates, which will lead to more spending, jobs, higher house prices, and make everyone happy by election day. As Sir John Key so elegantly put it: “The guts of what’s wrong is that the housing market is going down, not up.”

Unfortunately for the government, the long-held principle of central bank independence keeps getting in the way. The pesky ol’ Reserve Bank has the OCR at 3%, higher than the government would like, because the bankers aren’t convinced that inflation is completely under control yet.

This problem is partly one of the government’s own making. One of its first post-election moves was to pass a law under urgency, scrapping the Reserve Bank’s “dual mandate” policy. The bank famously has one job: keep inflation between 1 and 3%. In 2018, the Labour-led government gave it a second goal: to keep employment at the highest possible level. National thought that was a bunch of woke virtue-signalling that put airy-fairy nonsense like “jobs” ahead of important stuff like “the economy”. Nicola Willis called it “one of the greatest stains on the outgoing government”.

The bitter irony for Willis right now is that, in hindsight, if the government had kept the dual mandate, they might be getting the OCR cut she wants. The unemployment rate has climbed continuously since election night 2023, from 3.9% to 5.2%. If employment were still part of the Reserve Bank’s mandate, it would have more reason to boost the economy by giving out low interest rates.

Cast your mind back to the dark days of 2020. Covid was a new and scary phenomenon. The whole country was about to go into lockdown. No one knew what to expect. Everyone was flying blind, politicians included.

New Zealand, and most other countries, responded by making the money printer go brrrrr. Central banks provided low interest rates, and governments pumped out stimulus spending, which created artificial demand in a stagnating economy. Not all of that spending was particularly smart. Labour’s cost-of-living payments were both expensive and low-impact. The $3 billion worth of “shovel-ready” projects the government funded in April 2020 weren’t as ready for shovels as anticipated; some are only getting started now, which doesn’t do much to help the economy of 2020.

Broadly, that stimulus was necessary in the moment, but it was inevitable that there would be an aftershock of inflation.

Most of 20th-century macroeconomics was determined by the ideas of a moustachioed bisexual named John Maynard Keynes. When the economy slumps and people stop spending, the government should step in by spending more money or cutting taxes to get demand moving again. When the economy is booming, the government should do the opposite: scale back so things don’t overheat.

The post-Covid economy produced the Achilles heel of Keynesian economics: stagflation. When you have a stagnating economy with high inflation, you can’t spend your way out of it, because that will just make inflation worse.

Inflation in New Zealand peaked at 7.3% in June 2022. Almost every country in the world had the same problem and the same solution: manufacture a recession. Central banks would raise interest rates and governments would reduce spending to get inflation under control. Once that was sorted, they could carefully lower rates and spend more, and everything could go back to normal. It was simple in theory and incredibly difficult in practice.

Go too slow and you extend the high-inflation pain. Go too fast and you drive the economy into a deeper hole that will take years to escape from. The oft-repeated goal was a “soft landing”. Bring the economy down gently, don’t crash it into a field.

Then finance minister Grant Robertson, like most left-leaning leaders internationally, took a gentle approach. As a Labour man, his priority was to keep employment as high as possible throughout the transition, even if that meant it took a little longer. National thought Robertson was going too slow. They wanted to rip the band-aid off faster, so they could get back to the business of growth.

In hindsight, we can see the flaws of the government’s approach. Inflation is now within the Reserve Bank’s targets, but the economy isn’t bouncing back. The June 2025 quarter registered -0.9% GDP growth. The manufactured recession is becoming an actual recession. The soft landing wasn’t so soft after all.

The biggest problems weren’t the decisions that were core to the government’s economic strategy, but the wider policy decisions that had ramifications for the economy. They cut thousands of public service jobs, because National governments always want a smaller public service. They cancelled infrastructure workstreams for projects that went against their ideology. They pulled the plug on 212 Kāinga Ora housing projects and 100 school builds. None of that was particularly surprising. This is what National governments do. But it was a blunt reaction to a very delicate problem.

The scale of public sector cuts cratered the job market, especially in Wellington, and exacerbated the brain drain. Cancelling the Kāinga Ora builds disrupted a pipeline of contracts and employment that many businesses thought they could rely on.

In the last two years, the construction industry has lost 16,000 jobs and 1,100 companies. “Construction activity, excluding price effects and adjusting for a growing population, is now at the lowest level since 2019,” according to economists Shamubeel Eaqub and Rosie Collins, who wrote a sector overview for the NZ Chinese Building Industry Association.

Construction is the sector that is most vulnerable to the whims of the market. It shrinks rapidly when people stop spending money, but it doesn’t always bounce back so fast. After the election, the government hoped the economy would roar to life again as soon as interest rates fell. Now, that plan looks overly simplistic. Business confidence is low, meaning large corporations are less likely to throw the cash around. And construction can’t just turn around on a dime, not with so many companies that no longer exist and workers who have fled to Australia.

Time is running out until the 2026 election, and the turnaround doesn’t seem to be happening. Even if the OCR falls to 2%, it may not be enough to get things going again. While ministers will point to the previous government for creating the problem, the mismanagement of the solution is on their hands. But that doesn’t necessarily mean they were stupid or that this outcome was obvious. New Zealand is dealing with a difficult, hard-to-predict economic situation, and it’s easy to criticise with the power of hindsight.