Tight NZ election throws up three possibilities

David McLean
08:30am September 22 2017

Labour Leader Jacinda Ardern (left) and Prime Minister Bill English shake hands following a debate in Auckland this week (Getty Images).

New Zealanders are holding their breaths as one of the most tightly fought general elections in recent times goes down to the wire.

Two months ago, the election was the National’s to lose. But since then a change of leadership in Labour to Jacinda Ardern has reinvigorated support for the party and sparked a very close race.

With the outcome so uncertain, many are also pondering the likely impact on the economy and markets.

Polling shows support for both main parties – the governing centre-right National Party and the rejuvenated centre-left Labour Party – hovering at about 40 per cent support, with the incumbents a shade ahead on an average of recent polls.

As in prior elections, under NZ’s Mixed-Member Proportional Representation (MMP) system, both would need to call on support from minor parties to form a government.

In terms of outcomes there are three main possibilities.

The first is a National-New Zealand First governing coalition.

NZ First is a centrist/ economic nationalist party that tends to be left of centre on economic policy, conservative on social policy and advocates for tighter controls on immigration and foreign ownership.

The second possibility is a Labour-NZ First governing coalition.

The third is a Labour-Greens coalition.

Our Westpac NZ Economics team have done an analysis of party policies and how they may impact our forecasts for the economy.

Their conclusion is that a National-led coalition would mean little change, acknowledging some uncertainty around what NZ First policies might be adopted.

While Labour is not promising radical change, a Labour-led government could lead to some changes in our forecasts.

Labour is planning to spend more than the current government, primarily on health and education, which would see changes to our forecasts over the medium term. However, partially offsetting that increased spending would be a cancellation of some of the National’s planned tax cuts.

Labour is proposing a number of changes to the housing market including preventing “negative gearing” and extending the period from two to five years within which investors must pay capital gains if they resell a property. They would also build 100,000 new affordable homes over 10 years and establish a tax working group to look at tax on investment properties, with any changes implemented after 2020.

Taken together these policies would likely flatten or reduce house prices to some extent, but it is uncertain to what degree.

Labour has also promised to reduce immigration – mainly in the unskilled and student visa categories – by 30,000 a year.  We’re already forecasting a natural drop in immigration over coming years, so Labour’s policies would only impact our forecasts if they went over and above this.

Labour also plans to introduce a committee for monetary policy decisions – rather than the current governor as sole decider model – and to add full employment as a non-numerical target to its inflation focus. In practice, although it would be disappointing to see any weakening of the independence of monetary policy, we doubt either of these changes would make a material difference to the conduct of monetary policy.

Regardless of the outcome – provisional results are expected from 7pm (NZT) on Saturday 23rd September – New Zealanders are taking a keen interest in this election and this has been evidenced by record numbers of advance votes, which is positive for our democracy.

David McLean

David was appointed Chief Executive Officer, Westpac New Zealand Limited in 2015. Since joining Westpac in February 1999, he has held a number of senior roles most recently as managing director of the Westpac New York branch. Before joining Westpac, he was Director, Capital Markets at Deutsche Morgan Grenfell since 1994. He also established the New Zealand branch of Deutsche Bank and was New Zealand Resident Branch Manager. In 1988, David joined Southpac/National Bank as a Capital Markets Executive. Prior to this, David worked as a lawyer in private practice and also served as in-house counsel for NatWest NZ from 1985.

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