John Key's $400bn legacy

10:55 am on 6 December 2016

By Bernard Hickey @bernardchickey

Opinion - Political legacies are hard to measure in hindsight, let alone in real time, but John Key's economic legacy can be measured just by looking at what he judges as success - wealth and incomes.

A behind the scenes look at the Prime Minister John Key and Finance Minister Bill English getting ready for  Budget 2016 on Thursday 26 May 2016.

Prime Minister John Key prepares for Budget 2016. Photo: SUPPLIED/@NZNationalParty

Mr Key told his resignation news conference he thought his greatest success was the government's economic leadership in tough times and that the economy was growing, creating jobs and building Budget surpluses.

It is true the economy is growing at an annual rate of over 3.5 percent, which is one of the fastest growth rates in the developed world. The economy created 179,000 jobs in the last two years. It is pumping GST and income tax revenues into the government's coffers at such a rate that Budget surpluses are "hockey-sticking" up, as Mr Key said last week. He said they would be big enough for voters to "have it all" in the form of extra social spending, tax cuts, earthquake rebuilding and debt repayment.

All this economic vigour came after the worst Global Financial Crisis (GFC) since the 1930s, the most damaging earthquakes in our history and, recently, a prolonged collapse in the price of our biggest commodity export. Yet gross weekly earnings are growing at more than 5 percent per annum and have been for almost three years. Unemployment fell to 4.9 percent, the lowest point since Mr Key took office in the fourth quarter of 2008.

The benefits of all that income growth have not been spread completely evenly, but they are being spread more evenly than many think - and more than in most other countries. Income inequality has been broadly unchanged over the last decade. The retention of Working For Families, increases in the minimum wage in line with the average wage and the rise in New Zealand Superannuation in line with average wages has meant pensioners and working families in their own homes have benefited over the last decade. Much of that wage growth was real because inflation has been low, while borrowers have done well because interest rates fell so far and stayed that way for most of Mr Key's eight years.

Three big "buts"

Mr Key cannot claim all the credit. He has acknowledged Finance Minister Bill English was his key partner ensuring the government did the right thing and spent money hand over fist in the depths of the global financial crisis and after the Canterbury earthquakes. Other flavours of National governments might have taken a drier fiscal stance and made the GFC worse than it was. Jim Bolger chose Ruth Richardson and she made the 1991 recession worse than it should have been with benefit and other spending cuts that worsened inequality in a way no-one has yet reversed. Though Mr Key did not run economic policy directly, his close and harmonious partnership with Mr English can receive some of the credit for the economy's relative stability and strength since 2008, but not all of it.

Some of it was accidental. Some of the credit should be given to the Helen Clark-Michael Cullen partnership of the previous nine years, which was similar in its cohesion and stability to the Key-English one. New Zealand benefited hugely from the Free Trade Agreement with China and China's decision to spend like crazy on infrastructure as soon as the financial crisis started.

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Auckland house prices have spiralled up during John Key's tenure. Photo:

That stopped Australia from having a recession and created hundreds of millions of new middle class consumers for our milk, tourism and international education. The structural fall in global interest rates and inflation, combined with little net government debt in 2008, helped cushion New Zealand from the worst effects of the financial crisis. It allowed Mr English to borrow heavily to cope with both the financial crisis and the earthquakes without much pressure from either ratings agencies or voters.

The second "but" is the quality of that economic growth, in particular the "gross" nature of it. Gross weekly wages have risen more than 5 percent per annum for the last three years, in large part because more people are working - and working longer hours. Migration and an increase in workforce participation, particularly of those aged over 65, has driven much of that increase. Real output per hour worked, which is the best measure of the production growth needed to grow incomes sustainably, has been flat since 2011.

The third "but" is Mr Key's failure to act on his own warnings in 2007 of a crisis in Auckland housing affordability because of a lack of housing supply. Auckland house prices have risen since Mr Key's election, which, at times, he has been ambivalent about, noting voters like their house prices to rise and would not accept falls. He soft-pedalled on action to address Auckland's housing shortages as soon as prices briefly fell in 2009. He did not refocus on it until just before the 2014 election, when his government's actions may have worsened the problem by subsidising first home buyers. He did not address the underlying tax advantage for leveraged rental property investors in any substantial way. It is only now, with the urging of Mr English, that the government is starting to crank up its sources of housing.

Mr Key's legacy is sweetest for property owners, who saw the values of their homes rise $NZ400 billion to almost $NZ1 trillion on his watch. Meanwhile, the cost of servicing their mortgages as a percentage of disposable incomes fell almost 40 percent. Renters and aspiring homeowners have not benefited from the Key era. They have gone backwards. The poorest 40 percent of the population had their housing costs rise substantially under Mr Key, and faster than than their incomes, particularly if they are single, on benefits, or have insecure and poorly-paid work.

Finance Minister Bill English.

Mr Key has Bill English to thank for much of the economy's success, Bernard Hickey says. Photo: RNZ / Cole Eastham-Farrelly

The right-wing think tank, the New Zealand Initiative, described that legacy best in a report in October on inequality.

"There is a massive inequality concern that is rightly troubling many New Zealanders: housing. In short, New Zealand's "inequality crisis" is really a housing crisis, wrote the NZ Initiative's Bryce Wilkinson and Jenesa Jeram. "While incomes have risen for high and low earners, the rising cost of housing especially hits the poor."

Mr English has been the loudest voice in the government in recent years about how fast-rising housing costs drive child poverty and increase the government's costs. If he becomes Prime Minister for any length of time, he will have to deal with his predecessor's $NZ400 billion legacy of higher house values and housing costs. Somehow, he will have to restart growth in output per hour to create a real economic legacy.

Bernard Hickey is the publisher of Hive News and a regular contributor to a number of media outlets on matters concerning economics, business and politics.

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