Understanding the data 2: Why we are officially in recession

The economy of New Zealand is officially in recession. New Zealand’s gross domestic product (GDP) shrank by 0.1 percent during the October-December period, following a 0.3 percent contraction in the third quarter, according to the Statistics Department, a government agency.

(see https://tradingeconomics.com/new-zealand/gdp-growth).

Economists traditionally define a recession as two consecutive quarters of negative growth. On a per capita basis, the economy fared even worse, with GDP shrinking 0.7 in the last quarter of 2023 because the net immigration surge of 133,000 people in the year to December 2023 boosted population numbers simultaneously.

The GDP has been stagnant for the last two years. GDP per capita has fallen for five consecutive quarters and was down 4% from a peak in mid-2022. The last time that happened was associated with the 2008 world recession when unemployment rose in New Zealand to over six percent for a couple of years.

The problem for New Zealand today is that the government has launched a cost-cutting austerity drive of government spending that is sure to make the recession worse. The government claims that these cuts are necessary to reign in the surge in spending that happened to cope with the COVID-19 crisis. This spending led to large budget deficits. Deficit spending combined with the money creation by the Reserve Bank – actual Quantitative Easing for the first time in New Zealand – created the inflationary surge the government claims to be fighting. There is some truth in this argument.

The problem for the government is that it is giving tax cuts to landlords and the rich will keep the budget deficits going indefinitely. This has led to criticism from the orthodox monetarists like the Act Party founder Richard Prebble who has argued against the tax cuts unless they are matched by spending cuts as well. 

So he wanted a return to the slash-and-burn policies of the early 1990s. He also thought the Official Cash Rate of the Reserve Bank should have been increased to force a recession sooner to achieve inflation reductions rather than freeze the rate at its last meeting.

Progressive economist Susan St John has a different and contrary view. She wrote that “the figures show we are already in a recession and its effects are evidenced daily by welfare agencies dealing with increasingly high needs. This means there is slack in the economy and suggests that a tax stimulus of the right kind, along with other regulatory controls, could help slow a further downward spiral without reigniting inflation.”

She is also sympathetic to the fact that working people are over-taxed in New Zealand and deserve some relief. Much of the tax cut being implemented by the National government is simply reducing the drift into higher tax rates that happened with rising wages. National was able to get some traction in the public mind by highlighting that fact. This was especially true because Labour didn’t have a progressive tax alternative that could have shifted taxes from working people to the rich.

Despite the tax cuts the debt-to-GDP ratio is predicted to continue to decline steadily under the National Party. This is why the budget remains a contractionary fiscal policy that still requires cuts in spending across the board.  Without the tax cuts, the budget would have had to be even more contractionary than it is.

Without a wealth tax of their own Labour can’t reduce taxes on working people to make the tax system fairer by reducing taxes on working people. This needs to happen if they want to break from their own self-imposed neoliberal straight jackets and have a genuinely progressive tax policy.

Official unemployment rising

Unemployment rose to a seasonally adjusted 4% in the December Quarter 2023.

Official unemployment has remained lower than one would expect in this recessionary environment. Unemployment dropped to what pro-capitalist economists considered a “too low” number of 3.2% in 2022 based on a very strong post-Covid economic recovery. Capitalists don’t like low unemployment for the obvious reason that it increases the bargaining power of workers.

The “underutilisation rate”, which is a broader (and more accurate in my view) measure of spare labour capacity than unemployment alone, was 10.7 percent in the December 2023 quarter. This compared with 10.4 percent in the previous quarter and 9.3 percent in the December 2022 quarter.

Despite that fact, the “utilisation rate” remained reasonably high at 72%. This means more families have workers in them with jobs which helps protect them against the job losses that are occurring.

The government has also allowed a record number of people to migrate to New Zealand on work permits (and no access to benefits) to give employers access to cheap labour again after Covid had forced shut the borders. This reached a record 20,000 a month for all of the last year with the inevitable return of stories of migrant labour exploitation.

This creates a froth in the economy that doesn’t necessarily translate into real or long-lasting economic growth. That is why the per capita GDP growth is lower than the actual rate.

The government has just set a target to reduce the number of people receiving benefits by 50,000 by 2030. In December 2023 there were about 190,000 people on the Jobseeker Benefit. But just over 80,000 of those were receiving it because they have a health condition or disability – what used to be known as the sickness benefit. That leaves nearly 110,000 who are deemed ‘work ready’.

The 50,000 reduction won’t just apply to the work-ready though. It’ll target those on the health or disability jobseekers benefit.

The only way to achieve that target is to recreate the ani-worker anti-beneficiary culture that existed for so many years at WINZ until Covid forced a relaxation under the last Labour-led government.