The economy, stupid

By COLIN ESPINER

It's a little early to start calling this year's election, but here's a punt anyway: unless there is a miraculous economic recovery or National does something incredibly stupid, Labour is going to lose, and lose badly.

Looking at the myriad political polls that have been released in the past week, this may seem a pretty safe conclusion.

Four polls, including this newspaper's Fairfax Nielsen survey, have found Labour trailing National by margins ranging from 10 to 19 points.

On average, Labour comes in on 36 per cent support and National on 51%, a 15-point gap. It has closed a little in the past two months, but not enough for Labour to overhaul its opponent at the current rate of progress.

However, this prediction is not based solely on current poll results.

It is, as Bill Clinton once put it, "the economy, stupid".

Labour talks of the "economic headwinds" it is facing but, in reality, what is brewing is more of a perfect storm.

Unless it peters out at sea very soon, it is going to wreak havoc on this Government.

After nine years of golden economic weather, things are turning sour internationally and in New Zealand. Some things are legitimately beyond the control of the Government. Others it is responsible for.

However, in the end it will be held accountable for them all.

The squeeze on Kiwi households, which is becoming tighter by the day, is Labour's worst nightmare in an election year. If newspaper headlines featuring middle-class battlers struggling to make ends meet are not enough to persuade Labour things are going badly wrong, it could look at the results of questions posed for The Press by our pollster, Nielsen, published on Saturday and again today.

Fifty-two per cent of the public say they are worse off financially than a year ago. This includes 46% of Labour voters. If one takes the poorest voters, those on less than $20,000 a year, that figure jumps to 65%.

The response is the same across towns and cities, rural and urban New Zealand.

A quarter of all Kiwi households say they are concerned about their ability to pay their rent or mortgage over the next 12 months.

In Auckland, where house prices are highest, that figure rises to 29%.

One in 10 New Zealanders is considering moving to Australia within the next 12 months. That's more than 400,000 people. Of course, most will not go. However, the very fact they are considering it should be ringing alarm bells for Labour.

While Prime Minister Helen Clark might think that asset sales and National's supposed plans to issue infrastructure bonds to sell down government ownership of state- owned enterprises is a "defining election issue", most voters are more focused on the tsunami of additional expenses swamping them.

Officially, grocery prices are up 9% in the past year, although most households would laugh at this figure.

A survey in a weekend newspaper found a trolley-load of basic items bought last week cost 28% more than at the same time last year. Much of that has been driven by astronomical increases in dairy products. Cheese and milk have become luxury items in the land of the dairy cow.

Petrol tipped the $2 a litre mark for premium last week. That's 22% more than a year ago. Electricity is up 6% in the year, and more than 20% over the past three years.

Mortgage rates remain stubbornly high. The Reserve Bank indicated last week they were likely to stay that way for the remainder of the year.

Over the next few months, and through the election campaign, thousands of New Zealanders will come off fixed mortgages and find their interest bill has gone up

by $100 a week or more.

Yet, until recently, Finance Minister Michael Cullen was still saying Kiwis had never had it so good. After refusing to cut taxes for nine years in favour of income redistribution, this year was to be the big payout; the economic dividend from the years of plenty. Suddenly, the payout has become a rescue package.

Economic management has, almost overnight, become the central issue of this year's election. This is the first time Cullen's skills in this area have been under the microscope since Labour took office. During the good times, the previous three elections were fought on social issues, on genetic engineering, the Exclusive Brethren. Even foreign policy.

In 2008, it is back to the hip pocket. And the bad news for Labour is that according to the Fairfax poll, more people trust National with the economy. Despite being out of power for almost a decade, with an untested leader in John Key and a would-be treasurer whose administration presided over a recession when last in office, 46% of those polled plumped for National as the best economic manager compared with 33% who picked Labour.

As if things couldn't get any worse, the Government now also faces the strong prospect of major industrial action during the election period, as unions seek to claw back losses in real incomes as a result of price increases.

Aircraft engineers and junior doctors are the first to put their hands up. Others will follow. Wage settlements around or above 5% will likely fuel inflation and prompt the Reserve Bank to keep interest rates high. Yet union bosses, including the man tipped to be Labour's next president, Andrew Little, warn that they will not let their members bear the brunt of government monetary policy.

This year's Budget, due for delivery on May 22, has taken on huge significance as Labour mulls ways to get working New Zealand back on its side. And yet the supreme irony for Cullen, who refused tax cuts when they were affordable, is that he cannot deliver the election-year splurge his supporters are demanding and remain a credible minister of finance.

Anything beyond the most modest of tax cuts will see the Reserve Bank reaching for the interest-rate trigger yet again. Most voters will not thank Cullen for a $20-a-week tax cut if their mortgage payments go up.

And so unless Cullen wants to play chicken with the Reserve Bank, he will be forced into pushing big- spending plans into the "out" years, when hopefully inflationary pressures have subsided. This, however, will not impress those who want tangible relief from their economic pain now, not in several years time.

Cullen will, of course, demand to know just what National could do to make things any better. And it's a fair question. National's economic policy settings are virtually identical to the Government's. It will not change current monetary policy.

National would run a slightly higher level of Crown debt, freeing up more cash for tax cuts, but it is constrained by the same inflationary forces that confront the Government. National would spend more money on infrastructure and broadband and constrain increases in public spending. However, that's about it.

So the question comes down to this: in times of economic strife, do voters stick with the devil they know, or punish the incumbent and opt for the alternative, even if it's not much different? At this point, it looks very much like the latter.

- © Fairfax NZ News