New Zealand / Analyst Insights
What A Second Ardern Term Means For New Zealand

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by IBISWorld
Oct 21 2020

Prime Minister Jacinda Ardern has led the Labour party to a stunning victory in New Zealand this week, upsetting the political landscape. The scale of Labour’s victory is the largest since 1946, and represents the first time since 1996 that a major party has won majority control of the parliament. Now that Labour has an outright majority, it no longer needs to rely on minor parties to pass policy. As a result, it now has the capacity to become the transformational government it aspired to be following the 2017 election, and implement its full range of policies.

Ardern and the Labour party will contend with a New Zealand economy struggling with the ongoing COVID-19 pandemic, although the handling of the crisis has been far more successful compared with many other countries. Real GDP in New Zealand is expected to decline by 4.3% in 2020-21, to $245.7 billion. The unemployment rate has risen from 4.1% in 2019-20, to an expected 6.8% in 2020-21.

However, there is some light on the economic horizon. While consumer sentiment has fallen significantly over 2020, it has improved in recent months following the successful containment of COVID-19. Business confidence index remains negative at -22.8, but has improved relative to the heightened pessimism of 2018-19, when the index slumped to -33.8. In 2021-22, real GDP is expected to rebound by 5.7%, while the rate of unemployment is expected to drop to 5.9%. Ongoing monetary stimulus, including a likely introduction of a negative interest rate policy, is likely to further support an economic rebound.

Amid this economic backdrop, the Ardern government is expected to implement the following policies:

SME support

Labour has announced a range of policies targeted specifically towards SMEs, which account for 28% of New Zealand’s GDP and employ over 600,000 people. The Small Business Cashflow Scheme, which provides low-interest financing for businesses, will be extended by three years. By the first week of September 2020, approximately 94,500 SMEs had used this scheme to borrow almost $1.6 billion. The average loan was close to $16,500, and most of these SMEs employed five or fewer staff. Labour has also announced plans to transition the Small Business Cashflow Scheme into a permanent micro-finance initiative.

New regulation is also likely to crack down on merchant service fees charged by the Banking industry, which SMEs pay for the use of debit and credit card services. Relative to Australia, New Zealand retailers pay close to double for these services, at an additional cost of $13,000 per year. On average, retailers in New Zealand pay 1.1% of the value of every transaction on a contactless debit card and 1.5% on credit cards to their banking service provider.

SMEs will also benefit from government funding for digital innovation, including a $2,500 Digital Training Voucher. SMEs can use this voucher to subsidise the cost of digital training and investment in digital technologies for their business. The new voucher scheme will be targeted at businesses with less than 20 employees over the next two years.

The Ardern government has also pledged to provide a business subsidy of $7,500 on average, and up to $22,000, to hire unemployed New Zealanders. Businesses will have to prove that the job is sustainable, and will only receive the payment once the person has been employed for six weeks. Labour will increase the minimum wage to $20 per hour in 2021.

Infrastructure

Labour has pledged over $5 billion in funding for infrastructure projects, including $1.2 billion on projects to be commenced within 18 months. Over the next decade, the government has outlined a funding roadmap for transport infrastructure, worth $48 billion. The government has highlighted six key growth regions for infrastructure funding through the New Zealand Upgrade programme. These regions are Auckland, Waikato, Bay of Plenty, Wellington, Canterbury and Queenstown. Together, these investments are expected to drive growth in the Road and Bridge Construction and Institutional Building Construction industries. Road and bridge construction revenue is expected to grow at an annualised 4.0% over the five years through 2025-26, to $10.0 billion. Major projects to be built include the New Melling interchange ($258 million), Peka Peka to Ōtaki expressway ($330 million),and the Manawatū Gorge replacement highway ($620 million).

The Rail Transport industry is also set to receive extra funding, following over $1 billion in additional investment for KiwiRail in the 2018-19 Budget. In January 2020, an additional $1.1 billion in funding was allocated for upgrades to the Auckland rail network. According to the Government Policy Statement on Land Transport, released in September 2020, rail infrastructure is projected to be a key focus over the next decade.

Health

Labour is expected to ramp-up the scale of the health sector over the next two years. Labour has pledged to provide mental health support for all primary and intermediate students, boosting demand for the Specialist Medical Services industry. Labour is also forecast to introduce dental health grants of up to $1,000 for low-income earners, supporting the Dental Services industry.

PHARMAC, the agency that determines which medicines and pharmaceutical products are subsidised for use in community and public hospitals, is projected to receive an additional $200 million in funding over the next two years. This will support the Pharmaceutical, Cosmetic and Toiletry Goods Retailing industry, boosting its revenue by an annualised 0.9% over the five years through 2025-26, to $2.6 billion.

Agriculture

The Fit For a Better World roadmap, released by the Ardern government in July 2020, has the goal of lifting New Zealand’s Agribusiness exports by $44 billion over the decade through 2030. Several policies have been enacted to achieve this aim, and these policies are likely to be extended over the next Ardern term. Labour has previously allocated $134 million towards the development of small-scale water infrastructure, to give farmers access to higher value land-use options.

Labour has also announced a new integrated farming strategy, including $50 million in funding, to help farmers transition to environmentally friendly practices and cope with rising compliance costs. Labour has introduced significant new regulatory frameworks, such as one for water management to halt the loss of natural wetlands and streams, control high-risk farm practices such as winter grazing and feedlots, set new bottom lines on waterway health measures, and make real-time measuring and reporting of data on water use mandatory.

Energy

Labour has pledged to achieve 100% renewable electricity generation by 2030, five years ahead of the current target. New Zealand already generates close to 84% of its electricity from renewable sources such as wind, solar and geothermal power stations. This is likely to hasten the demise of the Fossil Fuel Electricity Generation industry, which has already been disrupted by the recently announced closure of the Tiwai Point aluminium smelter, operated by Rio Tinto. The smelter previously accounted for over 10% of New Zealand's electricity consumption.

Labour has also announced $30 million in funding to develop a business case for the Lake Onslow pumped hydro scheme, and a further $70 million for design and engineering work. The pumped hydro reservoir would be capable of storing up to 5,000 GWh of energy, equivalent to all of New Zealand’s existing hydro schemes combined. Pumped hydro, which enables the storage of renewable energy that can be extracted on demand by the Hydro-Electricity Generation industry, is being pursued by Labour as a necessary component of a fully renewable electricity supply chain. Given the potential for a dry year to restrict output from hydro generators, a large pumped hydro reservoir like Lake Onslow would ensure greater reliability of electricity. If the project is found to be viable, construction would likely commence within five years.

IBISWorld reports used to develop this release:

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