First Impressions (NZ): Initial thoughts on the new government’s coalition agreement
The final form and policy agenda of the new centre-right government was announced today and provided no major surprises. The final policy mix is possibly just a little more contractionary than National campaigned on.
Government structure and key personnel
Following weeks of negotiations in the wake of the 14 October General Election, today has seen the National, ACT and NZ First parties sign a formal coalition arrangement. Each of the parties will have seats at the Cabinet table, and so will be bound by the principal of collective Cabinet responsibility for the agreed programme of the coalition government – an arrangement that should be more stable than the alternative of “confidence and supply” agreements (with policies subsequently agreed on an issue-by-issue basis).
The key positions within the government will be held by:
• Christopher Luxon (National, Prime Minister)
• Winston Peters (NZ First, Minister of Foreign Affairs, Deputy PM until 31 May 2025)
• David Seymour (ACT, Minister of Regulation, Deputy PM from 31 May 2025)
• Nicola Willis (National, Minister of Finance)
Agreed policy agenda of the new government.
The compromise reached in the coalition agreements provides for each of the parties to pursue most (but not all) of their pre-election manifesto promises. It should be noted that the agreements between National and ACT and National and NZ First contain no costings of the agreed programme. The first costings – at least for the major initiatives – should come with the release next month of the Half-Year Economic and Fiscal Update (HYEFU) and the expected “mini-Budget”. Comments made by the new Prime Minister provided no indication that the fiscal bottom line would look much different to that conveyed in National’s pre-election fiscal plan i.e., a forecast return to an OBEGAL surplus in 2026/27, made possible by very tight control of government spending.
With respect to the National Party, which has 48 of the combined 67 seats held by the government, the main point to note is that it will implement the tax cuts they campaigned on next year as promised, effective from 1 July next year. But these tax cuts will not be partly funded by taxing foreign buyers of high value residential property. Instead, it appears that these will be funded by additional expenditure savings (for example by not increasing the Working for Families tax credit in 2026 and delaying when tertiary students are eligible for a year of fees free tuition – the latter reducing costs, as up to a third of students fail to complete their degree). At the margin, this funding means that the overall fiscal stance of the Government will be slightly more contractionary than would otherwise be the case. The housing market policies advocated by National have been incorporated into the final policy platform. Investors will be able to fully deduct mortgage interest on housing investments more quickly than initially proposed and the Brightline capital gains tax rules will be relaxed.
Turning to the smaller parties, ACT (with 11 seats) has won the right to establish a new ministerial portfolio for Regulation, with an associated government department funded by disestablishing the Productivity Commission, with the aim of ensuring that regulatory decisions are based on principles of good law-making and economic efficiency. Additional savings in public sector spending will be achieved by reducing non-essential back-office functions (with reference to headcount increases since 2017).
Meanwhile, as signalled by all ahead of the election, the Reserve Bank of New Zealand Act 2021 will be amended to remove the dual mandate (leaving a sole focus on price stability). At present, with inflation above target and employment above its sustainable level, we think this change would not have a material impact on the RBNZ’s setting of monetary policy.
The agreement with ACT also allows for the Government to take advice on returning the RBNZ to a single decision maker model, as well as replacing “medium term” with specific time targets for the return of inflation to the target range. We think it is unlikely that a review of the monetary policy framework, drawing on international experience and best practice, would conclude that either of these changes is desirable. Finally, the agreement would also allow for the Government to take advice on removing the Treasury observer from the RBNZ’s Monetary Policy Committee.
Regarding employment law, it has been agreed that the Fair Pay Agreement regime will be repealed by the end of this year and that 90-day trials will be expanded to apply to all businesses.
As expected, the Government will repeal the previous government’s ban on offshore oil and gas exploration.
National has agreed to NZ First’s (8 seats) demand that Core Crown expenditure reduce as a proportion of the overall economy. The parties have committed to “moderate” increases in the minimum wage each year (in our view certain to be much smaller than those seen in recent years) and to strengthen obligations on Jobseeker work ready beneficiaries to find work. The Government will establish a Regional Infrastructure Fund with $1.2bn in funding to be spent over the next three years (it is unclear whether this will be met from existing unallocated capital budgets). The current review of the Emissions Trading Scheme will be stopped (this will be welcomed by the carbon trading market), as will spending on several proposed projects such as Auckland Light Rail and Let’s Get Wellington Moving. As with the ACT agreement, the NZ First agreement provides for a number of policies designed to reduce regulation and red tape. National have also agreed to NZ First’s requirement that it supports the introduction of a bill as far as the select committee stage on a binding referendum on a four-year term of parliament.
Our thoughts on the coalition agreements
Overall, there are no major surprises in the coalition agreement and the broad thrust of the policy agenda is as we expected given the overlapping policies in the parties' respective manifestos. Therefore, the new Government’s overall fiscal policy stance, at least as regards the operating balance, appears likely to be moderately more contractionary than that which the outgoing government would have pursued. This is especially so given that National’s tax cut programme will no longer be partially funded by taxes on house purchases by foreign buyers, but by additional spending cuts instead. That said, we continue to think that some elements of the new government’s programme – notably its policies that will encourage more investor participation in the housing market – could provide some offsetting stimulus to the economy.
On balance, the details of today’s coalition agreement announcement do not appear to call for any reassessment of our outlook for the economy, the RBNZ’s monetary policy stance or the Crown debt programme. We will get a more definitive view with the release of the HYEFU before Christmas.
Next steps
Cabinet ministers will be sworn in on Monday and the new Parliament will sit on 5 December. Parliament will likely sit under urgency to pass key legislation required to give effect to some of the items on the Government’s “100-day plan”. Given the extensive work programme of the new Government, the Prime Minister has indicated that the House will sit right up until Christmas and will probably resume shortly thereafter following a briefer holiday adjournment than would normally be the case.
In the near term, a key focus will be the production of the foreshadowed “mini-Budget” which the incoming Minister of Finance has indicated will be published alongside the regular HYEFU sometime in December (this must be tabled before the House adjourns for the year, which will likely be on 21 December). In addition to providing the usual update on how the changes in the economic outlook since the Pre-Election Economic and Fiscal Update (PREFU) have impacted the fiscal outlook, we expect the HYEFU will give some indication of the Treasury’s estimate of the financial impact of the Government’s most important policy initiatives (such as the tax and spending cut programme). The implications of the remainder of the Government’s programme will be set out in Budget 2024, which will likely be tabled in May as usual.
Author and media contact
Kelly Eckhold, Chief Economist
+64 21 786 758
kelly.eckhold@westpac.co.nz
X: @kellyenz
Author: Darren Gibbs, Senior Economist
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