POLITICS : Labour’s Prospects Murky

Why do state and federal governments in Australia keep getting re-elected? Because it is hard to beat government when the economy is going well.
The economy isn’t everything. Labour nearly lost in 2005 here amidst rip-roaring boom at household level. Its drift from the centre on Mori and moral policy got National into the race. Then National offered very big tax bribe as an additional dividend for households from the economic boom.
So Labour is trying to cover itself off on sensitive political fronts in this term. But it has fallen down other holes. The biggest has been spending its parliamentary fund on pledge card and other electioneering last year.
Political commonsense dictated Labour agree that was mistaken, whatever the niceties about the rules. Few voters would willingly pay to be wooed. While Labour was combating allegations of “corruption” and taints by association with the Phillip Field affair, it lost the agenda – and essentially the first year of its third term.
In the spring gap opened up in the polls in National’s favour.
That is not just the fallout from the Field and election spending affairs. It is also lagged effect from the slowing economy. Except for blips upward on election day, consumer confidence fell from mid-2005. So did public feeling about whether the country is on the right or wrong track.
Mood changes take about year to translate into shifts in voting preferences. So National should have been pulling ahead by early spring. Its poll lift was right on cue.
Translate that into the runup to the next election. Labour needs the economy swinging up at the latest year from now – year before the election – and it needs economic confidence and the general mood also to be lifting.
Actually, consumer confidence bottomed mid-year and is now heading up. That is small straw in the wind – but only small and straw.
The right-track-wrong-track mood hasn’t yet turned the corner, though it looks as if it might be troughing. Consumer confidence has long way to go to recover the ground it lost in late 2005. And it could easily turn down instead.
What are the prospects? And what can Michael Cullen do about it?
The prospects are murky. House prices look to have peaked and so the wealth effect from price rises and withdrawal of equity for spending money are unlikely to be factor in consumer spending over the next year or two. Slower consumer spending growth is likely to slow employment growth. If house prices actually fall, that could intensify the consumer slowdown.
And there is the huge balance of payments deficit. At some point interest-
hungry retail investors in Japan and
elsewhere will lose their appetite for New
Zealand. That will push interest rates up, another dampener on consumer spending.
And there are the world imbalances: deficit United States and surplus China. If that unwinds messily, New Zealand’s imbalances will unwind messily, too.
Wrap all that up in an overpriced currency which hampers exports.
It is small wonder that in London in late September Cullen tried to jawbone the exchange rate down in frank interview with the Financial Times.
With only year to go before an upturn is unlikely to translate into votes, Cullen needs the imbalances sorted – and as painlessly as possible – long before then.
It doesn’t help that he has left himself very little fiscal room to stoke the economy if needed. Already this year Working for Families has injected hundreds of millions of dollars into households with children, easing the slowdown. He can’t repeat that to offset any new shock.
So he will need the Reserve Bank to come to the rescue. With the official cash rate the highest among developed economies, there is theoretically plenty of room for rate cuts to inject cash into the economy.
But inflation is way outside the Bank’s allowable band. Cutting rates would be an heroic gesture in those circumstances, especially if the dollar falls and pushes up import prices. And Cullen cannot force the Bank’s hand.
All is not lost. If the economic forces play out benignly, as some expect, the economy will be neutral come election time. That is far cry from 2005 but would leave Labour in with chance.
But only if it can build constituencies behind its other programmes. And at this point, that looks doubtful.

Colin James is Management’s regular political writer. [email protected]

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