Coalition negotiations – the factors which will matter

​If New Zealand First ends up with the balance of power after the elections, as current polls suggest, we may have to wait until 12 October to know what the next government will look like. That is when the final count will be delivered to the Governor-General and is the deadline Winston Peters has set himself.

We know from the Pre-election Economic and Fiscal Update (Prefu) that there will be significant fiscal headroom for policy concessions. But what will the big parties be able to wear, and where will they draw the line?

We look at the factors that will be top of mind when the coalition negotiating teams meet in smoke-free rooms behind closed doors.

National’s dream result – to form a government with its existing coalition partners; the Māori Party, Act and Peter Dunne – was dealt a hammer blow when Dunne stepped down.

This, combined with the knock the Greens have taken on the left of the spectrum, has put Peters firmly front and centre. Assuming he chooses to enter parallel negotiations with National and Labour, the deal-making could easily stretch out to 12 October because:

  • New Zealand First will have immense bargaining power and will be looking to maximise its influence, and
  • the negotiators will be developing a coalition agreement from scratch rather than building on existing agreements (as was the case after the previous two elections).

Prefu

The Prefu shows a much stronger surplus for the year ended next June than forecast in the May budget – up from $1.6 billion to $3.7 billion.

But much of that is driven by a bigger tax take than anticipated – an effect that is expected to tail off after this year.

This, plus a slightly lower growth track, means that the surpluses for the following years have been revised downward from the budget numbers.

The fiscal envelope

Given the Budget Responsibility Rules agreed by Labour and the Greens, the fiscal parameters will be much the same between Labour and National. The Labour-Greens have given themselves scope for extra spending on health, education, income support and the restoration of contributions to the Cullen Fund by:

  • setting a slower debt reduction path – 20% of GDP by 2022 compared to National’s 10-15% by 2020
  • scrapping the tax cuts scheduled to take effect on 1 April 2018 (total estimated revenue impact almost $6.5 billion over the next four years), and
  • extending the ‘brightline’ test for taxing capital gains on rental property investors from two years to five years.

Both sides have made allowances within their budgets for coalition concessions. If the race between National and Labour stays tight, they might eat into this provision by ramping up the spending promises. But the scope for this is limited because – for as long as New Zealand has high private sector debt and is running a current account deficit – the government must maintain a relatively strong balance sheet.

Other considerations

Two other considerations which will drive the decision-making are the degree to which different policy items align with a party’s branding and, where there is policy disagreement, how big are the rats which the bigger party would need to swallow.

Branding

There is a considerable overlap of values across the New Zealand political spectrum, which is to be expected given our small population. So the competing party brands and their points of divergence are often – although not always - more a matter of emphasis than of difference.

Below is our take on the four main brands.

Nationala strong economic growth focus supported by a small state/low tax preference
Laboura “caring" state, progressive taxes, a concern for those on low incomes
Greensenvironmentalism and the alleviation of poverty
New Zealand Firsteconomic nationalism, support for the elderly and provincial New Zealand

What size the rats?

Any concession which is at odds with these core principles will be a big ask (although almost nothing is impossible when power is the prize). Concessions which may not appeal but can be accommodated within the “brand” will be much less problematic.

The other big consideration relates to how “discrete” an initiative is. Can it be bolted on to the side of the government’s programme or is it intrinsic? Is the expenditure large or small, one-off or continuous? Will it have ripple effects into other policies or can it be contained?

On this score, New Zealand First’s policy that government agencies should favour New Zealand wool for both floor coverings and insulation, although scoffed at by Bill English, would be much easier for National to accept than would its proposal to set up KiwiFund, a state run KiwiSaver provider to compete with the private sector.

The Greens’ success in getting National on board with home insulation programmes is a product of the same thinking. It is relatively inexpensive, delivers a positive benefit and is uncontroversial.

Chapman Tripp will produce commentaries throughout the election campaign on those issues most important to business and to the broader economy.

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