New Zealand PM Says Fiscal Restraint Key to Taming Prices, Stoking Growth

Ben Westcott
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(Bloomberg) -- New Zealand needs to check government spending for it to successfully tame inflation, Prime Minister Christopher Luxon said weeks before releasing his administration’s first fiscal blueprint.

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The government is determined to get New Zealand’s “books in order,” Luxon said in an interview with Bloomberg Television’s Haslinda Amin on Tuesday in Singapore, where he’s leading a trade delegation as part of a three-nation visit to Southeast Asia including Thailand and the Philippines.

In a wide-ranging interview, Luxon expressed concerns on the Middle East conflict as well as rising tensions in the South China Sea, seeking deescalation and a path toward stability and security. He emphasized the importance of China as an economic partner and reaffirmed his plan to visit. However, Luxon said he won’t be able to make the trip this year.

On the domestic front, he said cutting wasteful expenditure is a priority for the government, as it seeks to reverse an economic downturn. New Zealand’s economy slumped into recession in the second half of 2023, and has contracted in four of the past five quarters.

“We’ve had an 84% increase in government spending in the previous six years, and what we’ve acknowledged and what we’ve identified is that actually there’s a lot of inefficient and wasteful government spending,” Luxon said, ahead of the budget due to be presented on May 30.

Some economists expect the recession to extend into this year as the central bank keeps interest rates high to rein in price pressures.

Luxon said checking government spending is the “way to support lowering inflation,” which then “brings those interest rates down and gets the economic growth happening as well.”

Annual inflation slowed to 4% in the first quarter from 4.7% in the fourth, data showed Wednesday in Wellington, though a gauge of domestic price pressures remained elevated. Stubborn inflation in the US has led the market to price a rate cut by the Federal Reserve in September instead of July previously, which could in turn delay any easing by central banks globally.

New Zealand’s Reserve Bank has said it doesn’t intend to start cutting interest rates until 2025, though most economists and investors expect the weak economy will prompt a pivot to monetary easing later this year.

“You’ve actually seen no further rise in interest rates, we’ve seen inflation trending down. We hope to have it back within our band by the end of the year,” Luxon said. The inflation target range is 1-3%.

Below are some excerpts from the interview with Luxon on other topics:

On Iran’s strikes on Israel and the tensions in the Middle East

“We condemn Iran for the attack. I mean it was unprecedented in terms of what we’ve seen in the region. But what’s important now is that actually all parties show restraint. To be honest, our primary thought is actually with the suffering, the pain and suffering of the people in the region. It’s been a region that’s gone through a tremendous amount.”

On New Zealand’s relationship with China

“We have a longstanding and important relationship with China, it’s been the case for many decades now. But what we do is we cooperate where we can, and that’s in areas of trade and certainly in areas of climate change. We have a strong set of values, where we have differences of opinion, given our differences in our political system.”

On when he plans to visit China

“I will do at some point. It won’t be this year, just by virtue of the schedule.”

On New Zealand’s plans to join Aukus

“We are open to exploring pillar two of Aukus to see whether there’s any opportunities for any involvement there. Obviously the pathway has been opened up for pillar two discussions and conversations in the recent weeks and we’ll obviously take our time over the course of the coming months and year to consider and explore what they may look like.”

--With assistance from Tracy Withers and Alex Chandler.

(Updates with inflation report)

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