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Home , Barbara Kuriger, Chris Finlayson, Darroch Ball, Eugenie Sage, Julie Anne Genter, Marama Davidson

BILL, WINSTON, JACINDA, JAMES AND THE 2020S The Investment Store and Devon Funds Management clients Colin James, 27-28 September 2017

1. A very brief word on the context • Through the 2010s the globe has got more turbulent in a number of ways. • Geopolitics are disordered: China's territorial claims; Russia's destabilisation of Ukraine and eastern Europe; trans-Atlantic populist upheavals (Brexit, Trump); and the Arab chaos, which reverberates in bordering countries. Emmanuel Macron's astonishing wins in France from outside the traditional party/political structure offer hope for reform in France and a stronger Europe (with Merkel) but can he hold his new force together? This is compounded by terrorist and anarchist disruption. There is increased insecurity, requiring heightened intelligence activity. For tiny this political globalisation could be difficult to navigate. • Demographic remixing is weakening national identities and cohesion. This demographic globalisation is a major source of and a threat to economic globalisation. • Global issues – notably climate change, energy, water and untreatable pandemic diseases – are becoming more prominent and pressing and require international cooperation. • Economic globalisation faces growing opposition in advanced economies, notably the United States, and thus to state-to-state agreements, particularly where they focus on regulatory convergence. But digital connectivity will remain a globalising force. The global economy is growing more slowly, in part reflecting changing demography. Old orthodoxies aren't working, provoking a first-principles political economy debate. • Disruptive technological change (technological globalisation, "crowd" activity) is transforming communications, finance and capital-raising, manufacturing and services, education, health care and social assistance, connecting previously national or local markets, intruding deep into private lives and aiding insurgency and terrorism. This builds huge power centres and undermines them: some consumers are choosing to "go local". • Disorder makes a disjunctive shock a very real possibility. That would alter the landscape. The global financial crisis was such a shock. World War I was a far bigger one. • In northern democracies younger generations are increasing their influence in business and politics: note support for Bernie Sanders (United States, 2016), Jeremy Corbyn (Britain, June), Justin Trudeau (Canada) and Macron (France) – they want a change from post-1980s orthodoxies (as do many middle-aged and older who have not done well). • New Zealand is in a little bubble: no terror attacks (yet), no refugee flood, economic output ticking along (though on a per capita basis in recession in the December/March quarters) and business and consumer confidence firm – and a bicultural settlement. But very high immigration, ultra-high house prices, seriously high household debt and low productivity give cause for concern. Longer-term issues are mounting, including climate change and future superannuation costs, embedded inequalities of wealth and income and life chances and regional disparities in population and economic growth. Also, as a very open society and economy, New Zealand is highly vulnerable to a global shock. And this election has reflected a version of the younger-generations' wish for change.

P O Box 9494, Marion Square, 6141, 021-438 434, [email protected], www.ColinJames.co.nz 2. The new Parliament: a big shift is under way • This election marks the beginning of a generational shift in politics and policy. The specifics of the coalition negotiations will make some difference in timing and speed of policy change but will not stop it. There are strong exogenous influences which will force change and the three cohorts up to around 45 have different experiences, mentalities and value sets from the over-50s cohorts. These differences are particularly marked in the under 30s and under 25s, who have grown up in the digital era. • The last big generational shift was the coming to power in 1984 of the generation that grew up after the second world war. This generation brought very different values to the cabinet table from those of its parents. There was a profound policy shift in economic, foreign, social, indigenous and environmental policy: New Zealand opened to the world, became truly independent and set down a path towards being bicultural. • That generation has now largely departed but has left a long shadow reaching down to those in their 50s. So the 1980s policy settings have broadly persisted, adjusted first by Clark governments' "third way", then by circumstance during the present government. Innovation, notably "social investment", has so far been broadly within the 1980s context. • The election has near-doubled the last Parliament's 12 under-40s to either 22 or 23, depending on the final count, which is a fifth of the new Parliament, and has similarly boosted the 40-45s. Overall, somewhere around a third will be under-45. Labour's , at 37, is Y-generation. One other on her front bench is under 40. Altogether, nine of her MPs now are under 40 and a similar number are 40-45. National has eight under 40 (one under 30) and a similar number are 40-45, including a potential future leader, , 40. The Greens have at least three under 40 (one under 30), four if the final count gives them one more seat. Leader James Shaw is 44 and his likely next co-leader, , is 43. has , 35, and , 43, in its current caucus. ACT leader David Seymour is 34. These lower-X/Y cohorts will likely dominate governments through the 2020s. • As noted above, in the population at large this lower-X/Y cohort and the next cohorts, the millennials and younger, have different life experiences, in part driven by digital technology and connectivity, and different perspectives, particularly on the natural environment. Their upbringing has been in a more stratified society, including in home ownership. Work and income are less secure and likely to be still less so in the 2020s. These endogenous and exogenous influences on the younger cohorts do not automatically translate into a 1980s-type radical policy shift because in some ways they are "conservative" (whatever that means in the modern context). So the big responses to the deep exogenous changes may not come until those now under 30 – the millennials – take power, which will not be until well into the 2020s. But business should expect from the early 2020s and through the 2020s significant and probably major rethinking of policy and implementation, to adjust to 2020s realities. Obvious candidates for rethinking include tax (wealth/assets in, environmental impacts in, offset by lower taxes elsewhere, including income?), environmental stewardship, the means to assure social cohesion and stability and how to incorporate international

2 realities into domestic policy and manage/adjust to exogenous influences. This will affect the business operating environment.

3. Parliamentary mathematics and government equations • has said stitching up a government will likely take two to three weeks. has said he wants to wait till the return of the writs on October 12 but may have meant the final count, due 2pm October 7. Jacinda Ardern has given a similar timeline. Negotiations could start earlier but will likely be influenced by the final count. • The final count, which includes 384,000 special votes not counted on election night, is likely to change how many seats each party gets. On election night the seats went National 58, Labour 45, New Zealand First 9, Greens 7, ACT 1. In 2014 National's election-night score of 48.1% dropped to 47.0% in the final count. A similar adjustment this time would cut National's percentage from 46% to 45% and cost it one seat and, if the adjustment is greater, it could cost it two seats. The Greens need only a slight lift (which is likely) to take its seat total to 8. If the 2014 pattern applies, Labour may also get a lift to 46 seats. In that event National would lead a Labour+Green combination by only 56 to 54. This could be a factor in Winston Peters' and New Zealand First's decision which side to back because a Labour-Green-New Zealand First combination would have 63 seats, two clear of a majority and so with some leeway. On election night figures a National- New Zealand First combination had 67 seats to the three-way combination's 61. • Which way New Zealand First will go is not a confidently predictable. Possible factors in the decision include: Favouring National: –National is the largest party and can do a straight two-party deal. –Peters chose National as his political vehicle in 1975 and was National until he was thrown out in 1993 and until then thought of it as "family", as put it. –English has more leeway than Labour/Greens to compromise. National is more pragmatic and more focused on power over principle, so can more readily make concessions, as in the 1996 bidding contest. So National can perhaps indulge Peters' "bottom line" of a binding referendum on abolishing Maori seats (and campaign against it). Labour and Greens cannot. –Labour's surge since July has probably stripped out most of the Labour-leaning support that had gone to New Zealand First, leaving a support base that is nearer National than Labour. New Zealand First's support was over 13% on average in July, nearly twice its election night result. A complication is Peters' intense dislike of . Favouring Labour –A Labour-led government would be in its first term with good prospects of re-election. –A binary Labour/National assignment of New Zealand First conference delegates would class more as Labour-ish than as National-ish. The some goes for the policy platform, though Labour cannot agree to a binding referendum on Maori seats. –There was more cooperation between Labour and New Zealand First MPs in the 2014-17 term.

3 –Joining National would be joining a fourth-term government facing a stronger Labour opposition and facing mounting problems in health and housing and other issues. The odds on winning a fifth term would be long and fifth-term wear and tear could sink the junior coalition partner. When New Zealand First joined National-led and Labour-led governments in their declining third terms it dropped under 5% in the subsequent elections. –National fired Peters in 1998. Labour treated him with respect. –While Peters dislikes the Greens' policy positioning on environmental matters, there is less distance between him and James Shaw than with previous Green co-leaders. And a way might be possible to make the arrangement work with the Greens involved at a lesser level. Jacinda Ardern has the innate management skills to make that work and maybe build Labour's vote, as did between 1999 and 2002, especially as beneath Peters and deputy leader the New Zealand First caucus is now more centrist, with some able, educated MPs. • New Zealand First could choose just to abstain on votes, in return for policy concessions. This could apply only if National was the minority government being tolerated because it would have a majority over Labour+Greens and the reverse would not apply. This would be an unstable arrangement, unlikely to last three years. So there could be another election or New Zealand First could swap sides. • Peters is 72. He could well not see the term out – z possibility is appointment to London or Washington. • Apart from Peters, the key New Zealand First people are Fletcher Tabuteau, Ron Mark, , . Darroch Ball and Clayton Mitchell

4. Implications for the next two/three years – National-led government • A National-led government's tone would aim for "incremental continuity", adjusted for significant concessions to the New Zealand First on economic and social policy. Exactly what concessions would be made is not predictable in advance but would likely include some constraints on immigration, foreign investment and trade policy and more overt backing for economic development, including in the regions. This would result in a significant change of pace and tone from three terms in which National could drive a stable programme with only relatively minor adjustments to accommodate small coalition partners and diversions to fight brushfires. Accommodating New Zealand First would add to the normal strain on a fourth-term government (viz, 1922-25, 1946-49 and 1969-72) as it shows its age, as tensions surface and as the public begins to weary of it, all heightened if, as in 1946-49 and 1969-72 the opposition is developing momentum. In addition, Labour in opposition would be stronger than in the past three terms. It would almost certainly retain and build on its new leadership and reorganise the wider party. It has brought in 17, mostly able, new MPs on the election night count (plus Willie Jackson, who was an Alliance MP 20 years back). • A re-elected National would also likely change its top personnel during the term. Bill English was last year looking towards a new role outside Parliament. He might serve out three years and fight the 2020 election but that is unlikely. He would by 2020 be 58 in a caucus with many new younger faces. A factor prompting a later rather than earlier

4 departure is that he would probably want to see "social investment" more securely embedded in ministers' thinking and action. Steven Joyce is not a career politician but likes the rough-and-tumble. He could take over from English. But that would be seen as transitional, which may not appeal. Other prime contenders would be as a transitional leader, Simon Bridges, representing the younger cohort and now finding his feet, and , focused and back in favour though linear-thinking. Paul Goldsmith would logically have a claim to be Finance Minister but that does not say he would be. Rising are whips Jami-Lee Ross and and 2014 intake backbench MPs and Chris Bishop. Of other ministers, Todd McClay has been competent in trade; has built an impressive track record in settlements; Jonathan Coleman has not got on top of health sector resourcing and has upset most of those working in it – might take over; has ability and is open to new thinking but has yet to grow into full education minister; English mate Nick Smith still has oodles of ability to get on top of mind-boggling detail but is too quick on the policy trigger and digs too many holes into which he then falls. English's reshuffle in May 2017 left little room for much change early in a fourth term, especially if New Zealand First ministers have to be accommodated. But there is a raft of able new candidates on the way into Parliament in safe electorates. • "Incremental continuity" (noted above) is the mature form of Bill English's "incremental radicalism" of 2008-14, which was to make incremental changes in a clear direction, taking the public along and reaching a point after nine years which would have been thought radical if done in the first six months or a year. The challenge for National would be to combine this with policy renewal and New Zealand First's wishes. • A core issue for National would be to develop social investment. Can it be broadened to look more like asset building, as some officials seem now to be exploring? How does it apply in health and education? Some policy announcements so far, eg, on mental health and education, suggest it will. How far will be able to go in buying the services it needs, as it is empowered to do, instead of just cooperating with other agencies? Can the investment concept be extended into environmental issues? Will the Treasury succeed in presenting a budget that accounts for "investment" in social (and environment?) programmes with long return horizons and differentiate it from spending? Related: can the Treasury succeed in converting the budget from a profit-and-loss account to a balance- sheet-based one? Qualified positive answers to all that. Note that the Treasury aims to widen its March investment statement to include natural, social and human capital alongside financial and physical capital – in keeping with its living standards framework incorporating "wellbeing economics". National is not keen on "wellbeing economics". A related issue is contracting not-for-profits to get innovation. Contracting is still short-term, tight, complex, over-legalistic. Multi-score-page contracts work against the very advantages not-for-profits might bring to social services. Whanau ora, now better based, might offer some pointers. Departments and ministers have to learn to live with failures (the public services equivalent of "creative destruction"). New Zealand First can probably go along with most of this.

5 • Another related issue is the widening role of departmental science advisers. Sir Peter Gluckman says the guts of the recent mental health package was initially assembled by the science advisers and there is some interest among ministers in using this process to address other knotty issues, such as how to get the country predator-free, reduce greenhouse gas emissions and improve water quality. If so, this could turn out to be major procedural innovation, on a level with social investment. • Social investment's reliance on metadata highlights big risks, identified in a report on 19 June by Sir Peter Gluckman. Aside from Statistics NZ, few, if any, departments/agencies have safe systems in place. From the outside, it looks like an accident waiting to happen. This ties into the ambitious plans to expand digital interaction between the public, including firms, and government agencies. Where and whether New Zealand First fits in this is unclear. • Climate change would be a major challenge. New Zealand is expected under the Paris agreement to detail its 2020-30 emissions trajectory before 2020. Paula Bennett and Steven Joyce kicked this off to the Productivity Commission, to report in June 2018. The emissions trading scheme needs substantial overhaul. Still to be worked out is how New Zealand businesses and/or the government buy emissions cuts offshore to obviate the need for drastic cuts at home heightened by failures in afforestation and electric cars. Stronger guidance for district and regional councils on adaptation is long overdue. A disturbing May report commissioned by the Ministry for the Environment was shelved by ministers (but then leaked this month). Other environmental issues would be on the agenda, with freshwater at the top. Many National supporters see their conservatism as including conserving the natural environment. The Bluegreens ginger group had 37 National MPs affiliated in 2014- 17. Younger MPs are less climate-change-sceptical than English and Joyce and some favour more action. New Zealand First has been taking more interest in environmental issues but will not want initiatives to affect regional economies too much. • Tax and related rebates would need much more attention, notably to lift the $70,000 threshold but also an overhaul of the messy tangle of tax rebates (notably Working for Families), special allowances, thresholds and abatement rates. If so, that would logically be in the 2020 budget, as Steven Joyce highlighted in his PREFU comments. • Fiscal strategy might be problematic. Pressure will grow for much more health funding than the 2017 budget allocated, notably in 2019-20 and 2020-21, just to meet demand. Concessions to New Zealand First, for instance on health, police and national superannuation, would come at a cost. A global shock would add pressure. Expect a more blatant election-year budget in 2020 because (a) winning a fifth term is harder than wining a fourth term (the last fifth term in 1925-28 turned to custard) and (b) New Zealand First would want some winnings to keep its supporters onside. The CBAx (cost-benefit-plus) tool requiring agencies to detail outcomes resulting from budget bids would continue to be developed but might need to be waived for some New Zealand First programmes. Monetary policy poses another challenge, from the root-and-branch Treasury review and from New Zealand First, which wants more relaxed settings (though is also aware low

6 interest rates are not good for its core older constituency). • The Business Growth Agenda might need some further adjustment to accommodate New Zealand First's regional focus though regional development plans could be tweaked to address most of its ambitions, with some tweaking for pet issues. • Potential touchy matters for New Zealand First: privatisation: foreign purchases of companies and land; trade agreements; migration. It is not obvious how New Zealand First's policies on these, especially migration, can be accommodated, though English can probably find ways and Peters won't push all of them equally hard. Also, regulatory reform to anticipate the 2020s, which some agencies have been working on, might not easily be saleable to New Zealand First. New Zealand First might also cause problems relating to Treaty of Waitangi issues, matters raised by the Leaders Forum and Whanau Ora. There is also Peters' insistence on a Maori seats abolition referendum and opposition to mandatory Maori consultative or advisory panels for local and regional councils. The more concessions to New Zealand First, the less in-charge National would look. That could prompt tension if some, especially younger, MPs wanted to reassert National's free-trade, deregulatory credentials (as in 1997 when ousted ).

5. Implications for the next two/three years – Labour-led government • The Jacinda effect: By any standards, Jacinda Ardern's impact on the election was big: from a Labour poll average of 24% in July to a 36%, maybe 37%, vote. How come? Ardern has substance, in character, intelligence and person-to-person dealings. She connects eyes-to-eyes, which conveys her substance to individuals and crowds. She does not have a nasty cell in her body (or soul). She can be funny. She is warm, without artifice. She likes single-malts and doesn't like Earl Grey tea. All that suddenly came through, to the media and to the public on August 1. The campaign launch on August 20 was bigger than any in the past 50 years and the overflow crowd spontaneously enthusiastic. Crowds since were similar. She was mobbed by the young. That can't be stage-managed. Ardern is a macropersonality, as Justin Trudeau and Emmanuel Macron are. (Key was but in a very different manner.) She appeals to 18-40s as someone who can represent them. She appeals to older liberal-left people as someone who can rebuild social justice: for them she has something of the Bernie Sanders/Jeremy Corbyn appeal. She will likely be Prime Minister, if not this time then next election (unless some untoward event intervenes or she decides not to be). As Prime Minister, she would prove a capable manager of ministers and officials. She would not be a revolutionary Prime Minister but she would be a reforming one. She is very close to who will be her key go-to on policy, whether in opposition or government. • A Labour/New Zealand First +Green arrangement would be a mix of some ambitious policy changes, to in part reflect next-generation thinking and wishes, but also some thwarted Labour and/or Green ambitions.

7 If problems arose, Labour would have a realistic option of an early election to resolve impasses and bid for a mandate. If the Greens were still in reasonable shape, there would be a fair prospect of an outright Labour+Greens win. • Labour's key people are: Jacinda Ardern, Kelvin Davis (Maori development), Grant Robertson (finance and state services), (housing, transport), (climate change, energy), (education), Andrew Little (justice), (welfare), David Clark (health), (economic development) and David Parker (foreign affairs, environment, water). Up-and-comers include Jenny Selesa and . Most of these are lower-X or Y-generation. The key Greens are James Shaw, a business background and on the environmental side of the party, Marama Davidson, now No 2 (poverty, social housing, Maori development), , 37, very smart (climate change, transport and heath), (environment, clean rivers) and Gareth Hughes (energy, tertiary education). • Labour (and Greens) would want to make big policy changes in several areas: Environment and climate change policy would be more ambitious on domestic mitigation than National and less business-friendly (except to "smart green" businesses). Generally Labour and Greens would want to be much greener and more interventionist, especially on water, and also more assertive on renewables in energy and transport. New Zealand First would want caution on climate change but could go along with energy and transport initiatives, particularly regional rail. Labour backs gas exploration and exploitation as part of the transition to a lower- carbon economy by substituting gas for coal, so wouldn't cancel block offers. But over time Labour would want to replace fossil fuels with renewables in light transport, building heating and industrial processing, with safeguards for workers. New Zealand First would back continued exploration/exploitation so Green influence would be limited and in any case National would back it. Jacinda Ardern, Grant Robertson, James Shaw and Julie-Anne Genter are well aware of the Treasury's wellbeing economics focus on stocks of financial, natural, social and human capital in place of simple GDP and would want to build it into social and environment policy. It fits comfortably with both parties' more ambitious social support policies. Social investment would likely be kept in some adapted (and renamed?) form but built around a notion of asset building and not liability avoidance and widened from the "most vulnerable" to what some call "proportionate universality", attentive to the lessons from the longitudinal study's findings that effective early intervention in a child's life, if things are going wrong, has the greatest long-term individual and societal benefit. Labour's families policy encapsulates this. In social policy generally, there would be some continued devolution of service delivery to not-for-profits but not to for-profit firms. Labour (and Greens) would want: a much expanded social housing programme; much increased funding for health to account for population growth and ageing and higher health inflation (including introduction of new interventions) and a rebalancing back to primary care and prevention; in education lower costs for students (free?), more focus on non-cognitive skills critical to the 2020s working environment but also more work-related skills training and retraining and higher professional status for

8 teachers; more emphasis on fixing up criminals and less on punishment in justice; and much more generous income and other support for the poor and disadvantaged. New Zealand First could go along with most of this except maybe in the justice area. Winston Peters might be sceptical of a wellbeing economics focus but some in his caucus, for example Tracey Martin, might not be. Labour (and Greens) would want a more union-friendly labour market and workplace safety policy, more active support for those who have to move from one occupation to another as technology and global forces impact, more attention to pay equity, particularly between genders, and payment of the "living wage" for government employees and eventually for employees of suppliers to the government. New Zealand First could go along with this. It is proposing a $20 minimum wage. On fiscal matters, Labour (and Greens) would set a slower path to net debt of 20% of GDP and remove National's 10%-15% objective: more spending and less income tax relief. New Zealand First could broadly fit this. Labour (and Greens) would gear tax policy to the less-well-off, actively explore wealth/assets/land and pollution/environmental damage taxes, with possible offsets. They want income from capital gain taxed. Whatever changes were proposed would be put to voters in the 2020 election. New Zealand First is wary of most of this and hostile to wealth tax. Labour (and Greens) would extensively rethink monetary policy. Labour thinking, which the Greens broadly support, is to inject an employment target (probably around 4% unemployment) and to get decisions made by a board that includes three expert outsiders, though the 1%-3% target would remain. New Zealand First agrees on a rethink but might disagree on details. Three areas of broad agreement across Labour, Greens and New Zealand First are for: –more focus on innovation and "manufacturing" to diversify the economy, including "green" manufacturing; –more use of state size, muscle and money to address issues, for example, housing; –continuation of the independent foreign policy (though New Zealand First would be more friendly to the United States than Labour and Greens); –wariness of investor-state provisions and excessive IP protection in trade agreements; opposition to foreign land/house purchases which, if followed through, would kill TPP11; Labour would otherwise pursue free trade but would need to reach across to National for support for any new agreements because the Greens and New Zealand First oppose free trade. Labour (and Greens) would want more respect for local democracy, a stronger role for councils and more active regional development.

6. The 2020 (or before) election • A National fourth term would likely be rocky and Labour would be a strong opposition and opinion polls would likely reflect this by end-2018. There would (very?) likely be a Labour-led government in 2020, unless Jacinda Ardern departed or Labour and the

9 Greens divorced or there was a swing to a new force that captures millennials. • A Labour-led 2017-20 government would have a good to very good prospect of a second term. Labour is more settled than at any time since 2008 and National in opposition would go through a leadership and top echelon adjustment. The Greens should come right if they survive this election though their longer-term future is in doubt. However, if a Labour-led coalition was hit with a global shock and the resultant stress fractured it, a National win in 2020 could not be ruled out. • Beyond 2020 much depends on how well inequalities and work/income insecurities are addressed, whether anti-immigrant resentment grows and whether there a major shock of some sort. The Jacinda effect could turn out to be transitory and depart with her, returning Labour to the long-term downward trajectory from which she has rescued it for now. If the major parties both lose traction, that would mean there would be no structured response to the stresses of the deep social change we are going through. That could fuel a populist response that destabilises politics and policy, especially if there is an economic or other shock (or two).

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