OLIVER HARTWICH: Hormuz crisis may force government reform

When oil prices spiked after the Strait of Hormuz closed, New Zealand’s ministers lined up to reassure the public. Fuel stocks were “healthy.” There was “no need for panic.” The associate energy minister assured New Zealanders that supplies were not under threat “in coming months.”

What the ministers did not dwell on is that government agencies are now briefing them daily on supply disruptions extending well beyond petrol. A fifth of New Zealand’s fertiliser imports come from Saudi Arabia, shipped through the strait that is now closed. For a country whose economy runs on grass-fed agriculture, a fertiliser shock in autumn is no small matter.

Quietly, officials are preparing contingency plans for an economic crisis that could yet require drastic measures.

New Zealand has been here before, and recently. This is the country’s fourth major economic shock in six years, after the pandemic, an inflation crisis and a recession.

Each time, the politicians have told us we were unlucky, that global forces were to blame.

That framing is too convenient by half.

Every one of these crises landed harder than it needed to. And the response to each has been the same: borrow enough to keep life tolerable, have the Reserve Bank inject a few dozen billion dollars on top, and avoid the structural reforms that might have prevented the next crisis from landing just as hard.

John Key, who led the centre-right National government from 2008, added tens of billions of dollars to the Crown debt after the global financial crisis and Christchurch earthquakes. He had enormous political talent and capital, and he achieved some useful reforms in his first term. But given what he had to work with, his overall reform record was modest.

Grant Robertson, Jacinda Ardern’s finance minister, borrowed NZ$70 billion for COVID. The Royal Commission estimated that at least NZ$30 billion of that went on non-pandemic spending. When Ardern resigned in early 2023 and nine months later, voters turfed Labour out.

Finance Minister Nicola Willis inherited the mess in late 2023 and is projected to add another NZ$72 billion in net Crown debt. She does not have a pandemic or an earthquake to excuse it.

Debt is an anaesthetic. It keeps the patient comfortable enough to refuse surgery.

The borrowing masks a deeper rot. New Zealand’s policy settings should, according to the OECD, produce GDP per capita 20 per cent above the OECD average. The actual figure is more than 20 per cent below it, a puzzle economists have taken to calling the productivity paradox. When the Reserve Bank raised interest rates to kill post-pandemic inflation, the economy buckled because there was no underlying productive strength to absorb the hit.

New Zealand generates over 80 per cent of its electricity from renewables, yet the prime minister had to declare an “electricity crisis” in 2024 when a dry winter collided with gas shortages.

Why has none of this been fixed? Every politician in Wellington knows the diagnosis.

The Productivity Commission, the OECD, the IMF and the think tank I lead have all published it, repeatedly.

In 1984, New Zealand embarked on one of the most radical reform programmes in the developed world. Roger Douglas floated the exchange rate, dismantled import controls and overhauled the tax system. His National Party successors largely de-regulated the labour market and curbed the welfare state.

Those reforms were possible because Muldoon’s economy of wage freezes, price controls and grandiose energy projects had failed so completely that there was nothing left to defend. Reform became politically cheaper than the status quo, which is the only circumstance under which democracies embrace radical change.

Douglas drove the reforms, but David Lange pulled the plug once the political pain grew intolerable, replacing him as finance minister with the more cautious David Caygill. Every subsequent prime minister has taken note. A prime minister who attempts bold reform and fails pays the price at the next election, or sooner. One who changes nothing can govern for a decade and retire popular. Few voters lose sleep over a widening productivity gap.

Even when a government arrives with reformist intent, the machinery grinds it down. The Luxon government promised to replace the Resource Management Act, New Zealand’s much-maligned planning law. The Bills that emerged dropped property rights protections and cost-benefit requirements. The coalition agreements also promised automatic approval for medicines cleared by two trusted overseas regulators. Officials gutted that policy into yet another bureaucratic process.

The public service expanded by 30 per cent under Ardern, but nobody would seriously claim it became more effective. A more politicised bureaucracy proved no better at delivering basic services and remained remarkably skilled at diluting ministerial ambitions until they were unrecognisable.

Many New Zealanders would not describe their situation as comfortable. The cost of living is punishing, wages are stagnant, and housing has been grim for a generation. But it is not uncomfortable enough to force a reckoning. Unemployment peaked at 5.5 per cent in this cycle, not 11 per cent as in 1991.

The 1984 reformers had the political luxury of catastrophe. Their successors have had three decades of muddling through, and New Zealand’s long slide down the OECD rankings, briefly interrupted by the reforms of the 1980s, has resumed.

New Zealand’s three-year parliamentary term, one of the shortest in the developed world, compounds all of this. A Bill to extend it to four years had cross-party support and passed through select committee, but it has been languishing on Parliament’s Order Paper since last August. The deadlines for a referendum have passed, so the proposal is effectively dead. A law designed to give governments more time was strangled by the time pressures it was meant to address.

Australians watching from across the Tasman should resist the temptation to feel smug. Strip away the mineral rents and the patterns look uncomfortably similar. Australia’s Henry Tax Review produced 138 recommendations for reform in 2010. Three were implemented. The housing crisis worsens with each passing year, and a regulatory burden that everyone denounces somehow never gets lighter.

The Strait of Hormuz may yet do what three decades of reports and recommendations could not. If the crisis drags on and oil stays above a hundred dollars a barrel, the damage to both countries could be severe enough to break through the comfortable inertia that has defined them for a generation. Catastrophe, after all, is the one thing that has historically made reform possible.

If only there were a less painful way to get there.

Oliver is the Executive Director of The New Zealand Initiative where this article was sourced.

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