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In NZ's old first-past-the-post political system, we knew what the government would be on election night. The winning party assumed power based on a bunch of promises, most of which it was free to dump in the future with the defense that "circumstances had changed". And that may have well been true. Maintaining flexibility can be a virtue since it allows one to adjust policies as new information arrives.

However under MMP, once a coalition agreement that binds all parties has been drawn up, it becomes difficult to renege on the plans made in that document. Since if one party tried to dump a part of it, then the other coalition partners would be affected and may not agree.

The upshot is that the coalition agreement which National, ACT and NZ First are about to sign effectively binds them to a committed course of action over the next three years. Renegotiation would be hard. Let's say, for example, the fiscal situation is found to have weakened in a few weeks time and inflation is up again, making National's tax cuts less tenable and its original desire to raise revenues from foreign buyers more important. It could hardly renegotiate the agreement with ACT and NZ First that may have locked in the those cuts and dumped the foreign buyer tax.

Is commitment good or bad? Whether policymakers should commit to a certain course of action or have flexibility to change is a central question in economics, particularly regarding monetary policy. Reneging on a promised route can lose you credibility, but having one's hands tied so you can't change course depending on incoming information can also be dangerous.


As coalition negotiations drag on, it has been left to speculation about what disagreements are taking place. They cannot be on economic issues. The differences in terms of finance-related policies between National, ACT and NZ First are trivial and inconsequential. It cannot be that the nation doesn't have a new government due to sticking points over matters like National's foreign buyer tax which has been featuring prominently in the mainstream media, nor for that matter any other tax or spending policy. For example, the foreign-buyer tax would only raise around 0.1% of GDP.

In terms of other tax policies, here is one of NZ Firsts "founding principles":

Our long-term objective is New Zealanders paying less tax.

It is identical to National's and ACT's. As for fiscal policy, NZ First wishes "to create surpluses to deal with unfunded commitments and to pay down debt". It could be copied from the ACT Party. None of them is offering anything remotely resembling a radical restructuring of a single part of our economic landscape.

So what is going on? The main differences between the coalition partners lie in the non-economic arena, particularly matters pertaining to race. NZ First doesn't remotely share National's vision of mass immigration since in its view that does not put New Zealanders "First". And of course on Treaty issues, ACT & NZ First are miles away from National.

Consequently, forming a coalition appears to be fraught not because of anything to do with economics, but because NZ First and ACT know full well that should the Nats water down those two parties strongly-held views on race-related matters, then both those two minor parties will be abandoned by their supporters at the next election.

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Robert MacCulloch

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