New Zealand's kingmaker has spoken

NZ First has announced that it will form government with Labour and the Greens, with Jacinda Ardern becoming New Zealand's second female Prime Minister (see Lessons from New Zealand for our pre-election thoughts). Going against the popular vote, Winston Peters stated that "the people of this country did want change. And we have responded to that".

Before making the announcement he warned of trouble ahead, noting that his "first priority is to prevent economic slowdown". He also signalled that he would change monetary policy in line with NZ First and Labour policy but will not go as far as the "Singapore model", i.e. the currency will continue to float rather than 'managed' against a basket of currencies.

It's a big shake up, but from our perspective this is the worst possible outcome for New Zealand. To go against the popular vote - the Nationals had 44% of the vote, with Labour garnishing just 37% - NZ First must have been paid.

And paid handsomely.

We are not unfamiliar with such an outcome over here in Australia, with Messrs Rob Oakeshott and Tony Windsor selling Australia down the river to enable our very own Labor leader, Julia Gillard, to hold onto power back in 2010. That agreement led to billions being spent on pet projects as well as the re-election of Labor and everything that went with it, such as the colossal failure that is the National Broadband Network (NBN).

In our home state of Western Australia, one Brendon Grylls went rogue and subsequently acquired A$7bn of state funds over a decade to finance regional white elephants. This in a state that still runs a budget deficit of A$2.5bn and has A$32bn in net debt.

So how bad will it be in New Zealand?

The kingmaker himself, Winston Peters, has already been confirmed as the new deputy Prime Minister and has secured four ministerial portfolios and one under-secretary position. Everyone already knows about his anti-immigration stance, so restrictions there are now a certainty.

He also looks set to change New Zealand's monetary framework, having previously advocated for adding a mandate of "...maintaining an exchange rate that is conducive to real export growth and job creation". New Zealand is currently without a Reserve Bank Governor, and one of NZ First's priorities may well be to influence that process.

There are many more NZ First policies and time will tell how many (or watered-down versions) will be adopted by Labour. But they all have a common theme, and that theme is that they will be expensive. Don't expect New Zealand's budget surplus to remain for long, nor for its net debt to GDP ratio to be reduced as was planned.

About the author

Dr Justin Pyvis is the Founder and Chief Economist at Pixelics. Justin is a published academic with a wealth of experience from working at AECOM, a global consultancy on the Fortune 500 and more recently with Asianomics Group, an economic, corporate and technical analysis research company based in Hong Kong.