Reversing a long downward trend?

US government borrowing costs appear to be increasing on fears that debt-funded spending will continue and it is increasingly unsustainable, because so much of the tax take is being eaten up in interest. It may also be due to fears of structurally higher inflation, although that’s not the majority of the pricing shift in US bonds yet (it’s mostly term premium).

The key reference rate for NZ is the 10-year government bond yield. It’s the ‘safest’ debt. It trended lower from the 1980s to a trough during the pandemic. Since then, it has risen. While the interest rate is still low, we now have a lot of debt.

The declining trend in borrowing costs meant we invested more and took on more risk. If rates trend higher, the opposite will happen.

Government debt and repayments

There are lots of measures of debt and interest payments. Total Crown, core Crown excluding ACC and NZ Super Fund, gross and net. In a crisis, it’s hard to imagine we would not use the entire balance sheet of the Crown. So for this post I will look at net interest for total Crown (and a similar concept for other countries).

The starting point differs. Figure 2 shows that well: US interest payments already take up a large chunk of tax revenue. In comparison, New Zealand is still relatively low. (This doesn’t mean its sustainable if we, like the US, keep borrowing to fund operations rather than make hard political choices on tax and spending.)

The impact is not immediate for anyone, because current interest rates only apply to new borrowing, whether additional debt or existing debt rolling over. The impact is varied across countries, as Figure 3 below shows.

Japan leads. Every 1%pt increase in interest rates costs around 1½% of taxes in the first year, and 6½% when all the older debt rolls over. Managing that kind of change, either in taxes or in spending cuts, is hard, and hugely disruptive economically, socially and politically.

New Zealand and Australia aren’t immune, but much more protected. For us the impact of a 1%pt increase in interest rates is under 2%pt of taxes.

Often the inerest costs are measured against GDP. While GDP as a national income proxy is useful cross-country comparison tool, I think tax is the right denominator, which is difficult to change and is where the money actually comes from. Notionally, governments can raise taxes, but that seems politically difficult.

Other channels: FX & private debt

But higher interest rates matter, especially in the key US market, which works as the reference point for much of the global financial system. The immediate relief is via a depreciating USD, according to theory. That affects relative prices for trade.

But it will also mean an increase in borrowing costs for others, possibly by a larger amount, because there is more fear around and that adds a ‘risk premium’ to our borrowing for mortgages and businesses.

Our private indebtedness, mainly to fund our over-priced house purchases from each other, is the main vulnerability. Households will bear a greater burden. Our whole economy is not as exposed as some, but it is still rather exposed.

There is another channel that can bite. When interest rates rise and there is more fear, it’s harder to borrow, because banks are fair-weather friends. An unwillingness to lend during periods of hardship amplifies economic effects, although it is unlikely that there will be a mass calling in of debts.

Hello financial repression?

It doesn’t mean the US will suddenly become bankrupt. It can continue to issue debt, but that might be inflated away, a form of tax, or an actual tax, which is far less likely. Even if foreign investors do not buy that debt, we have seen kings in the past force the princes and dukes to fork out the cash, or simply devalue money. A form of financial repression. Plenty of shenanigans are possible.

Keep an eye on interest rates. After decades of interest rates trending lower, they may be trending the other way, and the backwash may be unpleasant. But it may be a drawn-out affair, rather than a short, sharp change.

At 18 parental guardianship ends, can vote, buy alcohol, sign contracts, and an adult in the criminal justice system.

But not for welfare, where single 18-19 year olds cannot get Jobseeker/Emergency Benefit if combined parental income is above $65.5k (roughly one ordinary job).

MSD doesn’t truly know how many people that captures. Still, they say 4.3k 18-19 year olds will be kicked off. They concede there is no pathway to employment and this policy does not address the issues why these young people seek these benefits.

Their preferred option was to invest in training, education and improving NEET outcomes.

I agree. Clearly the politicians don’t care for evidence or advice.

No CBA done

There was no quantified cost-benefit analysis, although they noted costs exceed benefits for young people and their families. While there was no time in the Budget 2025 window, there was time before the RIS was finalised in September 2025. And there was over a year after the RIS was finalised, before the legislation and its commencement in November 2026.

The policy was designed as an immediate fiscal saving, with justification that followed. Process was deliberately scoped on operationalisation – delivery rather than the merit of the policy – and any harms were deliberately excluded. It’s a wilful preference not to know the consequences of this policy.

We have a public service increasingly unable to appraise/implement good policy. And we have politics that is short-term and craven.

My run of the Treasury’s CBAx tool gives a central estimate of -$156m NPV (at 2% SRTP). That is, costs far outweigh the benefits. The fiscal saving is a transfer from the poor to the crown in the short term, storing up worse employment, health and (in some cases) justice issues. I haven’t even done the Wellbeing estimates, because that’s no longer in vogue.

Should do good regulaion, but won’t

Judged against the Regulatory Standards Act and expectations of good regulatory practice, this policy fails on multiple counts: efficiency, proportionality, evidence, fairness/rights, consultation, and whole-of-system view. It’s all very well to exhort the need for good regulatory practices, but as we have seen repeatedly, those good processes are routinely and repeatedly ignored and bad policy implemented.

The broader NEET problem: current & future

This matters because all this policy does is kick some people off the benefit. But the bigger issue is with the 90k officially NEET (not in employment, education or training), which I think is more like 107k based on admin data. More than half aren’t on the benefit.

There will be no change to the reasons why these young people are NEET. It will simply shift a cohort from ‘NEET with support’ to ‘NEET without support and invisible to the system’. Out of sight, out of mind?

There are reasons to worry that something is wrong. Over 35k young people had a benefit as a first income in the last year, up from 22k three years ago. We can see the warning signs in concentrated truancy in at-risk groups and kids leaving school without qualifications.

A smaller share of young people on a benefit are moving into work – the exit rate has fallen from around 77% at the 2021 peak to about 53% now. There aren’t opportunities in a recession and competition is insane for the few available vacancies. NEET investments are similarly narrowing at those who are there now, rather than casting the net to catch those who are likely to become future NEETs.

Solutions aren’t easy, but could there be local actions?

I don’t know what the immediate solutions are. But we have a pretty good idea the kids in our schools today who are at risk (e.g. my esimates in the map below by TA).

Getting local communities together across schools, training orgs, local government, chambers of commerce/businesses and perhaps even MSD – whoever will turn up – I think is the way to get on with it.

Clearly central government cannot be relied on to make good policy. There are too many young people who are falling through the cracks. Better we try something local and small, rather than leaving a big chunk of our future generation without a pathway.

Of course our popualtion has grown, so the comparison should also be across the contribution to population growth.

The rate, or the natural contribution to population growth, is now 0.35%, vs over 1.5%pa during the baby-boom era (until around the early 1960s), then trended down and settled around 0.8%pa between 1980 and 2010 (that’s boomers having babies and increasing life expectancy really showing up in the data) and has been trending lower since.

The two charts below show the natural population growth in persons, and as a contribution to population growth.

Population growth is not a necessity per se, rather it is a core assumption in how we have set up our society, from taxes, spending, investing and borrowing decisions: there will be a bigger and richer generation that comes later, meaning we can run up some (or too much) debt now.

For a long time, this was true. Nationally, we still have some time. But not so locally, as the chart below shows – 18 districts now have deaths exceeding births.

The other side is strong growth in places like Selwyn, Queenstown-Lakes, Auckland, Waikato, Hamilton and Porirua – because these places are young and families are moving there.

Population growth is made up of births, deaths and migration in and out – regional and international.

Births, or fertility rates, have fallen for various reasons, including reduced infant mortality, increased cost of housing, opportunity cost of time out of work, cost of raising children, and shifting values.

Deaths have increased mainly because of an ageing population. While longevity is still increasing – and is to be celebrated – death remains an inevitability.

Slowing and shrinking natural population growth matters. Natural population growth tends to be fairly predictable – so you can largely bank this.

Migration, both regional and international, is more variable, affected by life decisions (for example to go to university), economic conditions (employment opportunities, housing, etc) and immigration policy. None of these can be banked.

Those districts where deaths exceed births are a natural experiment of ageing in New Zealand. The causes and local conditions are not uniform.

Some are retirement hotspots – encouraged by their sunshine, natural beauty, amenities and housing arbitrage (being able to sell their working life homes to fund their retirement home and lifestyle).

Some export their young (and more), mainly for education and jobs. Most do not return.

Others import workers from other parts of the country and world. I saw this in Balclutha – where Samoan is now the second most spoken language – because of Samoan workers at the freezing works in Finegand. Or the past immigrants who make up a large Cook Island community in Tokoroa. In both examples, these places experienced intense labour shortages.

Work and housing are the key drawcards for provincial NZ. When there is work, even if pay may appear modest compared to cities, lower cost of housing and little congestion can mean more money at the end of the week and a better lifestyle.

Ageing is a specific risk for local governments. Many have ageing infrastructure that has not been maintained for decades. Climate change is adding greater risk and cost. Older people – often with fixed incomes – cannot sustain large increases in rates, which are required to pay for new infrastructure and maintain what they have now.

For many places, they need to have a plan for how they would manage a shrinking population. But that does not mean giving up. Many have jobs and homes and other amenities – they could try connecting this to disaffected city dwellers, stuck on a hamster wheel of work, long commutes, congestion, high housing costs and little free time.

Could there be a win-win and buy us some time as we move to a flat or falling population reality?

By my numbers, around 43,000 families a year would be eligible. How many new children? International evidence is sceptical, so between 0 and 2,600 births a year.

That we have a low and falling firth rate is true. It has been below the replacement rate for over 40 years. So its not really ‘new’ and its already too late.

I have no problems with wanting to support children and their families. But a few issues to address. Some weekend noodling with the data to get this announcement straight in my head below.

Costing seems too light

The costing seem too light. Most children have at least one citizen parent (estimate based on some torturing of Census data, so grain of salt), and most people have fewer than 4 children, meaning most children would qualify. I think the policy will cost be roughly $214m in year one, $428m in year two, $642m from year three. This policy would be about 0.4% of our core crown spend.

Higher than NZ First’s release: “$400 million by the third year once the full cycle is established”. It seems to me they have under-costed the policy, and have only looked at the probability of the mother being a citizen, rather than either parent as per their policy.

There is of course no source of this funding; something else will have to give. No hard choices here - the usual bit of announcement politics and funding and tradeoffs happen later.

Buying a birth

Baby bonuses have been tried internationally: Australia and Hungary spring to mind. The evidence is pretty consistent: these incentives mostly change when people have children, not how many. Demographers term it tempo versus quantum.

In Australia, on the most generous published reading, its baby bonus bought extra births at around A$39,000 to A$43,000 each (Sinclair, Boymal and De Silva). A competing estimate using household panel data puts it at A$126,000 or more per extra birth (Drago and co-authors). Even the friendly number is expensive.

I ran a couple of scenarios for New Zealand. If this grant lifted births by 6% (the generous scenario), that is about 2,600 extra babies a year costing $265,000 each. If the grant only shifts timing as per the conservative scenario, it buys no new births, but helps out upcoming parents.

Hungary spends around 5% of GDP on family policy (loans, debt forgiveness, tax exemptions, housing support). Its fertility rate still fell and is very low at 1.39. If Hungary’s effort couldn’t hold fertility up, this probably wont.

Children come with financial costs

The main issue for families is they tend to have reduced income, as parents take time off work, move to part-time, etc. Illustrative only, based on published evidence (Sin, Dasgupta and Pacheco for New Zealand; Kleven and co-authors internationally): a mother on average earnings for her age who takes a year out and returns full-time forgoes about $52,500 over three years. Take a year out and return three days a week, about $111,300. The grant is $15,000.

Child poverty

Families with children already receive about $4.7 billion a year through Working for Families, paid parental leave, Best Start, FamilyBoost and the rest. This would add 14% on top.

Current instruments are targeted/means tested. A family earning $200,000 would get the full $15,000 per child. Universal policies are popular and easy to do, but expensive.

This is while 169,000 or 14.3% of our children are in material hardship. The same $642 million would be ~$3,800 per hardship child per year.

Spending money hoping for more babies despite evidence to the contrary, vs spending it on children who are already going without, says a lot about our values. So does spending money thats not been funded out of identified spending cuts or tax increases.

What would help

People are having fewer babies than they want because of unaffordable houses, childcare costs, and a job market that is still hostile to time out (which for families is a constant), plus a bunch of other things. Having children is an intensely personal and monumental decision.

International experience suggets some financial support does help to lift fertility at the margin, especially when the policies are sustained and provide stable support for combining work and family. Things like affordable childcare, decent parental leave, flexible work, and secure housing. We could spend $642m on other stuff better.

The choice

Fertility is an issue, because we are ageing fast as a society. Its been too late to lift fertility by near on 40 years. I can see the election allure of a visible monthly payment to 43,000 families – (almost) everyone likes babies.

If we had a spare $642 million a year, and we all professed to like babies so much, (if I were asked) I would look after the 169,000 children now living in poverty.

Tl;dr: I don’t think inflation is high because of excess demand and the RBNZ should not yet raise interest rates.

This is a nerdy post. I need a place to park some of thinking and pictures, and this substack is meant to be that place. It will be intermittent, because I have other time pressures (work, family, travel, etc.)

The reason is, when you look at what causes inflation, vs what describes inflation, the story is not what is out there. The current story is that inflation is already too high, much of it is from non-tradeable sectors (that is dometic and by implication, perhaps due to demand exceeding supply), and inflation expectations are becoming unanchored, there will be a wage-price spiral, and we are (in inflation terms) doomed.

Costs, wages & profits

I also look at what describes inflation, but first I want to unpack the business process for setting prices. Is it driven by costs, wages or profits? Its pretty simple in that every price must be made up of these three things.

But it gets a little complicated, because when you buy from a shop, that price includes purchases from many other suppliers (from wholesalers, to electricity and lawyers etc.), in a dasiy chain.

You have work through several layers of these linkages to understand the cumulative effect, which is what I have done in the following image. It breaks down price increases from their component sources of imports/taxes, wages, profits and there is a small wedge for some prices that I do not have this breakdown for (finance, government prices, agriculture).

If you are interested: I used Business Financial Data and Input-Output Tables to do this.

The chart shows that recent price increases are mostly about increasing profits. But the chart below shows that while profits are increasing, its because they are recovering from very low levels during the recession. They aren’t yet at some egregious highs, which would suggest ‘sellers inflation’ or profit gouging.

We may not like businesses increasing margins, but then we have live with job losses, business closures, or in less extreme outcomes delayed hiring and investment. Which we may not like either.

Non-tradable & excess demand?

We economists tend to look at non-tradeable prices, because tradeable prices are set in global markets and we can’t influence them. The domestic stuff is usually because we are increasing spending faster than businesses can keep up, so they raise prices.

But look at the chart below of some of the non-tradeable inflation. Prices of health insurnce, gas, electricity, post, council rates and ciggies aren’t going up loads because we are buying too much of these things.

Worse, many of these are necessities. Meaning when these prices we go up, we have less discretionary spending power. That is a handbrake on the economy, in fragile recovery that has already been hit by the war on Iran and associate increase in oil price and drop in confidence.

The expectations channel

There is a fear that because we will expect inflation in the future, it will drive current demands for wages and prices. But the data is nuanced. Inflation expectations can become unmoored, as it did breifly in 2022/23. But that was partly because of high inflation at the time, and partly because there was a fear that inflation would remain high for some time.

The first part, the conflation of present to the future is less important for the RBNZ, if the current inflation shock is due to a shock, as it is currently. If the second part, the longer term expectation part becomes very high, then it is a cause for concern, especially if there is pricing power in the market by businesses and workers.

History shows that short term inflation shocks have a short lived impact on inflation-expectations. When you look at inflation expectations without this known noise, the underlying picture still looks pretty stable to me (the orange line). The RBNZ should not be trying to engineer yet another recession because they fear inflation expectations have become unmoored.

Will you get a big wage increase?

The big fear, from the last bout of inflation, is a wage-price spiral. That is because inflation is high and the labour market is strong, we ask for and get big wage increases. These wage increases get passed on to higher prices, because the economy is strong enough, and on it goes.

But right now wages, excluding promotions etc, are rising at 2.0% a year, while inflation is running at 3.1%. Incomes aren’t keeping up with the cost of living, let alone driving it higher. This is confirmed by my first chart, that wages aren’t driving current inflation.

Further, the economy isn’t strong right now. House sales is a great indicator of our housing obsessed economy (HT , who coined the description for the NZ economy being a housing market with bits tacked on), and house sales have been falling since Feb-2026.

In a weak economy, with high unemployment and low number of job ads, job hunting is like hunger games - lots of unemployed vying for very few vacancies. Its hard to imagine that it will be easy to get a job and/or a big raise in this environment.

So what should the Reserve Bank do?

I reckon they should hold. Current inflation is due to one-offs and non-demand related factors: oil prices due to war on Iran, rates catch-up on decades of not increasing them, electricity prices because…actually who knows with that sector, and a margin recovery after a recession.

Some of the detail point to problems worth fixing, like thin competition in parts of the grocery and building supply chains, or councils that deferred hard calls for too long. None of those are fixed by higher interest rates.

We are not here because we are spending too much. We are here because the essentials cost more, wages have not kept up, and firms are rebuilding margins they lost. Squeeze harder and, yes, we will get less inflation, but that’s because we get fewer jobs and more shuttered businesses - becaue the RBNZ engineers yet another recession.

I hope the RBNZ takes a more careful look at what is actually happening in the way that prices are being set, what is actually driving inflation expectations, and a credible read on wage setting power of workers, before hiking and killing off a long hoped for recovery. A recovery is needed; how much longer should our young and poor need to bear the cost of these downturns to moderate inflation?

If they do hike, I will remind them it was the exact same mistake the RBNZ made post the GFC. How many mistakes can they make, before their very independence and role comes under scrutiny in the age of populist politics?

At Simplicity, where I am the Chief Economist, we commissioned market research a few months ago (Talbot Mills, Dec 2025) and found strong support to create baby KiwiSaver accounts, increasing contribution rates and make it compulsory.

This is excellent direction of travel. Public policy need not be a giant leap to perfection, rather shift the political and policy conversation about what needs to happen, then we argue about the detail. Which will inevitably happen, and change over time. We learn by doing, within the constraints of the politics of the day, as it should be in a democracy.

There were 4 strands.

1. Compulsion. This will mean everyone contributes. Some nuances are required, e.g. banning total remuneration packages.

But it will be a burden on low income people. Many don't currently contribute because it would mean lower take-home pay.

My preference would be to make the employer contribution compulsory, keep the employee contribution voluntary and unlink the two.

Auto enrollment shows those those who can afford to will. Why should lower paid miss out?

We should not fear employer contribution, a misnomer. The cost is not borne by employers - the incidence is borne by workers - the cost of employing someone is the total cost including KiwiSaver. This is a stupid line trotted out by small businesses and should be shut down at every opportunity.

2. Increasing the contribution rate to 12%. This is existing policy. Despite misgivings in some quarters, this is about right for most people. Same as Australia, but far less than countries like Netherlands and Singapore. Over 65s will also get the employer cotnribution if they work and contribute, which was previously - weirdly - not required.

3. Baby KiwiSaver, $1500 at birth. Most of us like children, and over 80% supported this (57% even for lowest support: ACT party voters).

The announced policy will cost $87m for the 57.k children born last year.

My preference would be something much more generous - to make it politically unviable to mess with in future.

I would prefer $10 a week for every child under 18, expensive at $615m. But that is a real investment in getting children and their families invested in money and their potential.

It also switches the current universality of income from over 65s to under 18s. This is the necessary demographic twist. Universal support to build wealth vs incomes is better IMO.

4. Making unconditional KS contributions for those on paid parental leave. The motherhood/caring penalty is real. Women are more likely to take time out of careers to care for children and are doubly penalised because their career trajectories after this break does not match men. This is a good step.

There were gaps, such as low income earners and self employed. Nevertheless, it shows maturity and progression. KiwiSaver done right will give future generations options to make our retirement system sustainable.

This recession has affected some groups more intensely:

Alpha-cession: Half of all job losses those aged under 20 (16k of 27k).

He-cession: Male job losses 2x women (18k vs 9k for women). Male dominated industries like construction hit harder.

Security-cession. While total jobs are down 27k, full time equivalent employment is down 74k. Hours have fallen sharply, and mix of jobs has changed: 33k fewer full time jobs, 5k more part time jobs.

Hustle-cession. People with side hustles has fallen by 13k.

Some context. Recession means we as a nation are spending less, so there is less work to be done, and that is what is showing up in jobs.

The share of the population in work and the unemployment rate has wound the clock back the clock nearly a decade to 2016.

Hours have fallen more. Its better that hours have reduced more than job shedding. History shows long periods out of work causes ‘scarring', making it harder to get back into the workforce.

It is still not as bad as the GFC, when the unemployment rate was closer to 7% than 5%. Businesses are hanging on to people, because good people are hard to find, but for how long if profits remain under pressure?

Recessions have winners and losers.

Some industries are still growing like education, utilities, finance and real estate.

Even industries that aren’t growing are hiring. ~130k people started new jobs in the last three months.

But there are few vacancies, job ads have falling sharply since late 2022. So, there is intense competition for few vacancies.

Looking ahead, every cycle turns. So far reported optimism hasn't translated into more job ads. This will be the key indicator of recovery.

What can you do?
Go south? Looking pretty good in Otago and Southland. Strong tourism and agriculture (especially dairy).

Go West? 30k (net) Kiwis went to Oz in 2024, because thing are better there. 300k growth in jobs in Australia (vs our 33k loss).

Go study? Great time to build up skills – yes tertiary, but also search out opportunities in apprenticeships, vocational education, support through MSD, etc. Qualifications aren’t everything, but they help. Technical skills and credential help to get a foot in the door, or to stand out from others. This is what most young people are doing, the number in study has spiked (+17k).

Ask? Personal recommendations are still best to find jobs.

This recession has hidden depths. Take care of those who are looking for work, and recommend them if you can help.

[I mainly write on LinkedIn, but am trying out Substack to keep my thoughts in one place that is easy to find and share. ]

Labour productivity has stalled, meaning the economy is growing but its largely because we are working harder (more workers, more hours, etc). The first picture below.

The reason we talk about it is because productivity actually boils down to more prosaic things. More productivity in a business/personal lens means higher profits and/or wages (relative to what you invest in money and effort).

I personally dislike the work productivity, it makes it sound like something mechanical, rather than greater financial comfort for less input (ideally including the cost to the environment etc, but thats not how our published measures work).

The second picture shows productivity growth in the last two decades (latest data to 2024 from Stats NZ), compared to the previous two decades:
- Productivity growth in the primary sector has slowed from over 4%pa to less than 2%pa.
- Productivity growth in the goods producing sectors (manufacturing and construction) has slowed from low to slightly negative.
- Services productivity has slowed too.

So many of our previous super-stars have run out of steam. The third picture shows that most sectors have very low productivity growth. The top 3 are:
- IT (broader but its really IT driving it up)
- retail (I was surprised by this, but clearly retailers are getting better at what they do)
- primary (despite the slowdown, remains better than other sectors)

So, what to do that isnt some magic solution from ‘government’?

Often, these conversations then move to what can government do? Often they are big things, like education, innovation, and investment policy. The government seems distracted with other things at present. Perhaps the better question would be what can businesses do?

I think there are two key things businesses can think about.

First, making sure they have the fundamentals of business right, to spot good opportunities and make the most of it. Those ingredients are good leadership, good management and good culture. Easy words, but hard to do. Requires foremost investment in leadership.

Second, if those fundamentals are present, then businesses:
a. Need to understand what the offering of best technology and qualifications in the wider context (ie external)
b. Get the right mix of those technologies and people into the organisation (by hiring people with the right attributes & training them up - the most effective tends to be informal on the job training & mentoring), and then the magic happens.

Macro trends show we are working harder but not gettting better off. Rather than asking what others can do about it, perhaps businesses could ask themselves what can I do in my business that will increase profits for owners, and incomes for workers. That is what productivity looks like in a business - and plenty of the levers are in the hands of business.

Subscribe now