Our litigation specialist at Franks & Ogilvie, Nikki Pender, reminds me that in our 2008  election  the  Labour and National campaign virtually ignored the GFC unfolding at the same time.  The election night balloons had hardly burst before the incoming Government was faced with circumstances markedly different from those forecast in Treasury’s Pre-election Economic and Fiscal Update (“PREFU”).

Track to another election campaign and we find politicians again being allowed by the New Zealand public to run blithe campaigns in the looming shadow of GFC Redux, as if it was not there. But this time the PREFU has that shadow very much in frame. Still the election lollies keep pouring out, though the PREFU would suggest we should be worrying whether there will be enough for the rent and groceries. Why, Nikki asked in notes that I've converted to this post, is the New Zealand media not hounding all parties with balloon puncturing questions?

I have no real explanation. Nor can I explain the constrast between the straightfaced reporting  of ludicrous tax and spending offers (especially by the Maori and Mana Parties) in comparison with the sustained mockery of Don Brash, leader of the only party which has consistently called for New Zealand to live within its means, lead by the man who produced the 2025 Task Force report on things we have to do to increase productivity.

Both National and Labour costings claim to be based on the main forecasts in Treasury’s 2011 PREFU.  Yet the PREFU indicates that the short term outlook is likely to be far less rosy than projected; or to use Treasury-speak, “the risks to our main forecasts are skewed to the downside”.  According to Treasury figures the “downside” would mean that NZ’s nominal GDP, cumulated over the five years to June 2016, is likely to be $35 billion lower than the assumptions on which the politicians are basing their election promises..

But that’s not the worst of it.  Even Treasury’s more pessimistic scenario assumed that Europe would be able to “manage the region’s debt issues and stabilise financial markets”.  In other words, as NZ Herald political editor John Armstrong pithily observed after the PREFU was released, “we are in the cactus if things really turn to custard in Europe and the United States”. 

 Two weeks later, and Europe is looking increasingly custard-like.  The Greek tragedy iswill struggle for audience attention now that Italy’s cost of borrowing has climbed above the 7%  assumed point of no return without bail-out assistance. Silvio Berlusconi may or may not resign;  Greek politicians can hardly agree on a new Prime Minister, let alone on the more critical issues; and Angela Merkel is reportedly considering an exit strategy from the euro. 

 Yesterday, a blogger on The Economist website Finito reflected on the dismal outlook:

 I have been examining and re-examining the situation, trying to find the potential happy ending.  It isn't there.  The euro zone is in a death spiral.  Markets are abandoning the periphery, including Italy, which is the world's eighth largest economy and third largest bond market.  This is triggering margin calls and leading banks to pull credit from the European market.  This, in turn, is damaging the European economy, which is already being squeezed by the austerity programmes adopted in every large euro-zone economy.  A weakening economy will damage revenues, undermining efforts at fiscal consolidation, further driving away investors and potentially triggering more austerity. The cycle will continue until something breaks.  Eventually, one economy or another will face a true bank run and severe capital flight and will be forced to adopt capital controls.  At that point, it will effectively be out of the euro area.  What happens next isn't clear, but it's unlikely to be pretty.

 How will this affect New Zealand?  Apparently not enough for the parties to alter their campaign course or their budgets.  No party has pulled any announced policy in light of this week’s developments.Yesterday Labour promised $75m worth of laptops to students over the next four years and National continued to splash asset sales cash about before it is banked.  As in 2008, it seems that New Zealanders have decided to enjoy a campaign in a parallel Pollyanna universe. 

I can understand why John Key and Bill English must remain optimistic. Jeremiahs do not win elections, especially if their competitors seem to have confined their economic education to Greek textbooks.  But when the election is over how will they defend themselves from allegations of wilful blindness in running on a manifesto based on a set of unequivocally outdated assumptions?  The truth may be that they feel forced to compete in Pollyanna land because no competitor was willing to demand realism. But a broken Labour Party will not carry much of the weight of unfulfillable election promises. This time National will not be able to claim “unexpected circumstances"..  If Europe is indeed at the beginning of Christiane Lagarde's dark decade it will look all too foreseeable with the hindsight of  a few months.