New Zealand has a new coalition government -- here's what it may do to the economy

Photo by Hagen Hopkins/Getty Images

Nearly a month after the general election was held, New Zealanders finally know who will govern them over the next three years.

The shock decision from New Zealand First leader Winston Peters to form a coalition with the centre-left Labour Party means that Jacinda Ardern will become New Zealand’s next Prime Minister, replacing incumbent Bill English of the National Party.

It’s the first change in power in New Zealand for close to a decade, and came as a major surprise to financial markets who were expecting Peters to side with the National’s who one a majority of parliamentary seats.

As Nick Tuffley and Mark Smith, economists at ASB Bank note, the next government will be an interesting mix, roping together parties from all sides of the political spectrum.

“Labour and NZ First will form a minority government, with the Green Party providing supply and confidence,” they said in a note released today.

“The two coalition partners will have 55 out of the required 61 seats in Parliament. The Green Party has 8 seats, providing a 2-seat parliamentary buffer via the supply and confidence agreement.”

The unusual alliance has created an elevated degree of policy uncertainty, particularly around the areas of immigration and foreign investment, along with fiscal and monetary policy.

While details remain sketchy at this stage, creating understandable nervousness across financial markets, Tuffley and Smith have come up with this excellent table showing what policy changes may be implemented in the new parliamentary term, along with the impact on the New Zealand economy.

Here it is:

Source: Commonwealth Bank

Tuffley and Smith admit that this is only their best guestimate until further details emerge.

However, given the mishmash of parties involved and slim parliamentary majority, they say the true test for the new government will arrive in the months ahead.

“The next few months will be key and it will be interesting to see how long the Honeymoon period of the new government and the second-youngest New Zealand PM in history will last for,” they say.

“A slim parliamentary majority and a large National Party opposition suggest that the new administration will need to exercise considerable discipline to retain control and advance its ambitious policy agenda. It will be a tricky balancing act.”

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