When Bill Clinton first ran for President of the United States, back in 1992, his campaign chief James Carville coined the now immortal phrase “it’s the economy stupid” to focus his team on what that year’s election was all about.

Over thirty years earlier, Stanford University economist Anthony Downs had postulated the theory that because they do not understand all the nuances of economic policy, voters judge governments at election time on how much they intervene in the domestic economy and what impact that has. He argued that public opinion about economic management was shaped like the traditional bell-curve, with a small group of voters having extreme views at either end of the spectrum, and the bulk of voters holding more moderate opinions in the middle. In turn, this meant mainstream political parties shaped their economic policies in a more centrist way to maximise their political support.

Downs’ theories and Carville’s bluntly stated pragmatism are relevant to New Zealand’s current economic position, just three months before the General Election.

The government’s management of the economy will be centre stage during the coming election campaign. And the public’s assessment of that will determine who leads the next government. The picture looks gloomy at present. The annual increase in consumer prices is the steepest in thirty years, mortgage interest rates are going up more rapidly than at any point since the 1980s, unemployment is projected to rise steadily over the next year, and economic growth levels look likely to remain relatively flat.

But the worse may be yet to come. The economy is already technically in recession, although it is possible that may not last too long. Elsewhere, the prospects are not so promising. The agriculture sector has been hit hard by the adverse weather events earlier in the year and weaker demand than usual in some markets. For differing reasons, the manufacturing and construction sectors are in decline as economic activity slows. The return of tourists has boosted the retail and transport sectors, but the service sector is starting to slow again, after a strong post-Covid19 recovery. The removal of the 25 cents a litre fuel price subsidy on 1 July will have an adverse effect right across the economy, as the queues at petrol stations this week and near panic buying in some places shows.

The government’s response, consistent with Downs’ theory, has been to boost its spending and influence in the areas of most concern – social services, education, and health. This was especially so in the early days of the post pandemic recovery and enjoyed public support at the time. But that has waned as time has gone on, and the government has started to acknowledge its pit of resources is not bottomless. However, right now, the challenge for all political parties is to work out where the new economic political equilibrium lies.

There are increasing questions about the quality, purpose, and priority of some of the government’s post pandemic spending, and whether it is becoming too involved in day-to-day economic activity and therefore distorting the market. However, there is no apparent enthusiasm for a complete change of direction and a return to the much more open market economy that prevailed before 2017. Although the Greens and Te Pati Māori shout at one end of the spectrum for more, rather than less, intervention, and ACT calls at the other end for complete government withdrawal, both Labour and National seek more centrist positions, more aligned with where they perceive the bulk of public opinion to be today. At the same time, neither appear clear where the new equilibrium should lie, and how they might achieve that.

Labour and National know full well that Carville’s mantra will influence many voters’ decisions at election time. The mini scandals that have engulfed Labour of late will have some influence, but for most voters the key factors will be whether they feel better or worse off economically than three years ago, and which parties they see as likely to improve their situation over the next three years.

Right now, confidence levels are very low, which does not augur well for the government’s electoral prospects. The Roy Morgan confidence survey last month reported an “extremely low level” of consumer confidence, although there were modest expectations inflation may fall during the next year. An Auckland Business Chamber survey in May reported nearly 55% of respondents expecting the economy to decline further over the next year.

The government’s problem is that it appears to have played all its cards – to minimal effect. The removal of the fuel price subsidy from the weekend marks the end of the last of the major Covid19 support measures. Subsequent steps – like the removal of the $5 prescription charge, or the extension of twenty hours free early childhood education, assuming all the problems with it are overcome – do not take effect until after the election. The new public transport subsidies for students and children, due to start from the beginning of July, have struck implementation problems in some larger cities, meaning its roll-out will be uneven.

In contrast, National has yet to play any significant economic cards. This may be because it is still finalising its position, or because it knows, in concert with ACT, full well what it intends to do, but does not want to scare the horses by revealing too much, too soon.

The one thing all the parties and the voters seem to agree on is “it’s (still) the economy stupid”. But beyond that, voters are still waiting to be convinced which party is more likely to be best for them.

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