New Zealand's knife-edge election comes down to the cost of living

A dead heat with a cost-of-living backdrop

Saturday's vote has turned into a verdict on the center-right coalition's struggle to tame living costs and revive growth. Most surveys show the National Party and Labour running side by side, and more voters have shifted toward smaller parties.

National will look to renewed support from New Zealand First and ACT, though the latest polling suggests the trio may still fall short of a parliamentary majority. For Labour to govern, it would require the Greens, Te Pati Maori and the Opportunity Party, contingent on Opportunity clearing the 5 percent bar to enter parliament for the first time.

According to Richard Shaw, who teaches politics at Massey University, "There is a frustration or perhaps an exhaustion with both parties, specifically the National Party because it is in government." "There is significant understanding that some of this is well beyond the government's control, but there is also a concern about the extent to which a back-to-basics policy agenda is maybe just not fit for purpose anymore."

What voters are weighing

The economy the next cabinet inherits is weak. Unemployment is at an 11 year high, house prices are stuck in a prolonged slump, and more New Zealanders are heading overseas for better opportunities. Public finances are in the red, debt levels are elevated, leaving minimal room for fresh expenditure.

Output per person underscores the drag. In the second quarter, output per person was lower than it had been at the time National won office in late 2023. Households say they are in a poorer position than a year ago, and they expect conditions to deteriorate further over the next 12 months. Real wages fell further in the third quarter while nominal pay matched the Reserve Bank's projection, according to Stats NZ, the Reserve Bank of New Zealand and Bloomberg Economics.

National campaigned last time on "Get NZ Back on Track." Failing to improve how voters feel about the economy has given opponents an easy line of attack and may result in Christopher Luxon preside over what would be the first one-term National government. Some of the headwinds predated his tenure. He came into office in late 2023, when interest rates were at record highs and the economy was skirting recession, while also contending with US President Donald Trump's tariffs and a global energy shock tied to the Iran war.

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The core pressure remains living costs. Prices for basic food have rocketed, and mandatory charges for power, petrol and local council land rates are rising fast.

Policy promises and market angles

Labour's agenda focuses on household relief, including no-charge doctor appointments, free pharmacy prescriptions, and limits on fares for public trains and buses. It also promises to expand the health workforce and finance building programs it believes will lift labor demand.

To finance higher spending, Labour plans a new capital gains tax and the cancellation of existing business tax incentives. The chances of increased borrowing and additional levies would rise if it must rely on left-of-center partners who favor greater spending and higher taxes.

Labour also intends to put the Reserve Bank back under a dual-objective framework - targeting maximum sustainable employment alongside price stability - which National scrapped in 2023. Economists argue the change could lead investors to anticipate a softer approach to inflation and, as a result, higher bond yields, although it likely won't alter near-term rate policy.

How the vote unfolds and why it matters for investors

Polling stations close at 7 p.m. on Saturday, with almost 3.8 million people enrolled to vote. According to the Electoral Commission, early voting opened two weeks ago, and roughly 1.7 million ballots had been submitted by Thursday. Preliminary counts should be out before midnight on Saturday, although the final outcome won't be certified for three weeks because many ballots come from Kiwis overseas or from voters who cast their ballots outside their home electorates on the day. Preliminary coalition talks are expected to start next week.

For portfolios, the near term watch list is clear. Fiscal space is tight, households are under pressure, and the Reserve Bank mandate could shift. That mix shapes growth expectations, the path for rates and where bond yields settle.

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