A still broadly popular John Key leaves on his own terms, but his legacy is mixed

John Key left Parliament tonight and gave up the reins of power on his own terms with his popularity still broadly intact, which is both unusual for any politician and would normally indicate a successful legacy. But Key's legacy is mixed, particularly when it is judged by his own measures of success -- wealth and incomes.

Key's valedictory speech spent surprisingly little time on what he has seen as its greatest success -- the Government's economic leadership in tough times and that the economy was growing, creating jobs and building Budget surpluses.

It is true the economy is growing at an annual rate of well over 3.5 percent, which is one of the fastest growth rates in the developed world. The economy created over 300,000 new jobs in the last four years and is pumping GST and income tax revenues into the Government's coffers at such a rate that Budget Surpluses are "hockey-sticking" up, as Key said shortly before he resigned. He has also said they would be big enough for voters to "have it all" in the form of extra social spending, tax cuts, quake rebuilding and debt repayment.

All this economic vigour came after the worst Global Financial Crisis since the 1930s, the most damaging earthquakes in our history and, just recently, a prolonged collapse in the price of our biggest commodity export. Yet gross weekly earnings are growing at more than 5 percent per annum and have been for almost three years. Unemployment is at 5.2 percent, just above the lowest point since Key took office in the fourth quarter of 2008.

The benefits of all that income growth haven't been spread completely evenly, but they are being spread much more evenly than many think, and much more evenly than in most other countries. Income inequality has been broadly unchanged over the last decade. The retention of Working For Families, increases in the minimum wage in line with the average wage and the rise in New Zealand Superannuation in line with average wages has meant pensioners and working families in their own homes have broadly benefited over the last decade. Much of that wage growth has been real because inflation has been very low and borrowers have done extremely well because interest rates have fallen so far and stayed that way for almost all of Key's eight years.

However, there's three big 'buts' to this picture.

Key can't claim all of the credit and he has acknowledged that Bill English was his key partner ensuring the Government did the right thing and kept spending money hand over fist in the depths of the GFC and after the Canterbury earthquakes. Other flavours of National Governments might have taken a much drier fiscal stance and made the GFC much worse than it was. Jim Bolger chose Ruth Richardson and she made the 1991 recession worse than it should have been with benefit and other spending cuts that worsened inequality in a way that no one has yet been able to reverse. Even though Key did not run economic policy directly, his close and harmonious partnership with Bill English can be given some of the credit for the economy's relative stability and strength since 2008.

But not all of it. Some of it was accidental, and some of the credit should be given to the Helen Clark-Michael Cullen partnership of the previous nine years, which was very similar in its cohesion and stability to the Key-English one. New Zealand benefited hugely from the Free Trade Agreement with China and China's decision to spend like crazy on infrastructure as soon as the GFC started. That stopped Australia from having a recession and created hundreds of millions of new middle class consumers for our milk, our tourism and our international education. The structural fall in global interest rates and inflation in combination with very little net Government debt in 2008 also helped cushion New Zealand from the worst effects of the GFC. It allowed English to borrow heavily to cope with both the GFC and the earthquakes without much pressure from either ratings agencies or voters.

The second 'but' is the quality of that economic growth, and in particular the 'gross' nature of it. Gross weekly wages have risen more than 5 percent per annum for the last three years, but in large part because more people are working, and many are working longer hours. Migration and an increase in workforce participation, particularly of those aged over 65, has driven much of that increase. Real output per hour worked, which is the best measure of the production growth needed to grow incomes sustainably, has been flat since 2011.

The third 'but' is Key's failure to act on his own warnings in 2007 of a crisis in Auckland housing affordability because of a lack of housing supply. Auckland house prices have risen since Key's election, which at times he has been ambivalent about, noting voters actually like their house prices to rise and certainly won't accept falls. He soft-pedalled on action to address Auckland's housing shortages as soon as prices briefly fell in 2009 and didn't refocus on it again until just before the 2014 election, when his Government's actions may actually have worsened the problem by subsidising first home buyers. He certainly did not address the underlying tax advantage for leveraged rental property investors in any substantial way, and it's only now with the urging of Mr English is the Government starting to crank up its own sources of housing supply.

Key's legacy is sweetest for property owners, who saw the values of their homes rise more than $400 billion to over $1 trillion on his watch, while the cost of servicing their mortgages as a percentage of disposable incomes has fallen almost 40%. But renters and aspiring home owners have not benefited from the Key era. They have gone backwards. Their housing costs are now rising faster than their incomes, particularly if they are single, on benefits, or have insecure and poorly paid work. The poorest 40% of the population saw their housing costs rise substantially under Key, and faster than than their incomes.

The right-wing think tank, the New Zealand Initiative, described that legacy best in a report in October on inequality.

"There is a massive inequality concern that is rightly troubling many New Zealanders: housing. In short, New Zealand’s ‘inequality crisis’ is really a housing crisis," wrote the NZ Initiative's Bryce Wilkinson and Jenesa Jeram. "While incomes have risen for high and low earners, the rising cost of housing especially hits the poor."

Bill English has been the loudest voice in the Government in recent years about how fast-rising housing costs are driving child poverty and increase the Government's costs. He will have to deal with his predecessor's $400 billion legacy of higher house values and housing costs. And, somehow, he will have to restart growth in output per hour to create a real economic legacy.

"It has been a privilege, an honour and a blast," Key said with his parting words. "Goodbye and good luck," he said.

For those New Zealanders with solid jobs and who owned property the last eight years have been mostly a blast. For those struggling to pay rent or find a home they can buy, they will be in need of that luck that Key wished them.