Tuesday, 19 April 2022

 

An elaborate but ultimately irrelevant game of pass the parcel is being played out at present about who is responsible for inflation rocketing to a 30-year high, with home mortgage rates and other lending costs set to do likewise. 

According to the Minister of Finance, it is all Vladimir Putin’s fault for invading Ukraine and disrupting world supply chains, causing shortages and pushing up costs. Coming on top of the wider disruption caused by Covid19 over the previous two years it is all just too much to bear for even well-managed economies like ours, he says. 

The Opposition will have none of this, blaming it all on the government’s mismanagement, by using the arrival of the pandemic as an excuse for a massive borrowing programme to enable it to spend indiscriminately on pet projects, many of which have had nothing to do with helping the economy recover from the onset of the pandemic. 

Meanwhile, the Governor of the Reserve Bank whose autonomy wings have already been clipped somewhat by this government requiring him to take the impact on employment into account when adjusting monetary policy laments to an offshore audience that he may no longer have the tools to get on top of this bout of inflation as quickly as he would like. 

Ominously, the only thing they all seem to agree on so far is that the rise in inflation this year will continue for some time, possibly well above the 7% level already forecast. 

Meanwhile, homeowners and taxpayers look on slightly dazed and bemused, while bracing themselves for whatever shocks may lie ahead. Already there are mounting reports from foodbanks and other social service agencies of unprecedented demand on their services, and the general expectation that the worst is yet to come. None of them care whether Vladimir Putin or the government is to blame – they just know the impact it is having on their already stretched household budgets, and they want the government to do something about it. 

So far, the government’s response has been mixed. A 50% subsidy on public transport costs and a 25 cent per litre reduction in fuel excise tax have been introduced – but for a period of three months only, with no indication of what is to follow. The Minister of Finance has also pointed to the April 1 benefit adjustments and the Winter Energy Subsidy for beneficiaries and superannuitants, as further income support measures the government is introducing. But these are annual payments already in place, with increases based on the lower cost of living of the last twelve months, rather than the likely much higher cost of living of the next twelve months.

Beyond that, he appears to have little else to offer, unless he is holding something back for the Budget due in just over a month. But he has already ruled out income tax cuts, changes to the Goods and Services Tax, and paring back any of the spending commitments the government has made since the advent of the pandemic. 

So, his immediate options look limited. It is possible he might extend further – or even make permanent – the public transport concessions and justify them on climate change policy grounds, but they are at best of limited value. Not everyone is able to use cheaper public transport to get to and from work, and with so many people, including many public servants, still working from home and the government seemingly unwilling to insist on people returning to their offices, the subsidy is of dubious value anyway.  

The government’s policy is looking increasingly like a modern-day version of borrow and hope which was an ultimately unsuccessful mainstay of governments in the 1970s and 1980s, leading to the massive restructuring of the economy after 1984. It is beginning to look like a repeat performance is underway. 

The Opposition’s response is no less unspectacular. There is the almost obligatory commitment to tax cuts as the universal panacea, and the predictable references to cutting back on wasteful spending. However, when asked to identify examples of where that might be, a sudden shyness comes to the fore. 

However, the Opposition does have the luxury of not being in power at present, so it does not have to deal with the inflation crisis. It can afford to sit on the side-lines and pick holes in the government’s response and sympathise mightily with the plight of households struggling because of high inflation, without having to reveal too much of its own hand. It knows that if inflation becomes too high and whatever measures the government may take to try to bring it under control do not appear to be working, it will be the electoral beneficiary. 

Just as Labour will be desperate to keep the focus on the current inflation outbreak being an international phenomenon over which New Zealand has little immediate control, National will be equally determined to hammer home the message that Labour’s borrowing and spending policies are making inflationary pressures worse than they need to be. The Prime Minister, on her current trip overseas, can be expected to make much of how, as in New Zealand, inflation is rising to new highs in both Singapore and Japan, but the comparisons may not be to her advantage. While inflation in Singapore is forecast to hit an eight-year high this year, at 3.4% it will be at least half the rate forecast for New Zealand. Although Japan’s inflation rate is expected to hit a two-year high, it was only a mere 0.6% in the year to February. 

A saving grace for Labour might be that domestic unemployment continues to be at a very low level. Whether that can be sustained in the medium term as international supply chains become more disrupted, and cause shortages of goods on the domestic market, leading to slowdowns in local production because of unreliable supplies of imported raw materials will be a major challenge. Labour could yet find itself in the same position the 1972-75 Labour Government of high inflation, and rising domestic shortages, leading to increasing unemployment. Then it was the fault of the First Oil Shock in 1974, just as it is argued to be the fault of Covid19 and Vladimir Putin today. But it was ultimately the government that paid the price at the next election.

 

No comments:

Post a Comment