Easter is historically a time for new beginnings. It is also about the only time of the year outside of Christmas when we get a proper break to take stock. We are nearly a third of the way through this cycle of the calendar so it’s worth checking which course corrections are required before the story of the year firms up and can’t be changed.
One sincerely hopes the Government uses this time thoughtfully. Inflation is rampant and it is very hard to see it coming under control without the central bank hiking interest rates aggressively and inducing a recession. This week’s 0.5 percentage point increase in the official cash ratewas both evidence of that and a sign of things to come.
Economists are increasingly of the view that a hard landing is unavoidable, both domestically and internationally. History suggests that once wage inflation joins price inflation in the legendary wage-price spiral, breaking the cycle without causing a recession is almost impossible. Indeed, it may already be too late to stop that happening. The best time to act was this time last year when many people were warning of the problems to come.
If the Government had corrected course then by easing up on spending, reversing direction on some of their cherished but economy-stifling policy ideas, and jawboning the Reserve Bank to reconsider its monetary policy settings, we may have managed something like the fabled soft landing. Unfortunately at this point it’s all about how bumpy and damaging things will get economically, and how much we can mitigate the damage to Kiwi families.
The Government’s oft-repeated talking point is that the historically significant levels of inflation we are now experiencing are solely imported and there is nothing they can do about them. There are two problems with that view.
First, it is clearly not the case that inflation is all imported. Our current inflation rate at just under 6 per cent and heading north is nearly double that of Australia’s at 3.5 per cent. The New Zealand Initiative this week pointed out World Bank data showing New Zealand’s inflation rate is higher than 19 out of 20 of our biggest trading partners. Those countries too have had to deal with the overheated world economy post-Covid and the price shocks caused by Russia’s invasion of Ukraine.
Indeed, the only country that flatters us unambiguously in the inflation stakes is the United States. That’s because politicians there went irresponsibly crazy with the taxpayer’s chequebook and the Federal Reserve completely overdid the monetary response. If that sounds all too familiar, it should.
The second problem is the danger that the Government’s rhetoric on inflation is more than a talking point, and the Prime Minister and Finance Minister actually believe their blame-shifting. That would indicate that they have no intention of taking corrective action to mitigate a hard economic landing, which would be a real problem.
It is very easy to fall down a rabbit hole trying to work out what this Government really thinks. They have become very adept at bare-faced assertions that black is white, way in excess of other recent governments. The best way to determine what they actually believe is to examine their actions.
A government facingthe risk of uncontrolled inflation and a hard economic landing seriously would take two pretty simple but important immediate steps. They would limit their own contribution to price inflation by controlling their expenditure, particularly their operating spending, and they would use policy changes to limit the risk of further wage inflation (that is, wage increases without accompanying productivity increases).
There is an opportunity to take the first step immediately. The Government’s 2022 Budget is being handed down in a month’s time on May 19. Grant Robertson has previously signalled a whopping $6 billion in extra annual spending in this year’s Budget, which is truly “fuel on the fire” territory. He should call a press conference next week and say that, in light of the inflationary situation, he is cutting that right back to something much more normal. Inflationary expectations would reduce overnight.
The second step is also easily within the Government’s grasp, although perhaps not their ideology. They should immediately reverse their increasingly restrictive labour market policies which are excessively constraining labour supply and fuelling wage inflation.
Their attempts to micro-manage our labour supply have become laughable anyway. In the past week they have announced absurdly specific levels of migrant workers in politically-favoured industries that have proven adept enough at whispering in the relevant minister’s ear. We are apparently to be allowed to import 275 skifield workers, 500 meat processing workers, 300 forestry workers and 280 people whowork in wood processing. Never mind the command economy overtones and that previous attempts to import specific numbers of teachers and ICU nurses fell flat.
The Government should junk their inappropriately timed immigration re-set, give the Immigration Department a boot up the bum to issue more visas, and open our borders to more normal levels of skilled migrant workers forthwith. That will ensure a more normal labour supply and wages that rise because of productivity increases, not because of artificial supply constraints and inflation. Again, inflationary expectations would reduce.
Unfortunately, our Government appears determined to implement their 1970’s-era labour market policies despite decades of evidence that they don’t work. Already we are experiencing negative net migration which will only worsen.
There are limits to what governments can do to control inflation. They can’t stop the Ukraine war, for example. But they can mitigate the worst effects. 2022 is all about how much the Reserve Bank has to lift interest rates, how hard the landing will be and how big the economic damage. If the Government doesn’t take at least the two steps described, inflation will worsen and the bank’s economic medicine will have to be tougher.
Talk of economic hard and soft landings brings to mind another aviation term, CFIT, or Controlled Flight into Terrain. It refers to a situation where apilot inexplicably flies a plane into the ground or a mountain without taking corrective action to avoid the obstacle in front of them. It normally happens because they are unaware of the pending disaster before it is too late.
The economic cycle is later than ministers think. This Government needs to recognise the terrain and pull up now. They are getting close to the point where their political epitaph will be “failed to course correct after the pandemic and drove the New Zealand economy into the ground”. That’s surely a legacy they don’t want.
Steven Joyce is a former National MP and Minister of Finance
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