Christopher Luxon is doing a good job of creating the impression that government spending is to blame for inflation.Photo / Jed Bradley
Christopher Luxon is doing a good job of creating the impression that government spending is to blame for inflation.Photo / Jed Bradley
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
It's important New Zealand gets through this tough economic cycle without panicking and reaching for brutal, unnecessary and ineffective policies of fiscal austerity.
I was pleased to see the Reserve Bank's more hawkish inflation stance last week.
We have to get local supply and demand back in balance orwe risk doing long-term economic damage.
We can't control the primary driver of inflation - global supply.
At least I don't think current fiscal policy's influence on inflation is materially different to what National's would be.
National says it will cut wasteful spending and will spend more efficiently in areas like infrastructure.
It would be a worry if they didn't say that. It's the least we'd expect from any opposition party.
But with a clear simple message, constantly repeated, National is getting good traction from a public looking for something to blame for inflation.
The Act Party is probably on more stable footing with its policy which would slash spending and return us to the era of fiscal austerity.
I think that would be terrible policy.
Inflation is bad for poor people. But unemployment is worse.
The damage we did with the slash and burn policies of the early 1990s pushed unemployment to 12 per cent.
It did inter-generational damage to families and communities that remains with us today.
Inflation eased everywhere through the 1990s as globalisation opened trade and computing brought big gains in productivity and supply chain efficiencies, pushing costs and prices down.
New Zealand's innovative, inflation-targeting monetary policy was bold and effective.
It deserves its recognition as a valuable tool, adopted widely by central banks around the world.
But its champions often seem to forget the supply side of the 1990s economic story.
The austerity hawks also fail to recognise the deep social impact of running high unemployment and cutting the benefits of the most marginalised people.
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
At the Finance and Expenditure Select Committee on Thursday, Reserve Bank Governor Adrian Orr got a grilling from opposition MPs keen to hear him say the Government's spending policies are adding to inflation.
He didn't bite, at least not in the way they might have hoped.
Orr acknowledged that all government spending creates demand and is therefore inflationary.
It's important to understand the difference between government with a small g and the Government with a big G.
The former refers to the generic institution, the latter refers to the current regime.
Orr was careful not to comment directly on the current Government's fiscal policy but his subsequent comments were interesting.
They offered fodder for both the Left and the Right.
He noted that the most important assistance fiscal policy can give central banks is in delivering efficient long-term value, in areas like infrastructure that boost productivity and increase the economy's capacity.
That's an area where the Government does seem vulnerable to opposition attack lines.
Having initially been caught out by questions about what spending he'd cut if in power, National leader Christopher Luxon has honed his response.
He has a list which includes things like the $300 million to merge RNZ and TVNZ.
That does look like a bit of a folly in the current climate.
Its inflationary impact might be marginal, but what's the point? Who benefits? Why now?
Some on the Left argue that National's over-emphasis on government spending as an inflation driver is evidence of economic illiteracy.
To me, it looks more like evidence of Luxon's strength at selling a story.
His time in business managing retail brands for global food giant Unilever and at Air New Zealand have made him a highly savvy marketer.
He has a clear simple line. And he's going to keep repeating it.
That's just politics.
What's positive is that National hasn't yet been pulled into the austerity trap.
Orr's Select Committee response last week suggested he doesn't think he needs that kind of help in the inflation fight.
"The near term up or down on demand, because of government spending has largely been resigned to the history books of economic policy," he said.
That was because of the time lags involved and the difficulty in unwinding it, he said.
"It is not a good tool for cyclical stabilisation."
In other words, as a tool in the inflation fight spending cuts won't deliver results in time for this cycle.
That doesn't mean government spending shouldn't be a big political issue.
We need to put the blow-torch on the quality and efficiency of spending by the Government.
We can't afford not to spend on our future but we also can't afford to spend badly.
