Liam Dann: Five things the Government could do to ease inflation pain

OPINION:

High inflation is hitting Kiwis in the pocket.

The Reserve Bank is lifting interest rates to tighten the money supply and get on top of inflation, but for most home owners that's just making the pain worse in the short term.

Yesterday, in his speech to the IMF, Reserve Bank Governor Adrian Orr noted that central banks can't beat inflation on their own - they need support from government.

So what can the Government do to help?

Here are five policy moves the Government could make. But be warned, most of these come with a sting in the tail.

1. Control prices and wages

Governments are powerful and can use that power to directly control pricing. They can even pass laws to ban price rises and freeze wages.

In 1982 Rob Muldoon's National Government did just that. It was a disaster.

Businesses tied themselves in knots dealing with the rules. Most found ways around them and inflation continued to rise at a double-digit pace through the early 80s.

Meanwhile, the economy became less efficient, less productive and ultimately poorer.

Luckily New Zealand learned that lesson and no one's advocating we try it again.

Governments can control prices and wages more easily in areas where the state owns and runs things.

As a short-term measure we've already seen the Government slash the cost of public transport by effectively increasing the level of subsidies.

Price freeze: Prime Minister Sir Robert Muldoon froze wages and prices in 1982, without much success. Photo / Herald archive

In theory they could apply this principle in other areas. For example, they could subsidise the cost of delivering things through NZ Post and in doing so put downward pressure on pricing for other operators.

But as well as being expensive, these measures would still distort the market and would likely damage the economy in the long term.

The Government could also limit pay rises for state sector workers. But that will be politically very difficult as negotiations with nurses are proving.

2. Cut taxes

This is the most obvious and easiest way to put money back into people's pockets.

National has already indicated it would look at this, with changes to income tax settings.

Cutting GST on goods and services - even as a temporary measure - would also see prices drop.

But tax cuts also have the potential to add to inflation.

Anything that puts money back in people's pockets right now will boost consumer demand.

Strong demand at a time when supply is constrained is why we have inflation in the first place.

With little influence over the global supply problems we face, all the Government can do is try to remove demand from the domestic economy. That's why rates are rising.

3. Cut regulations and red tape

Regulations add cost to business which is passed on in pricing to consumers.

Making it cheaper to do business by removing regulations is an option for easing price pressure.

But there are risks. In theory regulations are there to protect workers and consumers.

They ensure safety standards are being met and that we aren't being ripped off.

That said, if inflation gets bad enough, it is something for the Government to consider, even if it is on a temporary basis.

It's certainly something opposition parties will be talking up.

4. Create more competition

More competition means lower prices.

It's not specifically an inflation issue, but price comparisons around the world on everything from groceries to building products point to the fact that Kiwis pay more than we should.

A lot of that is down to lack of competition in sectors like supermarkets. The Government is trying to address the issue through Commerce Commission inquiries.

But that seems like a longer-term solution.

Short term it could push harder to encourage international retail players into our market - potentially offering tax breaks and regulatory breaks.

5. Spend less

Sadly, there is no pain-free way to get on top of inflation. It's a bit like staying on top of your weight.

If you put too much in, there's an expansionary effect. Ultimately you just have to put less in.

Putting less money back into the economy, either by cutting spending or limiting spending growth, will help beat inflation.

Unfortunately New Zealand is still playing catch-up on infrastructure and investment in areas like health. Cutting that spending would have economic consequences further down the track.

But if we really need to hit inflation hard it is the nuclear option. National did it in 1991 with the "Mother of all Budgets", drastically slashing spending.

Prime Minister Jim Bolger and his Finance Minister Ruth Richardson are all smiles as they enter Bowen House to present the 1991 budget. Photo / Herald archive

We did beat inflation but we also pushed the economy into recession and unemployment to 12 per cent.

Fears of that sort of "hard landing" are why neither National nor Labour say they are prepared to cut spending right now.

The commitment, from both sides of the house, to keep investing in the economy points to a belief that this inflation cycle should pass without the long-term pain it caused in the 1980s and 1990s.