Many buyers in the current property market are likely to get stung by interest rate rises. Photo / Fiona Goodall
OPINION:
The Government has had an unfortunate and unlucky week.
Prime Minister Jacinda Ardern probably expected a great deal of public interest in her first overseas trip since our borders closed.
Instead, the trip appears to have vanished into a vacuum of disinterest, with even the delegation on the trip apparently bored.
On the domestic front, the trip has been squeezed out by the issue that's squeezing everything else: inflation.
With undoubtedly ugly inflation data due on Thursday, this week was always going to end in an awful lot of hot air about an awful lot of hot money.
What was less expected was Reserve Bank Governor Adrian Orr injecting himself into the debate when he implicitly narked on the Government's spending in a discussion with the IMF published on Tuesday morning.
This call turned inflation into a week-long, rather than day-long story, squeezing out much of the public interest in the Prime Minister's trip.
Hunched over a laptop with a gloomy branded backdrop, looking every bit like 2020 had taken him hostage, Orr told the IMF that central banks needed support from "fiscal authorities" to tame inflation. The translation (for most people, though not Finance Minister Grant Robertson himself) was that central banks, including New Zealand's Reserve Bank, needed help when taming inflation, probably by cutting back on public spending.
The news was unwelcome for Robertson, who instead of trimming back on spending, will instead deliver a Budget next month with a record $6 billion in new operating spending.
When Robertson decided on this operating allowance last year, inflation was forecast to be just 5.1 per cent this year and 3.1 per cent next year. Those forecasts are now likely very off mark, raising questions of whether the Government should go through with such a big increase in spending.
Labour is helped by the fact that National has committed to this level of spending too.
National called on Labour to fund its $1.7 billion tax cut from this same $6b allowance, leaving the remainder for public services. It's a clever way for National to have its cuts and eat them too, but it does weaken its position on inflation.
Until the party dares to say that it would trim back operating spending from what Robertson proposes, it cannot argue that it would deliver anything other than the same level of inflation as the Government.
In the 1980s, inflation was construed as divine retribution for the sins of politicians who wanted to promise everything but trade-off nothing: a slap on the wrist from the invisible hand.
In the 2020s, this is a lesson for National just as much as it is for Labour: if it wants to argue the state is a cause of inflation (and that is correct, at least in part), then it cannot at the same time commit itself to the same levels of spending as Labour. There are trade-offs.
It's worth noting too that levels of spending will decrease next year as the recovery gathers pace. Core Crown expenses will dip from $128b this year to $120.2b next year. As a share of the economy, government spending will shrink from 35 per cent of GDP this year to 30.5 per cent next year, and 29.5 per cent by 2025.
Treasury also thinks that next year the effect of public spending on the economy will be contractionary, rather than expansionary.
Robertson is obliged to make the case for why this spending increase is necessary at a time of high inflation (he has made that case, arguing on Monday he will not trim back on health, education or housing expenditure for inflationary fears).
However, in fairness to the Government, its fiscal response was usually criticised for being skint rather than excessive.
Adjudicating the economic response fairly would show the Government deserves less credit than it gives itself for stemming a wave of unemployment, and should cop some blame for a level of inflation that is higher here than overseas.
It is not, strictly speaking, correct that New Zealand's health response was remarkable in global terms for delivering low unemployment. All around the world, unemployment has been far lower than expected following the pandemic (this is partly why everywhere is currently experiencing inflation). Unemployment was 4.2 per cent in the UK and Australia in the December quarter, and 3.2 per cent here.
Countries like Canada have not managed to get control of employment following the pandemic but these are the exception, not the rule. The Government can hardly take credit for something we see replicated the world over.
New Zealand's record on inflation was more mixed. In the December quarter in Australia, annual inflation was 3.5 per cent, in the UK, it was 4.8 per cent, and in New Zealand a massive 5.9 per cent.
There is an argument to be made on those numbers, that New Zealand overcooked the Covid response, particularly in that final quarter when the Government was caught between pumping business support into the economy to assist with the Omicron outbreak, while trying to, at the same time, keep a lid on inflation.
An equally important question - and one that isn't really being asked right now - is not whether Robertson overdid his job, but whether Orr overdid his.
Did the Reserve Bank have to print so much (digital) money? Did it keep loose monetary policy in place for too long? And should the Government have tried to clean up some of the inevitable mess low interest rates would create in the housing market by implementing some form of tax?
In the rare event these questions are asked, they inevitably disappear into the political void between Labour and the Greens - a space which no one is very much interested in right now.
Another question that probably deserves an answer is whether the Reserve Bank should have printed money by buying debt directly from the Government, rather than from banks.
For a very brief period it considered doing this and produced a briefing to this effect, but the idea was swiftly shot down. Other central banks, notably the Bank of England, actually did cross this monetary fiscal Rubicon and directly (but briefly) financed their governments. It did not seem to lead to inflation-stoking fiscal ill-discipline there.
Meanwhile, the Government and the Reserve Bank's de facto method of delivering monetary stimulus to New Zealand remains using low interest rates to inflate the value of Kiwis' homes.
We saw the social effects of that during the pandemic, as house prices increased to an unconscionable level. We're now seeing the downside of that. There have been 61,600 first home mortgages taken out since March 2020. As the Reserve Bank raises interest rates to combat inflation, some of these buyers are about to get very, very hurt.
This should concern all parties. New Zealand has not yet recovered from the current crisis, and it appears the next crisis is just around the corner.
Despite this, Labour and National haven't asked themselves whether it's wise that one of the main tools for overcoming an economic downturn remains allowing the Reserve Bank to set fire to the housing market. Inflation will eventually be tamed. The broken housing market, it appears, will dog New Zealand for much longer.
Expectations tempered around return to surplus in 2027/28.