Opinion: We need a new toolkit to respond to our economic challenges
We have faced an unprecedented series of economic challenges in the past two years. Battered by Covid, borders closed, supply shortages, extreme weather events, a war in Ukraine and now we are experiencing inflation rates not seen in three decades. For younger New Zealanders this will be their first experience of serious inflation.
The choices we make to tackle it could either harm the economy, our whānau and communities, or it could be the start of addressing long-term challenges and ensuring the wellbeing of our people. Aotearoa New Zealand needs a modern economic toolkit that’s fit for purpose in the 21st Century.
We are now in a cost of living crisis most affecting the very basics to exist – shelter, electricity, fuel and food. The latest numbers from Stats NZ’s June quarterly consumers price index show the annual inflation rate was 7.3 percent, the highest it’s been since 1990.
Housing and household utilities were the main drivers, followed by transport and food costs. While salary and wages have also increased in the past year, at only 3.4 percent this is less than half of the inflation rate.
When wages lag behind prices, household finances go backwards and consumers can purchase less in real terms.
Blame for the highest inflation rate in a generation has been laid at the foot of several doors: more expensive imports, particularly oil; Government spending; the Reserve Bank’s wider mandate to consider employment and its stimulus policies such as quantitative easing; and a booming housing market.
Tough choices are being made this winter – to eat or heat.
Blame for the highest inflation rate in a generation has been laid at the foot of several doors: more expensive imports, particularly oil; Government spending; the Reserve Bank’s wider mandate to consider employment and its stimulus policies such as quantitative easing; and a booming housing market. Many of these issues are converging to drive inflation.
The orthodox response is to try and cool the economy by the Reserve Bank hiking up the official cash rate and increasing borrowing costs for businesses and households thereby decreasing their spending. This would then likely increase our current low unemployment rate, reducing workers’ wage demands, further cooling the economy and, all going to plan, limiting price rises.
A bitter medicine
‘Pain’ is the only solution according to a former Reserve Bank chairman. Tighter monetary policy would likely see mortgages costs further increase, jobless numbers rise and wages lag. It’s bitter medicine.
Something is very wrong with our economic toolkit when the main policy choices presented are unemployment or inflation. Lowest-income New Zealanders, especially Māori and Pasifika, are already bearing the highest burden of inflation and shouldn’t be expected to shoulder the costs of tackling it.
Under traditional thinking over the next week the Reserve Bank will be considering a significant interest rate hike. It will be weighing up its dual mandate on inflation and employment and asking, what’s worse, inflation or unemployment?
Recent research from Motu found people’s wellbeing was negatively affected two to 4.6 times more by unemployment than inflation. This internationally important insight was built upon a Gallup World Poll sample of one million people in 138 nations over 12 years; however most pundits pick the Reserve Bank will prioritise inflation.
There’s a saying that goes, ‘generals always fight the last war’.
New Zealand’s monetary policies were first designed in an age when wages and prices spiralled upwards fuelled by inflationary expectations. In today’s conditions there is no guarantee the Reserve Bank achieving a slowed economy will actually reduce inflation.
Data points to much of the inflationary pressures being imported and outside of our control. If ongoing international price hikes and supply constraints continue we can expect their inflationary impacts to continue as well – regardless of how cool our economy becomes.
If the traditional ‘cure’ increases unemployment and doesn’t actually tackle the cause of inflation, it risks harming the very patient it is trying to save. New Zealand could see all the pain for little inflation gain.
The Government has responded to the cost of living crisis by trying to ease some of the pressure. Making fuel and public transport cheaper, alongside a $350 relief payment, has alleviated financial conditions for two million New Zealanders – but not those struggling the most on benefits.
Easing the burden of inflation falling on Kiwis is helpful but it doesn’t tackle the causes. The Government could be doing more to reduce inflation which could also benefit New Zealanders and the environment. Here are a few ideas to consider.
Housing, fuel and food price fixes
Housing costs have been a major driver of domestic inflation – high building and construction costs, average house prices over a million dollars and rapidly rising rents. Numerous solutions have been offered to the Government, from speeding up KiwiBuild construction, a revived Ministry of Works, rent controls, or New Zealand joining the rest of the developed world and taxing the financial gains from rising house prices encouraging investment dollars to go into productive enterprises. There are plenty of solution multipliers in housing.
High oil prices have also been a major driver of New Zealand’s inflation. The Government is currently looking at modifying the successful Clean Car Discount which reduces oil demand. It could also make permanent half-price public transport fares or better yet, make public transport free as Auckland Mayoral candidate Efeso Collins has proposed.
In the first quarter of this year the profits of the largest energy companies were in excess of $NZ150 billion leading to the United Nations Secretary General to “urge all governments to tax these excessive profits, and use the funds to support the most vulnerable people through these difficult times.”
New Zealand Labour could follow the UK Conservative Government’s lead and put in place a windfall tax on oil companies trading here.
They might also consider something similar for New Zealand corporations whose company profits look set to have jumped 60 percent over the past two years. Some businesses, especially tourism and hospitality, are doing it tough but some are absolutely raking it in.
It’s a story common across parts of the world. US data shows corporate profits contributed disproportionately to inflation there. Increasing prices faster than costs and taking that gain as fatter profits rather than sharing it with workers drives inflationary pressures.
For companies that benefited from the $20 billion wage subsidy scheme and are perversely keeping the funds while posting high profits and special pay-outs to shareholders the Government could try and reclaim these clearly no longer needed funds.
The Government could act assertively now rather than wait until next year to appoint a Grocery Commissioner to tackle the supermarket duopoly that the Commerce Commission estimates makes more than a million dollars a day in excess profits.
The Government is still the majority owner of the bulk of our electricity generation and transmission network and could use this power to immediately drive down bills directly, or roll out solar panels which could achieve the same result. It could also encourage social enterprises, cooperatives and employee-owned businesses which keep profits and benefits in the community.
The Government could be looking at a range of solutions that reduce inflation while boosting the wellbeing of New Zealand’s people and environment rather than leaving it alone to the bitter pill of interest rate hikes.
Many of the issues driving inflation in New Zealand were systemic problems before: dependence on fossil fuels and high per-capita emissions; unaffordable housing; the rent-seeking behaviour of some of our largest corporates; and uncompetitive markets delivering high costs for consumers.
The cost of living crisis shows yet again the need to redesign our economy to one that delivers wellbeing for New Zealanders. There is a growing movement in Aotearoa, and around the world, to make sure the interests of society and the environment are served by the economy and not the other way around.
Rather than prioritise economic growth and short-term thinking we should ask how we can ensure everyone has enough to live a rich life – filled with dignity and purpose, in thriving communities with a vibrant culture. Facing a cost of living crisis, the Government can open a modern economic toolkit and move from Wellbeing Budgets to a Wellbeing Economy.