Labour is not responsible for the global economic crisis, the Ukraine war or the Reserve Bank’s record rate rise but is set to suffer electorally the way it did after the oil shock in 1974

Opinion: The Reserve Bank made history last week. But it was not because of its record 75 basis points increase in the Official Cash Rate, with the prospect of a similar increase when the OCR is next reviewed in February. Nor was it because of the governor’s subsequent admission the bank was seeking to deliberately engineer a sharp recession to get inflation under control as quickly as possible. Rather, it was because of the circumstances in which these announcements were made.

Many commentators have already suggested that the bank’s decisions, which are projected to have the country at the trough of the recession around election time next year, have probably sealed the Government’s electoral fate. This raises the potential irony of the statutorily independent Reserve Bank acting in a way that directly influences the country’s future political direction and the shape of the next government.

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Adding to the irony is that the Reserve Bank’s statutory independence was established in 1989 to stop the central bank being used to suit the whims and political convenience of the government of the day. Before the floating of the New Zealand dollar in 1985, Sir Robert Muldoon often joked the exchange rate was set simply by his telephoning the governor and telling him what it should be.

Monetary policy was set equally erratically, essentially being as loose or tight as suited the political purposes of the Prime Minister (who just happened to also be minister of finance) of the time, without any regard to inflationary or other external pressures. Inflation was controlled by short-term wage and price freezes, which only served to set off a bigger inflationary explosion once they were lifted.

Floating the currency to let the dollar find its true value against competing currencies and establishing a statutorily independent Reserve Bank with overall responsibility for monetary policy were deliberate steps to shift New Zealand away from the capricious chicanery that had characterised those earlier years and led the country to the brink of financial collapse in 1984.

The Reserve Bank’s recent decisions are the first time where it has, in asserting its statutory independence, effectively turned the tables on the politicians. Last week’s decisions determine not only the economic framework under which the next election will occur, but also potentially its outcome.

This approach has served New Zealand very well over the past 30 years. Although we have been buffeted from time to time by external economic shocks, most notably the 2008-09 Global Financial Crisis, there has been an underlying stability to our economy, not seen in earlier years. What debates there have been about the independence of the Reserve Bank have related more to the extent politicians have from time to time tried to stymie the bank’s independence. (The present government’s broadening of the bank’s mandate to include employment outcomes and lifting of the inflationary band that the bank operates within come to mind.)

However, the Reserve Bank’s recent decisions are the first time where it has, in asserting its statutory independence, effectively turned the tables on the politicians. Last week’s decisions determine not only the economic framework under which the next election will occur, but also potentially its outcome. While there are no credible political voices calling to overturn the bank’s operational framework, it would not be a surprise if some more thoughtful politicians are beginning to feel uncomfortable that an independent statutory agency may be able to influence election outcomes this way.

The bank will no doubt argue it has acted solely in line with its legislative mandate, and any political consequences are neither its concern nor its responsibility. That is certainly true as far as the letter of the law is concerned, but the bank is not so naïve to be blind to the wider consequences of its decisions. By asserting its neutrality to the extent that its decisions are likely to be a major factor in whether the Government can survive what was already looming as a difficult election, the Reserve Bank has been either extremely courageous or foolhardy.

The answer will become clearer next year when we see the accuracy of the bank’s predictions and the efficacy of its decisions, let alone their political impact on the Government, and more widely on the living standards of New Zealand families.

This backdrop has somewhat muted Labour’s celebratory commemorations of the 50th anniversary of Norman Kirk’s great victory in November 1972. Rather than reflecting on the progressive social and foreign policy achievements of that government, Labour may well now be focusing more on its dismal fate. By the end of 1974, bereft of Kirk, and facing soaring inflation and rising unemployment following the Opec-induced oil shock after the brief 1973 Yom Kippur war, the New Zealand economy, which had undergone a short-lived boom in 1973-74, was facing a deep recession.

Heading into 1975 and another election, the new Rowling government decided to borrow against New Zealand’s high international reserves to shield New Zealanders from the worst impacts of the recession and to buy the government time. That was derided by National as “borrow and hope”, leaving Muldoon a largely free rein to campaign against rising debt and the government’s inability to control its own spending. With the aid of the notorious “Dancing Cossacks” campaign – implying the government was dangerously left-wing – it proved enough to deliver National a landslide victory in the 1975 election.

It all has a somewhat familiar feel to it when compared with the current Labour government’s post-pandemic economic management. Labour was not responsible for the oil shock in 1974 and tried to shield the country from the worst of its impacts, but it still paid the electoral price. Today, Labour is likewise not responsible for the post-pandemic global economic crisis and the Ukraine war but seems likely to suffer at the next election the way its predecessor did. And that was before the Reserve Bank’s “icing-on-the-cake” intervention.

This Labour government has long sought to portray itself as the contemporary inheritor of Norman Kirk’s and the Third Labour Government’s mantles. It may now be closer to doing so than at any point in its tenure. But it is not likely to be for the reasons it wishes.

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