The finance minister’s nightmares
The Finance Minister sat down with Luke Malpass to talk inflation, the upcoming Budget and why Labour is sticking to its guns on long-term spending.
Grant Robertson is in the political fight of his life. The Labour Finance Minister came to power with many ambitions, but one overarching theme. He wanted to prove that the idea that Labour Party finance ministers were bad with money was false. He aimed to run balanced Budgets with higher general levels of spending to finance longer-term spending, while also running Budget surpluses.
When Covid hit in early 2020, that grand historical plan was blown out of the water. Locking down the entire economy required a fiscal cash hydrant to be pried open to pay for wage subsidies, keep air freight coming into the country, keep businesses going and so on. It soon became clear that the Budget surplus announced in 2018 would almost certainly be the last one of Robertson’s tenure as finance minister.
New Zealand got through Covid, the headline macroeconomic figures have continued to surprise on the upside, Unemployment is 3.2%, annual economic growth is 5.6%, wages growth (average hourly earnings) is 3.8%.
But all of those positive figures are now dogged by a powerful indicator with the ability to rule them all: inflation. Running at 6.9% over the past year, driven by increases in building costs, hikes in food and excise. It makes everyone feel worse off, because, basically unless you got a 7% pay rise in the past year, your income went backwards.
Robertson was arguably a major reason Labour did so well in the 2020 election: the wage subsidy worked well, he was a safe pair of hands on the economy, and told a compelling economic story. Yet having spent the money during the pandemic for another year or so – almost all of which has cross-party support – Robertson’s grand project and economic narrative risks being tipped up by inflation.
It’s something that, like Covid, was not on anyone’s radar at the beginning of 2020. Back then it seemed that central banks had cracked the code: increased productivity through new technology, efficient global supply chains and healthy levels of immigration had meant that the central bankers could run relatively easy money policies, without the risk of the inflation genie getting out of the bottle.
Covid-19 tipped up that apple cart and is still doing so. Managing both the economics and the politics of that inflation will determine both Robertson’s legacy as finance minister and Labour’s re-election prospects.
‘‘The cost of living is putting huge pressure on a lot of households – we haven’t seen inflation numbers like this for a long time. And so it definitely is there when people are at the petrol pump or in the supermarket. And obviously for particularly low and middle income households that provides some real stress and pressure,’’ Robertson tells the Sunday Star-Times sitting down in his office on the 7th floor of the Beehive.
One of the Government’s key lines has been that inflation is an imported problem created by Covid and exacerbated by the Ukraine War. But in the end, he acknowledges that makes little difference to people facing bill shock.
‘‘Obviously, if you’re a household and you’re at the supermarket, you’re still facing it, no matter where the source of it comes from.’’
The extent to which inflation is – or should – be imported is contested. One of the key advantages of having an independent central bank is that a country can set its own inflation destiny. There’s also a lively debate over the extent to which inflation is imported, versus the Reserve Bank of New Zealand simply making the same mistakes as other central banks around the world: not recognising that the initial economic recovery from lockdowns was stronger than expected and so keeping the cheap money hose on for too long, blowing up house and asset prices and fuelling intergenerational inequity.
However, Robertson is interested in the things that he can control – of which Adrian Orr and the Reserve Bank are not one. He points to the fuel excise reduction that was made last month as taking some heat out of it and strongly pushes on Labour’s supermarkets inquiry which the Commerce Commission completed last month. In an earlier draft last year the commission had said one of the option was splitting up the two major supermarket chains Foodstuffs and Woolworths, in some form. The final report did not recommend that, but Robertson says that all options – including more radical changes – are still live. ‘‘Oh, they definitely are on the table. ‘‘There are some very good recommendations, but as you point out, they didn’t go as far in the recommendations as some of the discussion… What we’ve said to the supermarkets is, we want to see an improvement here. We want to see prices more reasonable for New Zealanders. If the things that have been recommended in the report don’t deliver that, then we’ll be prepared to move further.’’
Iask Robertson about how difficult it is to manage what increasingly looks like a disconnect between what people are feeling out there in voterland, and what the Government sees as the things driving an increase in the cost of living.
He hews back to a finely tuned attack line that he has been deploying against the National Party for some weeks now, which boils down to Labour investment versus National cuts to pay for tax cuts for the wealthy. But clearly he understands there’s risks here.
‘‘So the politics of it, I get. I understand that people have got massive cost of living pressure. We’re alleviating that where we can, but there isn’t a free lunch here. And if we cut off that long-term spending where we need to make those changes, New Zealanders ultimately suffer.’’
Robertson – and Reserve Bank governor Orr – have both been making the same argument. There certainly isn’t a free lunch and there are big tradeoffs present in squeezing inflation out of the system, especially if it is trying to be achieved quickly. Most economists argue that squeezing inflation out of the system too quickly would be counterproductive, resulting in disruption, an unemployment spike and recession.
Some of the big investments that Robertson is referring to will be met in the Budget on May 19. Within Labour, Robertson has been driving the party’s infrastructure agenda since early 2020 when the ineffective Phil Twyford was effectively pushed aside and a pile of new spending on predominantly roads was embarked on in the socalled New Zealand Upgrade.
‘‘New Zealand’s population grew from 3 million
‘‘I don’t think New Zealand has had the infrastructure investments it’s needed over decades to be the kind of economy we should be.’’
to 4 million across about 30 years, and from 4 to 5 million across about 15 years – half the time. In that period we didn’t invest in the long-term things we needed: the housing, the roads, the public transport, and we’re suffering for that now,’’ he says.
‘‘And so the way I view my job is to get the balance right, do what we can do in the near term for those who need it the most, but not give up on those longer term issues.’’
One of those issues – one that hasn’t been associated much with Robertson but which he has been involved in the whole away along, is Three Waters. At its heart this is not really a local government reform, but an infrastructure one, which through political mismanagement has become bogged down in arguments over local democracy and iwi co-governance.
‘‘I happen to think this is one of the most important infrastructure changes we’ll make. Almost every week there’s a story on Stuff about a problem with water: a boil water notice, asbestos and some pipes, you know, issues with stormwater flooding.’’
While he says that it is important to listen to concerns over governance, ultimately, the changes will go through. ‘‘The overall reforms are essential not only from an infrastructure perspective, but from a health one as well.’’
But it is putting together the budget that has also been central to Robertson’s life these past few months. ‘‘There’s always more being bid for then there is money to do. So there’s a period in my life where I’m saying no a lot to people,’’ he says, explaining that the Government is now working out how to package it all up.
In last December’s Budget Policy Statement it was announced that there would be big licks of money for climate change, housing and health. And being a Budget, there will probably be some cash stashed away for a surprise policy or two.
This year’s operating allowance – new extra operational spending for year – will be $6 billion, but Robertson has been at pains to point out that it will include a one-off component for climate and health. In particular, wiping the persistent district health board deficits off so that the new Health NZ organisation can start with a fresh slate
‘‘Some of that is making sure that the health system itself starts from a basis where it’s not inheriting massive debts and deficits from the previous incarnation … it’s what we are calling a ‘reset’ essentially,’’ he says
But inflation will obviously gobble up some of the increase, and Robertson hoses down too much forward expectation, warning that it won’t be a big new spending Budget – but keeping improving things Labour promised to do
‘‘There’ll be some new spending, but a lot of it is just the mechanics of keeping going, making sure New Zealanders have got the public services that they need.’’
There are also some new fiscal rules coming down the pike. When Labour was first elected in 2017, it adopted new fiscal rules governing spending – these were designed to give some principled guidance around spending and try to prove the party wasn’t profligate with other people’s money .
‘‘You know, Covid came along and we had to spend and we’d saved for the rainy day as a country and it came and we did the right thing, in my view, to spend how we did. We’re now coming to a budget where we have to reset those fiscal rules.’’
Yet of all the things that the Finance Minister – and Minister for Infrastructure – has on his plate, it is ‘‘the infrastructure deficit’’ that keeps him awake at night, he says. This has been a recurring theme during interviews with him since the start of 2020.
‘‘I don’t think there’s probably many people lying awake at night thinking about them, but I am concerned about it because I don’t think New Zealand has had the infrastructure investments it’s needed over decades to be the kind of economy we should be.
‘‘If you are worried about productivity, congestion in our big cities is a major problem,’’ he says also listing off housing and Three Waters.
It hasn’t been an easy few months for Robertson. Aside from putting the Budget together, he is the local MP for Wellington Central, an electorate seat that Parliament sits in and a part of the job that he clearly loves.
In his role as the local member he did a lot of work behind the scenes for the weeks during the occupation of Parliament and the surrounding streets, which ended in a riot as police cleared the grounds on March 2.
Yet he, like the whole country, is starting to emerge from the fog of Covid as the future looks more open, more normal and freed from the constant threat of lockdowns, business restrictions and so on.
‘‘ I just think it’s an acknowledgement that as we come through this period of time where a lot of New Zealanders have had Omicron – or their family have had it – that this has been a really hard couple of years for New Zealanders and with the cost of living rising off the back of that, that’s hard and we know that people’s mental health takes a hit in those situations as well as their physical health.
‘‘And I think it’s important that we do acknowledge that New Zealand has done really well here.’’
One of the bugbears of all politicians is that voters crave more.
You won’t often be thanked for the last good thing that you do if a new problem emerges. And so it is with inflation. The country gave the Government good marks for Covid management and an unprecedented majority, but Covid is no longer the issue du jour. Inflation is.
And how the reality and politics of that are balanced with the other things that Robertson wants to do – will determine his success this year. And the fate of his big project, trying to prove that Labour is a sound economic manager.
The 2022 Budget will be handed down at 2pm on May 19.
Almost every week there’s a story on Stuff about a problem with water: a boil water notice, asbestos and some pipes, you know, issues with stormwater flooding