Never mind the economy – it’s about the voters, stupid
When a country’s Reserve Bank governor admits to deliberately engineering a recession to bring down inflation – suggesting that workers should get lower pay rises and employers trim prices – one thing’s certain, he’s playing politics with monetary policy.
Wednesday’s Reserve Bank of New Zealand monetary policy statement, which raised its official cash rate (OCR) by a record 75 basis points to 4.25%, was a study in offence-is-the-best-defence on governor Adrian Orr’s part. It also employed that most useful device in a politician’s toolkit, amnesia.
Forgotten was the fact that it was the Reserve Bank itself which flooded the market with cheap cash when it printed more than
$50 billion between March 2020 and July 2021, causing drunken-sailorlike spending. Instead, it was the punters’ fault.
‘‘Think harder about your spending,’’ Orr admonished. ‘‘Think about saving rather than consuming. I know that’s a strange concept.’’
If saving was hard before, Orr has all but ensured it will be impossible now. The Reserve
Bank’s forecast of four quarters of recession, starting next June, contracting the economy by 0.5%, will see to that. As will the dire forecasts of a 5.5% OCR next year, leading to a GDP decline of 1%, which will push unemployment to a forecast 5.7%.
Adversity is an unequal opportunity provider. Worst affected will be those holding debt, as rising interest rates make it harder and harder to service that debt. That’s first-home buyers, the young, and those on benefits and low wages who struggle to pay the bills.
If further evidence of the politicisation of monetary policy was needed, then look no further than a slew of economists who have called Orr out on his burn-downthe-economy strategy. On RNZ, Auckland University economics professor Robert McCulloch called it ‘‘probably one gigantic mistake’’, arguing instead for a more modest OCR rise.
Bank economists joined the chorus of disapproval, labelling the bank’s move ‘‘hawkish’’, with several questioning the necessity of the record rise. In trying to kill inflation, will the economy be killed in the process, is the fear.
Jarden’s investment strategist and economist John Carran describes the Reserve Bank’s overtightening of monetary policy as ‘‘a significant risk’’.
If, as McCulloch contends, Orr’s motivation for raising the OCR was to fend off criticism that the bank was oblivious to the signs of surging inflation, with Orr desperate now to look tough in fighting inflation when it has been too soft for too long, it has
presented conundrums aplenty for political parties.
For Labour, it’s chickenscoming-home-to-roost time.
Having continued to spend on its transformational change programme, such as the centralisation of the country’s health, tertiary education and three waters systems, the party now faces the prospect of holding an election when a major proportion of its voters will possibly have been hit with 8% interest rates, alongside increasing inflation eating away the value of their pay packets. This will make the possibility of a Labour win in 2023 seem more like a mirage in the desert.
Will Finance Minister Grant Robertson go from being the country’s Father Christmas, happy to splash the cash in an election year as he intended, to Scrooge, as the Reserve Bank has instructed, in an effort to present the Government as a responsible fiscal manager?
The risk if he does that is he’ll have little to offer voters in next year’s Budget, which will reinforce the view that the Government hasn’t listened to the electorate’s woes and doesn’t care.
All the empathetic messaging in the world (‘‘We know Kiwis are doing it tough’’) will get you only so far unless there’s strategic policy to back it up.
Worse still is Robertson’s comment this week blaming the economic woes on external forces while reminding us that New Zealand enjoyed the tenth-lowest inflation rate in the OECD. It’s the sort of patsy messaging that infuriatingly ignores voters’ pain.
For the National Party, this week’s dire economic warnings have turned the fevered dream it’s hoped and prayed for since 2020 into reality.
Using bad economic news to quietly sideline a previous policy of axing the 39% tax rate might make the party a more qualified economic manager in its eyes, but recent polling shows National still has some way to go to earn voters’ trust in it.
Simply telling the electorate that Kiwis need the National Party to demonstrate sound economic management, as Christopher Luxon had the audacity to do this week, while providing voters with only one economic policy to date on lowering tax margins, isn’t enough. National should be producing strong economic policies now, and be able to defend them vigorously, to do that.
During the 1992 presidential campaign, Bill Clinton’s strategist, James Carville, coined the phrase, ‘‘It’s the economy, stupid’’. In 2023 the same will hold true. Except both parties would do well to remember the new variant: ‘‘It’s the voters, stupid.’’