Squaring the fiscal circle on what Govt has promised
When Adrian Orr stood up and gave the news that the official cash rate was going to be on hold for the foreseeable future, the results was drowned out by news of Newshub’s probable closure at the end of June.
Orr was asked about Newshub and – while offering his thoughts for people who might lose their jobs – he said one would expect advertising to shrink in industries that rely on advertising, partly because of interest rates trying to squeeze inflation out of the system.
The cost-of-living crisis and associated higher interest rates will be affecting many corners of the economy. TV news stations such as Newshub, which rely entirely on advertising, are some of the first in the gun. Other media, namely legacy newspaper companies (including Stuff, publisher of this masthead) have also been hit by advertising’s decline, but have subscriptions as a part of the revenue mix.
Orr made a couple of very interesting comments. First he reiterated that the bank is determined to drive out what he called “the evil” of inflation. He also made some strong remarks about the China inflation dividend having run its course.
What he said in effect was that China has gone from being a low-wage economy to a middle-income country and is no longer producing very cheap goods for countries such as New Zealand to consume.
This is a large structural shift that, of course, has been known in econocrat circles for some time, but it was useful for the governor to explain it. There is not just the monetary response to the hangover from Covid-19 that is happening, but also a structural change from the pre-Covid world economy.
One thing was clear from the monetary policy statement. Despite the bank thinking that it has more or less picked the track of the economy and won’t have to raise interest rates again, there are a couple of important caveats.
The first is that the bank has what the governor called an “asymmetric” appetite for risk. That means that although it sees the picture as pretty balanced, there is little room for upside risk. In other words, if too many pockets of inflation pop up, the bank will move to act quickly and higher interest rates will be the result.
However, Orr and the monetary policy committee don’t think that is likely. Instead the bank thinks interest rates will have to stay at the current level for the foreseeable future. While some analysts are picking there could be rate cuts in August, that is far from a universal view.
This means New Zealanders will continue living with the currently elevated prices, while also dealing with the highest interest rates since before the global financial crisis.
And despite interest rates not being near the levels they were in the late 1980s or early 1990s, very low interest rates combined with restrictive land regulation have driven house prices sky high in New Zealand.
Compared with previous periods, that means that although the cost of money for mortgages is coming back to something like the historical norm, the massive pile of debt that many New Zealanders are carrying just to be able to be homeowners means the pinch is felt quickly.
All of this matters for the Government, which has gone about trying to rein in spending, but the full picture of how much that is happening will not become clear until the May Budget. However, in Wellington stories and rumour abound about what is being cut. It is understood, for instance, that public sector plane flights have been severely curtailed. Head count across the public sector is being targeted and The Post has reported on cuts in Justice, Education and ACC in the past week alone.
The politics of this are broadly good for the Government. It was elected on this platform and Wellington was basically the one of the few cities in the country that remained a bulwark for the political left. That means, politically, that the Government can basically wear any pain it immediately causes in Wellington, although given the difficulty of getting employees in Wellington, there will be a few employers eyeing up the market more favourably.
Any broader implications in the delivery of government will only be felt in the coming years, although it is basically the Government’s thesis that fewer public servants can deliver the same amount of public services. Time will tell.
Luxon, Nicola Willis and the rest of the Government – including David Seymour and Winston Peters – have been doing their best to prepare the country for the era of restraint that is coming. And as the Budget nears, negotiations between the parties will no doubt become a bit sharper. The news yesterday that Christopher Luxon has claimed a $52,000 living away from home allowance comes at a bad time for the Government. Luxon is entitled to claim the allowance as he is not living in Premier House – the prime minister’s Wellington residence – because work is being undertaken to fix it up.
But given that he is a wealthy man and owns the house where he is staying mortgage-free (as well as a number of others), he has already come under criticism for not doing his bit for fiscal restraint.
This sort of criticism should be taken with a dose of context. Just because Luxon is a wealthy man does not mean that the allowance is a bad idea. There is always a risk that wealthy politicians can make a rule that works for them, but that can mean short-changing a future PM who is not as wealthy. And in the usual course of events, Luxon would live at Premier House, which he apparently expects to move into after work is done on it.
This should be a case for spending money on Premier House. New Zealand is not a two-bit poor country and whoever the prime minister is should have a decent residence where various dignitaries and New Zealanders can be hosted. The house has been nickel-and-dimed by a conga line of prime ministers, in common with the NZDF planes that sometimes ferry prime ministers round as part of their jobs.
Nevertheless for Luxon it was very much an appearance of “what is good for thee is not good for me,” and by Friday evening he said he would pay the money back, calling it a distraction.
The bigger fiscal question remains just how the Government is going to square the circle on everything it has promised in the May Budget. March has just ticked around and the Budget process is well under way.
Prior to the election it promised to continue health and education increases in line with inflation, deliver tax cuts, as well as various other spending promises. It will try to do this while also whipping the books back into shape.
And that is also in the context of coalition partners who want resources for their areas.
This will not be an easy task practically, and potentially even more difficult politically. All roads lead to the May 30 Budget, when there almost certainly won’t be interest rate cuts in sight. It’ll be a tough ask.