Clock ticks for Labour's battle with inflation

‘If it isn’t hurting, it isn’t working’, John Major said of the remedy

Time is cruel to everyone, but it’s particularly cruel to governments struggling to cohere two countervailing and contradictory forces: the immediate wants and demands of the electorate, and the ambitious legacy projects of its ministers.

This challenge is particularly acute in a time of high and broad inflation, when the temptation is to aid the electorate by hosing them in money, a tactic that’s more bonfire than bromide.

Tackling inflation means sucking demand out of the economy, usually with higher interest rates. This is, by its very nature, painful. Former British Chancellor John Major (later prime minister) said of tackling inflation in 1989, “if it isn’t hurting, it isn’t working”.

Well, we’re about to find just how much hurt the electorate can take — and whether it’s willing to re-elect the Government presiding over that hurt next year.

The Government got unlucky with its Budget this year. With $5.9 billion in new operating spending, it was easily the biggest Budget (as Budgets are conventionally understood) in recent history, yet it was almost literally blown out of the news cycle a day later by a North Island tornado.

The Government is burdened by the task of finding a bridge between the euphoric highs of its multiple crisis responses in its first term, and its clear transformational ambitions in the long term. The current Budget did not find this bridge.

The difficulty is this political and economic climate is about as hostile as any Jacinda Ardern has encountered as leader.

Labour MPs, including the Prime Minister, are re-energising themselves after a punishing start to the year, which has seen the party slip behind National for the first time in two years. Ministers have been roadshowing the Budget this week, averaging about 10 media engagements a day.

Ardern’s trip to the United States, in particular the Harvard commencement speech and White House visit, will give her the opportunity to elevate herself above the bunfight that is domestic politics.

Overseas, most prime ministers are feted with a caricature of themselves. In the US, Ardern is lauded for her post-March 15 firearms legislation, and the Covid response. Domestically, her Government faces questions over gang-related gun violence, and a daily Covid death toll that currently exceeds the US’.

Finance Minister Grant Robertson has been juggling a busy Budget roadshow with local electorate and Labour duties. He ended Budget week with a visit to Vincent’s Art Workshop, a well-loved community venture in Wellington, to farewell one of its long-term staffers of 29 years. This week, he briefly paused his ownpost Budget roadshow of chambers of commerce to speak at the tangi of Joe Hawke, former Labour MP and Bastion Point occupier.

Neither event will win Robertson any votes, but they’re grounding, and you need that in this business — Labour will certainly need grounding as it heads into what is perhaps its most difficult political year.

At the heart of the Government’s woes is whether it’s lived up to the ambitions it set itself in 2017. In the Speech from the Throne, Ardern said her Government would be one of inclusion, transformation, and aspiration. This is an inclusive and aspirational Government — it’s set itself ambitious targets in areas like child poverty, climate change, and transport, but so far it’s hard to argue a strong case for it being transformational.

To transform something, it must change form in some way. But this Government hasn’t changed substantively from its predecessor beyond being a bit more inclusive and aspirational. Five years in, without real transformation, the aspirational stuff is mocked as much as praised.

That tension between aspiration and transformation reached new heights in Budget month.

The Infrastructure Commission warned the Government it needed to get better use out of its infrastructure and sounded the alarm on building any new highways, this was ditto-ed by the release of the Emissions Reduction Plan a fortnight later, which added a quietly ambitious target for boosting renewable energy consumption to 50 per cent by 2035, and having people drive 20 per cent less by then (that year the Government wants 30 per cent of the light fleet to be zero emissions too).

That’s not a bad aspiration — but the plan, though more detailed than any other we’ve had, didn’t exactly detail how we’d get there.

Meanwhile, the challenges of the present, almost exclusively related to inflation, are goading the Government into dropping its sights on the future.

In the past fortnight, both Treasury and the Reserve Bank delivered gloomy inflation forecasts. The Reserve Bank’s was slightly more optimistic than Treasury’s because it factors in higher Official Cash Rate guidance — swapping out one ill for another, as far as the electorate will be concerned.

This week, Reserve Bank Governor Adrian Orr tiptoed into the most contentious political topic: whether the Government’s spending is putting pressure on inflation with an answer, which, like the prophecies of the Delphic oracle, could be construed to mean whatever.

Orr said the bank believed Government spending “is putting upward pressure on aggregate demand and hence inflation now” (tsk tsk, Mr Robertson).

But he gave succour to Robertson, adding “over the course of the projection period [Government spending] starts to have a negative impulse”.

Translation: the Budget that’s the subject of such great scrutiny now, which kicks in from July 1, isn’t the inflationary villain it might be — but previous spending decisions were.

More bonfire than bromide.

National is wisely shifting its attack to next year’s Budget, slated to include $4.5b in new operating spending, of which Treasury thinks $3.5b might be eaten up simply paying for the inflated cost of public services. That would leave just $1.5b for election-year Budget goodies — a similar amount to the relatively restrained Budgets National delivered in its third term.

It’s little wonder National finance spokeswoman Nicola Willis began arguing, minutes after the Budget was released, that Robertson would likely lift those allowances, as he has done, in one way or another, for every Budget he’s delivered.

There’s no immediate solution to this inflation crisis that doesn’t involve hurt. Unfortunately for Labour, most of that hurt will be booked in election year, with an OCR of nearly four currently signalled — double today’s cash rate. That’s paired with inflation that’s still set to be 3 per cent the quarter before we likely go to the polls. The only bright spots for Labour are that growth and unemployment are expected to look good next year, before worsening.

By the middle of the decade, the economic picture looks good on the inflation front, but with relatively slow growth (1.2 per cent) and high unemployment (4.7 per cent).

But there are threats to that too — and this is where the future comes crashing into the present. Treasury’s Budget forecasts, which show inflation heading towards 2 per cent by the middle of the decade, are based on an oil price of US$69 (NZ$106) a barrel in 2026 — the Reserve Bank’s forecast is only slightly higher. Both forecasts are based on oil futures markets.

But a survey of energy market professionals in January, before the war, warned climate concerns and supply chain disruption could see prices range from US$55 to US$125 by 2025 — or as high as US$150 in the next five years — $40 above where it is now. To paraphrase Crocodile Dundee (in honour of the Australian election), “You call that a cost of living crisis? — This is a cost of living crisis” — and it might not be going away.

This long-term pain could come crashing into the present when the Government decides whether it will further extend fuel tax relief in a little over two months — don’t rule out an extension. It’s outrageously costly, but even the Green Party is cautious about lumping painful costs onto motorists when New Zealand has so few alternatives.

For Ardern, a prolonged energy crisis could be something of a morality tale for her transformational agenda, one that exposes the transformation for being too far away, and not urgent enough, while shining light on the challenges she was transforming for aren’t in the future.