By Craig Renney*
This week sees the publication of New Zealand Consumer Price Index (CPI) data for the first quarter of 2022 by Statistics New Zealand. Bank economists such as those at ANZ and ASB are forecasting that inflation will rise above 7%. Both the Reserve Bank and the Treasury see inflation being higher than experienced recently. Inflation has become a core political issue in New Zealand and overseas. Inflation is affecting the French election, the US mid-term elections, and has been responsible for the political crisis currently engulfing Sri Lanka.
Some economists, and even some who failed their economics exams, continue to suggest that the government is responsible for this. Their justification is that New Zealand had one of the strongest fiscal responses to COVID-19. Government spent more here to protect jobs and businesses and we are now paying the price for that – with higher interest rates and higher inflation. As David Seymour put it we are now facing a “direct response of the Government's costly COVID response.”
A cursory glance at the international data might appear to support that view. IMF data shows that New Zealand has had the second biggest discretionary fiscal response to COVID among advanced economies. Other countries with strong fiscal responses to COVID (USA and the UK) are also facing strong inflationary pressures. US inflation reached 8.5% in March, and UK inflation in March was 7%. Both are decade-long highs.
But if government spending is the driver of higher inflation, then countries with lower levels of COVID-19 spending should have lower levels of inflation, right? Sadly, this is where this idea falls apart. Take Spain for example. It has had a level of COVID fiscal support around 40% of that found in New Zealand. Its inflation rate is 9.8%. What about France – it spent a little more than Spain, but less than NZ. Its inflation rate is 5.1%. That is the highest rate since 1997. Sweden had the second lowest level of fiscal support during COVID according to the IMF. Its saw inflation leap to 6.1% when last measured.
The truth is, there does not seem to be much of a relationship between inflation and government spending on COVID at all. Some people point to Australia as an example and say that lower inflation there proves this link. The reality is that inflation in Australia is measured quarterly, and we simply haven’t had the latest measurement. But the evidence so far from inflation expectations data is that it will rise to levels currently seen in New Zealand.
What is driving inflation right now is the same around the world. The IMF notes household energy costs and the costs of commodities are rising on the back of the Ukrainian conflict. Supply chain disruptions on the back of COVID shutdowns in China are causing shortages of certain goods. Credit rating agency Fitch notes that Russia and Ukraine account for a third of the global wheat and barley production, and two-thirds of the world’s sunflower oil exports. Lockdowns in China to try and prevent COVID spread may also disrupt the planting of rice and corn. This together with higher fuel costs are driving global food prices – and is in part why they are rising in New Zealand at their fastest rate in 10 years.
Given the above evidence, it is imperative upon those demanding cuts to spending to show how it would work. They need to hold up the things that they would cut now for public examination, and demonstrate how that cut would lead to lower prices for New Zealanders today. They must be honest with the public about what it is they classify as “wasteful” spending. It’s not okay, as Christopher Luxon has done recently, to demand that things like public transport are cut and then state, “I haven't thought too deeply about it too honest.”
Those demanding cuts should be honest about who they are trying to protect from the current round of inflation. The last attempt at a cost-of-living package from National was squarely aimed at those with higher incomes. Removing the 39% tax bracket would benefit the top 3% of income earners in New Zealand. The proposed changes to mortgage interest deductibility and to the bright-line test would benefit landlords and property developers. This isn’t a package based upon defending Kiwis from inflation. It’s a handout to those who already have enough.
Rather than cutting back the $6 billion in new operational expenditure at Budget 22 next month, we could do something that will genuinely protect New Zealanders from inflation. A Green New Deal that invested in energy conservation, home insulation, and in a transfer away from carbon intensive industrial processes would create jobs, save money, and help address our part of the climate emergency. Ramping up the building of state housing would address rental prices, reduce our costly reliance on emergency housing and motels, and give some of the most vulnerable New Zealanders the best start in life.
Reducing spending on essential public services at a time of increased demand would be making the poorest bear the costs of inflation that is not their fault. Doing so on the basis that public sector spending in NZ is delivering higher inflation globally would be economic idiocy of the highest sort. Our ability to influence globally driven inflation may be beyond our control, but our response to that challenge is not. Budget 22 next month provides an opportunity to make sure that those with the least ability to pay are protected in the short-run, and that all New Zealanders benefit from the creation of a more inclusive economy in the long-run.
*Craig Renney is the Council of Trade Unions Policy Director and Economist. He was an economic advisor to Finance Minister Grant Robertson between 2017 and 2020.
56 Comments
I'm going to give a real layman's take here. Feel free to tear me to pieces.
1. As we know, the CPI comprises an aggregate of the prices of goods and services. The only way I see the govt causing price inflation is if their spending impacts supply in the marketplace. Therefore, we can't really blame govt spending for increasing the cost of vegetables. They're not really building houses either so we can't really blame them for impacting the cost of building supplies, except if they're being swallowed for any construction they may be doing.
2. The govt's fiscal spend seems to be focused on health. I don't really understand why that would be impacting price inflation so please enlighten me if I am wrong.
3. I'm going to harp on about property because it gets too much air, but I also don't see how govt spending is impacting the price of land. Probably not even worth mentioning as land prices have a directly benign impact on the CPI.
Fire away.
You pump money into a system, it will find somewhere to go (just like pumping too much water into a paddling pool). It doesn't have to be where the government is directly pumping the money. It could be the second/third/fourth set of hands that have the money that goes and spends that money on goods. If these people have an excess of money, they don't second guess the price. If they are tight on money, then they second guess if they want to pay that much. This is how inflation basically works. Too much money chasing too few goods.
You pump money into a system, it will find somewhere to go (just like pumping too much water into a paddling pool). It doesn't have to be where the government is directly pumping the money
I understand this but we're talking about govt spending. Not quite the same as commercial banks creating mortgages to bid up existing house prices.
It's just a different method of transmission. If the government suddenly decides to give Kiwi Bob the bridge builder $500M to build a new harbour crossing and he is going to make $200M profit on that, then Kiwi Bob is going to flush $300M into the economy through buying goods and services to get the bridge built and $200M into the economy through buying himself some new toys. The money will still always flow into the economy somewhere, so if it is more money than would be spent by the government in a normal year, then it is stimulatory.
Sure. The funding is spent into existence, but it is not necessarily inflationary. The money supply has been expanded but its impacts on the price level could be benign.
We need to be careful about how we define "inflation." Commercial banks lending to bid up house prices is inflationary.
Here's my $0.02 ($0.03 when adjusted for inflation).
1. Government spending impacts inflation by influencing demand as well as by influencing supply. For example, the Goverment wants people to buy green ferraris so it announces a new programme which will help NZers buy green ferraris. Under the programme, for every $1,000 you put towards a green ferrari, the government will pay another $1,000. This increases the number of people who can afford a ferrari (as for the consumer ferraris are now much cheaper) thereby increasing demand. This drives inflation - because more people can afford ferraris, more people compete with each other to buy them, thereby bidding up price.
2. Government spending on health will eventually trickle into other areas. E.g. Government set up a fund to pay doctors around $240 per vaccine administered, which was funded by printing money. This money went into medical practices, increasing revenues and profits. This money was then paid out to doctors and staff of these practices. Doctors and staff then went and spent this money in the economy. On a small scale, the money introduced into the economy would not have mattered much - but we are talking billions and billions of dollars introduced this way.
3. Government spending is not impacting the price of land. However, I think it is clear that a low OCR affects land prices. In theory, the OCR is not influenced by the government, but in reality it can be and is. Low OCR makes borrowing money to buy a house very cheap (in fact, at its lowest point, it was free in real terms). As it gets cheaper to borrow money to buy a house, more people can borrow money, and the amounts they can borrow go up. People take this money and compete with each other over the same number of houses. House prices go up.
The one thing no one wants to discuss is cutting back on credit creation and mortgage top ups against now questionable equity.
Which in my mind is where the real inflation is. Look at Japan, massive spend in infrastructure. None of it impacted the cost of living for Japanese.
I really think the writer over-estimates the government's ability to spend money on anything and get actual value for it. Just spending for the sake of spending isn't really good enough when you're taxing the inflationary components of the wages people need to make ends meet.
What about increase in money supply? 20% of all USD in existence were created in the last year. Europe, Japan, China and many others have also been printing with abandon for years. Granted, much of this excess has been stuck in the asset price bubble but enough has entered the tradable economy to influence inflation. Is it just me, or is it really weird when commentators completely ignore this factor?
Yes, nzd money supply also increasing but less so than our trading partners. Having an export based economy means we import inflation from them.
FWIW I don't believe central banks in many countries incl. NZ are completely independent. There's usually a lot of implicit negotiating going on.
Fair enough. Interestingly, imports as percentage of GDP also very low compared to most countries. About 21% of GDP. Average about 30%
I still think there's an import effect going on. But like most things , it's multifactorial and some factors affect each other so there's no one smoking gun.
It would still be nice to introduce some money supply questions into interviews with pollies, academics and commentators, at least to hear their views.
This is THE issue... increasing the money in circulation and chasing the same goods. This is economics 101 stuff, it isn't rocket science.
This looks to be a rather partisan article. I note that he was an economic advisor to Grant Robinson 2017-2020. It appears that he may have been partially responsible for the current inflation.
https://www.wsj.com/articles/biden-errors-inflation-mitt-romney-woke-ad…
https://www.wsj.com/articles/government-spending-fuels-inflation-covid-…
Richard Werner: QE Infinity https://www.youtube.com/watch?v=xkGZH1IMr_I
Richard Werner: QE Infinity https://www.youtube.com/watch?v=xkGZH1IMr_I
This round of inflation is probably permanent, and probably upward until collapse/recession/stagflation.
It is not being driven by government spending, but we can say it was driven by spending per se.
It is actually exponential consumption coming up against the limits of the planet, to provide. Scarcity 101 - except that this is ultimate scarcity; no 'replacement at a certain price-point' nonsense this time.
I'm not sure where you're coming from. Commodities are not running scare to the point where it's the cause of inflation currently. Prices are high but its just part of a cycle.
We're only getting more efficient at getting them. A single average cubic mile of Earth’s crust contains a billion tons of aluminum (from bauxite), over 500 million tons of iron, a million tons of zinc and 600,000 tons of copper
Where have you been?
try reading up on EROEI.
It takes ever-more energy to get the ever-more dispersed molecules to which you refer. And ever-more energy to get the remaining energy.
Come on - get with the programme. Perhaps asking asking yourself about phosphate...... oh, and Julian Simon was wrong....
Richard Werner: QE Infinity https://www.youtube.com/watch?v=xkGZH1IMr_I
Well, 'e would say that, wouldn't 'e (to quote Mandy Rice-Davies). Being a CTU 'economist' and all. Perhaps 'e should check the definition of 'non-tradeables', figger out the Gubmint share of That, and come to a more nuanced POV.
As one example of non-tradeable inflation, try Ecan rate proposed increase of 25%.
Good piece - but then I am guessing my politics are more Craig than Christopher.
However, I do think it is important that all commentators recognise that Govt spending (increases or decreases) can have an impact on prices. For example, a Govt investment in solar panel subsidies would put upwards pressure on the cost of getting solar panels fitted - at least in the short-term. However, the same scheme should have a deflationary impact in the medium-term as the industry expands to meet demand, and household spend on energy falls. The challenge for Govts is scanning for inflation risks upfront - before they spend - and doing what they can to mitigate the risks. So, to use the solar panels as an example again, the risk of fitting prices increasing could be mitigated by setting ceiling or guide prices (per kwh) for installation work that qualifies for a Govt grant.
I think Craig Renny is trying to take the heat off Labour.??
When you have fiscal deficit spending together with Central Bank money printing ( seen by doubling of balance sheet), ..... and you throw that at an economy that still has an appetite for borrowing/spending, then what do you expect.?
In NZ, because there was no recession, and Govt supported wages during covid, the private sector was still in a "spending mood".
first link shows housing credit growth in 2021 approached 12%
https://www.interest.co.nz/charts/credit/housing-credit2
Second chart shows Private sector credit growth from 2000 onwards.... very high rates.
https://www.rbnz.govt.nz/-/media/ReserveBank/Images/Speeches/2020/2020-…
One thing I've learnt from studying history is that a "supply shock" is NOT the cause of inflation.. The seeds that are the cause are sown over time, and in my view are largely a function of monetary inflation.
The supply shock is kinda like "turning the light on in a dark room". ... the dark room being unfettered credit growth/money printing that has been going on for a long time, and which has not manifested in an economy , in the prices that make up the CPI.... so much.
In 2007 Central Bank bal. sheets of the big 4 was about 5 trillion .... Now it is over 40 trillion
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To the extent that Central Banks are part of the Govt, ..... then yes , Govts are responsible for inflation.
AND... I'd say Central Banks are tied to the hip, in regards to how close they are , with Govt.
At this point in time Govts/Central banks are not really serious about dealing with inflation. They just want to gets us to believe they are.... ( expectations ).
just my view.
A DIFFERENT NARRATIVE:
What this article fails to address is the Forex Market.
To the untrained eye the NZD-to-USD exchange rate may look fine at NZD $0.67.. HOWEVER, the Mass Printing of USD has devalued the purchasing power of the USD..
"SO WHAT" you ask? Well, the world is priced in USD and due to the RBNZ's "money printing", our exchange rate is the same as in 2019. ONE PROBLEM - The USD is worth much less now than back in 2019 !!
Supply and Demand people.. the more NZ Dollars floating about, the less they buy of other currencies. When Bill English was Finance Minister a desirable exchange rate (favoring exporters) was NZD $0.63. What may have been desirable back then would be disastrous today.
Don't buy into the Keynesian fever dream.
PS: Also the outrageous housing market will lead to people demanding outrageous wages, which aren't outrageous. Should have put a pin in that one !!.. again.. Housing = Credit Availability.
Good Luck.
The only reason there is any confusion about this at all is because people refuse to distinguish between monetary inflation and price inflation, which are two entirely separate and distinct phenomena.
I say "refuse to", because at this point that is the only rational explaination. It's not hard to understand the difference, and the types of people who write about these things surely must have an obligation to understand it.
I simply cannot believe that someone with Craig Renney's credentials can get this wrong without trying.
Inflation is inflation… no distinction. Money is ultimately measured by what goods and services it can buy now and what it can purchase in the future (store of value).
It’s clear nations have by in large overcooked their stimulus in the pandemic.. we’re encountering the perfect storm and the only way out is to let it rip.. then we can rebuild
Dying of Money - Lessons of the Great Inflations 1974
" The expansion of Germany's Reichsmark circulation, that is to say its money supply, always led the way with inflation. When it abated temporarily the inflation abated temporarily, when it stop permanently inflation stopped permanently. Nevertheless inflation was always blamed on everything under the sun but Government spending."
"Lenin is said to have declared the best way to destroy the capitalist system is to debauch the currency. By a continued process of inflation Governments can confiscate, secretly and unobserved an important part of the wealth of all their citizens."
“Craig Renney is the Council of Trade Unions Policy Director and Economist. He was an economic advisor to Finance Minister Grant Robertson between 2017 and 2020”
This disclosure is important for readers to know. Easily missed. Grant is obviously worried about CPI release today & is looking for help so he does not get blamed for being over 7%.
The government has significantly contributed to the economic mess NZ is in & any decent economist knows this.
Grant’s proposed extra $6 billion spend to ram through it co-governance agenda to get more votes is such a waste of money, provides more harm than good and stokes inflation much higher than necessary.
Sorry Craig, but you make a derisory comment about economists that have failed their exams, and yet you work for CTU and previously for Robertson. Sigh.
It is little wonder that NZ is in the position it is now if you have been advising the Government. The Government has inflated the money supply whilst KNOWING that production cannot keep up with the demand that the money supply inflation has caused. And somehow that is everyone else's fault? And now you are proposing MORE spending?
Unfortunately, you appear to have been part of the problem, and now you want to exacerbate it. This Government has spent billions and produced nothing to show for it. Since they have come to power, spending has increased 68% (core spend 2017 76bn, core spend forecast for this year, 128bn). And Government provided services haven't got 68% better.
What we are starting to see now is legislation inflation starting to flow through from scaffolding on building sites,higher minimum wages lifting all wages eventually,more holidays lowering productivity days,resource consent delays,iwi requirements and recognition and this is all before the mother of all inflations appears next in what we will all end up paying for water once its in four super entities control
Keith Rankin on cost of living v inflation
https://www.scoop.co.nz/stories/HL2204/S00066/problem-of-price-increase…
Terrible article.
Money printing does 2 things it drives inflation and debases the currency.
For some reason the writer hasn't referred to NZ's housing bubble. While the chief driver of NZ's housing bubble and crisis, has been the greatest period of catastrophic immigration in NZ history, money printing has helped inflate housing.
NZs cost of living crisis has NOTHING to do with the price of groceries or petrol which is the focus of media attention. The cost of living crisis is being driven by the largest mortgages in NZ history along with rents which are also the highest ever. On top of that is record rates from councils who owe more debt - again due to immigration - than any other period in history.
I'm stunned that the writer is an 'economist ' but then he did work for Grant Robertson, who directed the Reserve bank to print the cash.
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