By Jenée Tibshraeny
‘It’s easier to cool an overheated economy than it is to fire up a frozen one’.
This was the approach taken at the start of the pandemic, as the Government and the Reserve Bank (RBNZ) threw everything at supporting economic demand.
But now that it’s time to remove the punchbowl from the party, it’s become clear it will be difficult to ensure we walk away with only a mild headache not a debilitating hangover. It’s going to be difficult lifting interest rates to cool inflation, without bringing the economy to a grinding halt by eating too much into mortgage holders’ disposable incomes or crashing the housing market.
Nonetheless, even a relatively smooth landing will produce collateral.
Those with lower disposable incomes are already being disproportionally affected by higher living costs. Many of these people might also be asset-poor, meaning they didn’t benefit from the boost the RBNZ gave prices in 2020 and 2021 (and the years prior).
Meanwhile higher interest rates will bite recent homebuyers with mountains of debt the hardest.
The difficulty is, there is no quick and easy way for government policy to protect the vulnerable, currently earmarked as collateral, in our forthcoming journey to “normalise” a very off-kilter economy.
Sure, there are longer-term fixes. It's important these remain the focus of policymakers.
But without an obvious way of smoothing out the ride down over the next year or two, it’s difficult to see the Government coming in to bat for the most vulnerable, particularly if this group is small and powerless enough to not dent Labour’s chances of being re-elected at the 2023 election.
Let’s go back a step - what’s the problem?
All the stimulus provided by central banks and governments around the world since the start of the pandemic has increased demand, all the while Covid-19 disruptions have decreased supply. This is causing prices to rise.
While the aim of central banks was to lift inflation, they didn’t expect the moves they made to be so effective. Meanwhile, it was hard for them, in 2020, to foresee supply chain disruptions and labour shortages persisting this far into the pandemic.
So, the cost of petrol, food, building materials and labour are up.
Low-income earners are going to feel these price rises the most. If you only have $100 to spare each week, you’re going to notice a $30 increase in your grocery bill more than if you’re able to save say $500 a week.
Furthermore, because both the cost of building new houses and the cost of buying existing houses have gone up, so too have rents. Again, those with lower disposable incomes will feel this the most.
Welfare and wage hikes
Finance Minister Grant Robertson will struggle to support these people using welfare payments - by increasing the value of existing payments or widening the eligibility criteria for support. He would get slammed by the Opposition for borrowing and spending more at a time we’re trying to cool inflation.
As for the left, who are calling for higher welfare payments - Robertson can point to the fact he’s already lifted welfare payments.
Then there’s the minimum wage. The Government on Friday announced this would rise from $20 to $21.20 an hour from April 1.
The 6% increase aligns with the increase in consumer inflation, meaning Robertson can deflect criticism (using this measure at least) that ‘wage growth isn’t keeping up with the cost of living’.
He will also be able to deflect criticism ‘there isn’t enough separation between the Government and the RBNZ’, as a minimum wage lift of 6% arguably does the opposite of what the RBNZ’s trying to do, cooling inflation.
Nonetheless, the matter will give the Opposition the ability to say he’s contributing towards inflation, and hampering hospitality, tourism and retail businesses already struggling due to Covid-19 restrictions.
No clear answer
It’s difficult to identify other quick fixes to alleviate the pressure on low-income earners.
There will be readers who align with National and ACT and suggest the Government unwinds the rules it put in place to make life harder for landlords - Healthy Homes Standards, the removal of interest deductibility and the extension of the bright-line test.
While assessing these policies would see this piece take many tangents, the reality is, the Government won’t make U-turns on these policies.
Green Party supporters will call for rent controls. Again, the merits/problems associated with this are best addressed in a separate article. Nonetheless, Robertson ruled it out last week.
There are of course also structural changes that need be made to increase housing supply, improve competition in the supermarket, fuel and building materials spaces, and make the tax system fairer and more efficient. Productivity also needs to be improved; people actually need to be incentivised to upskill, innovate and work hard, rather than try to get rich by buying and selling assets.
It’s absolutely crucial the Government remains focused on addressing these longer-term issues. It’s made a start on a number of fronts, but has a long way to go.
While short-termism can be dangerous, it remains difficult to look at the rise in the number of people in need of emergency food and housing grants, and not think, what can we do about this - now?
The problem is, there is no easy fix, both practically and politically. It’s simply going to be difficult to soothe the pain associated with inflation and the tightening of monetary policy required to get on top of it.
Those already at the fringes of society will be hit hardest. It’s unlikely they’ll make a huge dent in the left’s support base. Although their disenfranchisement will chip away at the country’s social fabric.
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