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.
164 Comments
...Meanwhile, it was hard for them, in 2020, to foresee supply chain disruptions...
As I recall in very early 2020 supply chain disruption was already biting hard.
Semiconductors it was further back than that even, in 2017 it became near impossible to get larger ICs like GPUs and ASICs that are used in crypto mining. Suppliers didn't want to ramp production however as they didn't want to flood the market if crypto crashed.
Reserve banks are run by economist for economists, generally they aren't that interested in what's going on in the real economy.
Actually, pending - and worsening - shortages have been long foretold. Here.
This article, because it is based on 'caused', not 'causal', is incorrect in most of it's conclusions.
We are at the business end of global depletion; call it supply chain if you must, but depletion is what is at the front end of it. We laid too many forward bets (on there being even more at every future moment, forever) and the last decode we've laid even more more. With Covid, they laid more on the more on the more.
Now two thing are happening. One is that scarcity is driving up prices of necessities. Underlying that, is the scarcity of energy, lifting the 'price' of all things (nothing happens without it). While 'price' may render some energy projects viable, more and more won't be energy-viable. So this is a one-way trip, accelerating.
The other is that you cannot control ultimate scarcity of a necessity, using interest-rates. All you can do, is disenfranchise the poor, first. Ultimately, you hasten the (now inevitable) moment when the whole ponzi collapses.
Thus the need to go to war (which is always driven by scarcity).
We were already at the planetary limits of exponential growth, ex-covid. Yet some are still away back at the anthropocentric stage of saying we need to build more houses. And exponentially more houses. And exponentially more houses. And - madness. Why we followed a blind faith like neoclassical economics, beats me. Why we continue to, is just astounding.
Then again you have the (I suspect) politically-motivated domestic example of Fletchers slowing down the supply of gib, for no apparent reason, other than to put a spanner in the works of the building boom??
https://www.newsroom.co.nz/building-projects-grind-to-a-halt-as-dominant-fletcher-freezes-gib-orders
It staggers me that too many of our politicians are resistant to intensification and planning for more public transport in future (and thus more local living overall). The idea that we need more roading projects out on the fringes of the city at $300,000+ per metre to "give people choice" is...it's just nuts. Not a smidgen of forward thinking there at all.
" 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.:
It may seem a little pedantic but this phrase is indicative of so much thinking....with a big chunk of participants in the domestic economy having zero (or even negative) savings it misses the reality that too many already had zero discretionary income pre inflation.
Adding inflation to this (large) group dosnt just reduce savings/spending, it increases defaults....and those defaults cascade.
Economies are not suspended from the top.
money for the most vulnerable? minimum wage to be raised, that puts a load onto the employers. tax cuts then, that puts a load onto the government. apart from the radical restructure, GST introduced, by the Lange/Douglas lot, who has ever heard of a Labour government reducing income tax at any level?
For the historically-challenged such as mills...
1. State-owned enterprises Act 1986 - the obscene selling-off the family silver in late-night deals to profiteers, who needed to be bailed out 5 minutes later (Fay and Richwhite, looking at you)
2. Commerce Act 1986 - gave free rein for the same profiteers, who were about to take ownership of our publicly funded and owned utilities, to price-gouge NZer's as much as the market could bear; which continues till today.
3. State Sector Act - 1988; swept away the 'public interest'-orientated public service and those with professional skills; replacing it with a siloed, corporate model based on New Public Management theory and Public Choice Theory - ideologies last seen prior to the Great Depression and pre-1890s. Break the link between funder and provider. Targets, inefficiencies, cost over-runs galore. Keep costs off the books (looking at you Bill English) Hello Transmission Gully. Substitute run-down infrastructure, public health and housing crises, etc.
Oh and taxes were slashed for the wealthy. https://teara.govt.nz/en/graph/21553/income-tax-over-time
Labour could provide tax relief on the lowest income households by making the first $20k PAYE-exempt and offset this Crown revenue loss with tax on speculation.
That's an extra $2.5k back into the pockets of households that need it the most.
Plus, the long-term benefits of making asset speculation less attractive in NZ so some of that capital floating around can be put to more productive use.
Maybe start by firing Orr and bringing in someone who has more interest in price stability over woke causes!
Nonetheless, even a relatively smooth landing will produce collateral.
the vulnerable, currently earmarked as collateral
I understood collateral to be a good thing, something that could be used to secure a loan for example. I don't really understand what it means in this context. Can anyone enlighten me?
That would be "collateral damage" which is a military euphemism.
Here it would appear collateral is being used as a synonym for vulnerable which I would regard as a crime against the English language (just joking). Collateral actually means something precious like women and children in a military context or something of value in an economic context.
Perhaps you should consult a dictionary - there are plenty online
https://www.merriam-webster.com/dictionary/collateral
collateral noun
1: property (such as securities) pledged by a borrower to protect the interests of the lender
2: a collateral relative
A collateral inherited the estate.
3: a branch of a bodily part (such as a vein)
4: informational materials (such as brochures and fact sheets) used in selling a product or service to a prospective customer or buyer
collateral adjective
1a: accompanying as secondary or subordinate : CONCOMITANT
digress into collateral matters
b: INDIRECT
no direct objection, but a few collateral ones
c: serving to support or reinforce : ANCILLARY
collateral evidence was presented at the trial
2: belonging to the same ancestral stock but not in a direct line of descent
— compare LINEAL sense 3a
Brothers, cousins, uncles, and nephews are collateral kinsmen.
3: parallel, coordinate, or corresponding in position, order, time, or significance
collateral states like Athens and Sparta
4a: of, relating to, or being collateral used as security (as for payment of a debt or performance of a contract)
b: secured by collateral
a collateral loan secured by stocks and bonds deposited with the lender
The situation we find ourselves in today is a direct result of our pandemic response. We narrowly defined "success" as low case numbers and high vaccination rates, and ignored absolutely everything else.
Now that we've succeeded according to our own myopic definition of success, we're left to deal with the train wreck we created in the process. Politicians will excuse themselves using the false dichotomy of "well, would you rather have had 7000 deaths per year?", and as case numbers inevitably rise anyway, and vaccination rates fall off with every new booster requirement, we will end up having to implement the sensible kind of public health response we should have had from the start of the pandemic anyway, except now we will probably have to do it in the grip of a major recession.
Did I read that Chloe Swarbrick was calling for an investigation into this governments economic response to COVID-19? I seriously hope one day there is a royal commission of enquiry into the whole thing. What a hot mess.
Imagine what the Green party's response would have been had they the levers on power. They would have been handing out fillet steaks, lollies, ice cream you name it. Got the impression that there are one or two environmentalists in the Green Party, the others are just rabid socialists.
“Every line of serious work that I have written since 1936 has been written, directly or indirectly, against totalitarianism and for democratic socialism, as I understand it.”
George Orwell, “Why I write”
Most New Zealanders are pro-socialism in reality. Just ask them on pension day or handout day, not tax day.
Catch 22.
What is the point reviewing the response? The key definitive learning from this mess that that we need a healthier population.The country will fare far better to pandemic viruses, climate change, aging and everything else if everyone had a super healthy lifestyle. The individual cannot do it alone, as a society we must prioritize healthy living.
Engineering a landing we can walk away from is probably the best we can hope for here. Major economic crisis don't normally start down here in NZ.
Look to the FED to get a feel for where interest rates are going. Without NZ having a risk margin higher than US rates it's game over for the kiwi.
Throw in Geopolitial events around Taiwan or Ukrane, supply line collapse, another variant of covid like alpha or delta.. Global flu pandemic.
Oh and not to mention climate change is probably going to effectivily add a couple of % to base rates going forward, if we are not commited to fighting climate change then take a few % off future growth
Look to the FED to get a feel for where interest rates are going. Without NZ having a risk margin higher than US rates it's game over for the kiwi.
Well, they are. But:
The Fed is entering another inflation panic, and short-term rates have to price it, but people outside of long-term Treasury holders don’t seem to remember the Fed is almost always panicking about inflation at moments very much like these. What we continue to find is policymakers focused on the wrong variables for the wrong reasons consistently leading to the wrong conclusions. Link
If the yield curve ever does end up massively steeper and nominal rates rising in leaps and bounds curve-wide, with longer-term rates going up much faster than those at the short end, this fire-sale of safe and liquid instruments will indeed represent a global carnival of realistic upward growth and inflation expectations for the whole world. Link
Unfortunately, this is the graphic reality.
Jenée Tibshraeny , True painful journey ahead..........But who laid the path for it.......
Mr Orr should personally come out and apologize to the nation for imitating Fed and ignoring all data that was pointing towards Hyper Inflation.
USA is a Big and Diversify economy, which will survive much better, unlike NZ which is a tiny economy and courtesy politician and RBNZ focused solely on housing sector.
How much will they pump, from here where as can manipulate to an extend before fundamentals step in to take their own course - can delay but not avoid the inevitable.
The key issue is that raising the minimum wage rate embeds wage-related inflation more deeply within the system. An alternative would have been to remove income tax (currently 10.5%) on the first $14,000 of income. Or remove GST on food. Either or both would have helped the lower-earning groups within society without further embedding wage-related inflation in the economic system.
The challenges of the inflation-managing task for the RBNZ have now increased.
KeithW
Removing lucrative and long-accepted taxes is simply not gonna happen under a Labour administration.
New Taxes, Levies and the like, with their attendant platoons of administrators, systems, forms, websites and appeal channels, why yes.
More non-tradeables.......
Most comments out of the US note that the inflation is largely supply-side-derived. And central banks have little to no capabilities to affect That.
Therein lies the nub of the matter.
Raising wage so fast is killing small business and will this not add to inflation.
This is politics. RBNZ is own its own trip and so is our Politicians.
Rent increasing every year...wages increasing....fuel price going up....everyday Grocery bill going up........AND they said that inflation is Transitory.
Politicians are trying to cover the painful path that lays ahead.
You don't seem to have an axe to grind Keith so maybe you can answer, I've never seen anyone else manage it.
Why are our polies and many others in media and industry so adamantly against a tax free threshold. Both sides of the spectrum are prepared to up subsidies like WFF and AS, but never a never free threshold? Even hear rediculous statements like everyone must pay some tax, as they never heard of GST, excise tax etc.
redcows,
No simple answer there. But most people do not seem to recognise that the combination of a GST that is very high by OECD standards, plus income tax that starts at the first dollar of income, means that low income people are typically paying around 30% of their income as taxes. High income people with say $180,000 income pay GST on a much smaller proportion of their income ( becuse they invest much of their income) and can end up with a total tax rate somewhere in the low 40s, or even high 30s. Accordingly, overall NZ tax rates are very flat compared to most OECD countries. Further, NZ is very unusual for not taxing capital gain, which once again favours those who are wealthy and can leverage up their land-based investments. The consequence is that NZ is a great place for the wealthy.
KeithW
Yes that argument was promoted by Jim Anderton prior to the 1999 election & Clark & Cullen took it on board so that, out of coalition necessity, they raised income tax at the higher end. Of course the Lange/Douglas govt had introduced then increased GST, but had compensated with income tax reductions but the next Labour more or less reinstated the old levels. Then we had the Key National government increasing GST to provide for some income tax reductions and had scheduled more of the same. This Labour government cancelled those and raised income tax again at the top brackets. Jim Anderton was not wrong but you can see what happens once a form of indirect taxation is introduced in that any compensation to income tax is soon simply clawed back. So as has happened here, the tax payer ends up paying the GST and then income tax at the same rates as before.
Keith, please provide your source "overall NZ tax rates are very flat compared to most OECD countries". Also, it might pay to ensure that you are comparing apples with apples, since there are countries in the OECD that tax at both federal and state levels, therefore, comparing tax rates is not that simple. And saying that NZ are not taxing capital gain is nonsense. NZ has had capital gains tax since 1892 in various forms. For instance, 1973 Labour passed a law (which lasted 6 years) that taxed people 90% of realised gains on property transactions! However, there was always a capital gains tax in the Tax Act, but it only applied if the person was in the business of making capital gains, ie a property developer, a share trader etc.
In terms of CGT on residential property, of course it is the people that don't own a house who wail the loudest about having a capital tax, as generally, their argument is that a CGT will lower property prices (which they cannot afford). Which of course, is nonsense. It didn't have that effect in either the UK, or Australia.
The problem is systemic and long built...applying tax relief or subsidy at this late stage cannot avoid the consequence...as you note the solution to inflation is not more inflation. Within the current paradigm any increased support for the bottom is simply a direct transfer to the top.
The only solution was to recognise the flaw earlier and head it off at the pass....too many didnt do their jobs for too long.
And so here we are.
The problem is political.
To understand their mindset :
When had fear in March 2020 that housing market growth may stall or fall, the entire system became hyper active and acted o ernight - LEAST REGRET.
When everything was pointing towards ponzi as back in October 2020, did they acted or adopted the policy of wait and watch allowing the ponzi to prosperous.
And now when feeling is that despite all efforts, ponzi may collapse are again trying to pump but this time fundamental will take over. This tension is only in a month or two of indication that ponzi may collapse. Just month or two - why not wait and watch now.
Raising the minimum wage is futile if we already have the highest levels of rental stress and homelessness for low income earners. The real solution was to have been addressing the housing situation, but as Labour have already failed there they have left themselves with few good options.
Bracket creep means that Govt revenue from taxation is increasing at a very rapid rate. Rather than shift all of the rates, removing the bottom rate of taxation would give the same absolute relief to everyone. As it stands, the latest increase in the minimum wage rate will work its way through many other wage rates.
KeithW
Bracket creep means that Govt revenue from taxation is increasing at a very rapid rate. Rather than shift all of the rates, removing the bottom rate of taxation would give the same absolute relief to everyone. As it stands, the latest increase in the minimum wage rate will work its way through many other wage rates.
KeithW
why not take it a few steps further -- as the vast majority of households earning up to 80K are taxed on one hand and then given a benefit back on the other - - why not simple scrap income tax up to say $40K and save the government the hassle of taxing and then giving it back -- better still make 40-100K 10cents -- leave a huge incentive for people to actually work , or upskill their job -- most of the money would be saved by not handing it back in WFF and AS payments -- and the rest could be reclaimed by adding 2 or 3cents to the over 120K bracket --- where for the vast majority the savings up to that point would still make them better off
time to start thinging radically on tax - -and simplify as much as possible - to promote greater efficiency - and thererfore productivity
Don't make me laugh. Labour have employed something like 600 more people at MSD just in the last year, who are going to be figuring out why Jenny gets $87.20 in subsidies while Bob get $87.18. There will be many serious reports written about why Jenny must get that extra 2c, written by overpaid public servants that add nothing to the actual running of anything (i.e. they are dead weight, dragging down productivity because they could be employed in doing something actually useful).
Keith is bang on, if you aren't going to do a UBI, you actually care about poor people and things like productivity, you should drop the bottom tax rate to 0. They have the tax income to do it now, but as I said above, there is no way a Labour government would not put itself at the front and centre of increased income tax redistribution. It's in their blood, they don't know what else to do.
There is nothing to worry about. The reserve bank has done their job to ensure financial stability and prevented the formation of dangerous asset bubbles and we have an extremely competent finance minister that has an unrivalled understanding of basic economics.
We are in safe hands. First class problems. The world looks at us with "envy".
Haha. If only that were true. Interest rates would be around 10%, and houses would be half as much. But no. Orr has doubled down to a system groaning under the weight of it's own debt.
Global owned banks are happy. They are sucking Billions out of NZs productive sector for no upside to NZ.
"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".
I agree with this statement but this should have happened some time ago with a forward thinking mindset, it is going to be very difficult now with the house of cards tumbling.
Minimum wage increase is all very good in keeping up with inflation of 6% (lets say 10%) but the working middle class are getting stung with employers not willing or able to raise wages to meet a rapidly rising cost of living.
And all the while, with protesters at their gates, clear and indisputable evidence of an economic downturn and global storm clouds forming (US inflation @ 7.5% and rising, Russia/Ukraine etc) the Govt continues to tell us nothing to see here, trust us we know what we are doing!
"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".
In NZ anyone will be a fool to stop speculating in property market which is well supported and promoted by Mr Orr and Jacinda Arden.
Why look at any other business when our government loses no opportunity to convince and assure that come what may will not like house price to fall ever under their government. So why look at any other business with all the hassel of compliance, employee shortage, wage rise, cost of raw material rising besides working 18 hours x 7 days will not give as much $$$$ so easily and in short time as in Housing market.
What face do reserve bank and government have to ask and expect people to look at other productive options.
Real Shame.
Does your average kiwi care about those on the fringe of society any more? We're all in the rat race now, every man is out for themselves. If anyone's doing it tough, it's their fault, they didn't work hard enough...
So many have no idea what's happening outside their own bubble and have no care - not their problem.
Labour know this, hence why they don't really care either... it's all about the voting base...
Exactly.
Someone commented here yesterday that they love inflation in eroding the value of their debt.
While that might be true and a personal benefit, it also showed a high level of disregard for the many adverse impacts of inflation, especially on poorer people (or if you don't care about poorer people, then maybe think about the adverse structural impacts on economy)
Asset bubbles do tend to increase the level of narcissism present. Was the same in the US prior to 2008 when I was there. 'Who gives a f%#@ about anyone else when I can make $XXX this year'.
And you see that paradigm among the property spruikers here. The benefit to self over the short term to them is far more important to the well being of society over the long term. Yet they're blinded by greed and don't realise that without a well functioning society, there will be little to be joyful about in the long run - see history...those that become wealthy at the expense of others live in fear of revolt and that society will turn on you with either taxes, reform or pitchforks.
The oddly those same people who showed maximum narcissim in the way up of the bubble are the first to ask for the assistance of others on the otherside...'please I'm very sorry I didn't mean to be so greedy, taxpayers please help bail me out'.
Dead right. I have thought about this a lot as to why and how we have become so greedy and self centred. I believe a lot of it has to do with the fact that we have lead privileged lives, protected from major recessions, wars and anything else that might curb our insaitable appetite for all the good things in life and fuelled in recent times by massive QE.
Don't get me wrong, I certainly don't wish for any of the above mentioned events but there is no denying that post these events historically the world was a much more united, caring and community focused place as we knew first hand the brutal realities of the alternative.
Yeah I have thought about it a lot. Definitely the things you mentioned, but there will be more.
I think the large decline in religion might have also played a part.
Sometimes I have also wondered if a 'live for this day' mindset might have been influenced by the cold war and the sense that the world could be destroyed any minute.
Perhaps also diversification of society - while it comes with benefits, I think it can also potentially erode a sense of societal unity.
I think the 'greed' phase started in about 2013 under John Key. I certainly noticed the change in NZ society...I arrived back here in 2011 after witnessing the US bubble explode then watching what I have over the last 9 years has been extremely painful. Yet what most people don't realise, is that what we have in NZ property wise is on a completely different scale to what the US was in 2008. The greed and ignorance on display is unreal. But the spruikers want to try and normalise that - and if you call them out about it then they attempt to silence you and ridicule people, calling them doom, gloom merchants.
Its the classic play of a psychopath - who only really cares about themselves and uses others around them for their own benefit - but pretending they are the good guy. Classic wolf in sheeps clothing play. If the chickens come home to roost, will society have pity for them and treat them well if they default on their debt? Based upon their behaviour over the last 5-10 years and the arrogance on display, why should society do so? They certainly don't deserve the care of society given the care they have shown to other parts of society who actually pay taxes and are struggling on a daily basis to put food on the table.
Sure but not to the extent to which we've witnessed the last 10 years or so.
Take a look at the house price index in NZ and think about the character of the country or your neighbourhood before then, around that period, and where we find ourselves now. We had an opportunity then to walk a different path - but the anglosphere has decided to go in a different direction. Max greed.
People stopped caring about one another around then....instead of 'love they neighbour' (if you want to go down the bible path), it became 'turn thy neighbour into my rent slave'.
Independent, your political leanings seem to get in the way of the reality of the situation. Here's a fact for you, house price rises under the Key Government were significantly smaller than under both the Clark and the Ardern Governments.
"given the care they have shown to other parts of society who actually pay taxes", it appears you are saying that people that own a house or houses don't pay tax? Here's more facts for you. If you dig around, you will find Government produced statistics that show in raw income tax, 12% of NZ'rs pay 48% of total income tax collected. The bottom 48% of income tax payers pay 8% of total income tax, and the bottom 66% pay only 19% of income taxes. The people that you are castigating are already carrying those you claim are "struggling on a daily basis to put food on the table". How much more do you think they should pay?
The numbers are even more skewed when net income tax paid is calculated.
It's worth looking at the quarterly national accounts and the household spending data (e.g. monthly credit card spending and the retail trade survey). The data shows that consumer spending is broadly on trend. What has changed is (a) what people have spent money on (e.g. goods more than services) and (b) huge slumps and surges in spending patterns. Critically, businesses have responded to supply chain disruptions by building up their inventories and this is probably where a good chunk of the extra demand has come from. And, how do businesses pay for inventory increases? They increase prices where they can. Note that the sectors that have built up their inventories the most in NZ are also the sectors driving domestic (non-tradable) inflation.
The total value of stock held at 30 September 2021 was $9.0 billion, up $994 million (12 percent), compared with September 2020. The largest increase came from motor vehicle and parts retailing, up 29 percent ($472 million), followed by hardware, building, and garden supplies, up 18 percent ($210 million) [Stats NZ Retail Survey]
Anyway, my point is that Govt stimulus has supported the economy and employment through the Covid disruption - but the goods and services price increases we are seeing do not appear related to that stimulus - or consumer spending per se. The 'just in time' global supply chain is probably changed forever - and businesses are likely to carry higher inventories (and therefore higher costs) for years. That means changes in prices. Claudia Sahm has some great (US-based) references here - including a link to the excellent Odd Lots podcast, which has done some seriously deep dives into global supply chain issues.
"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’."
What this does (even if it doesn't cause inflation to rise) is it further sustains it- his attempt at deflection is moot.
The country should had started opening up much earlier to smooth out the inflationary pressures and reduce the need for monetary and fiscal policies pumping torrential money into the economy over that time.
However, popularity politics takes precedence and now everyone pays for it. It's arguably that it is what people wanted and politicians just give what their voters want.
There're no quick fixes. We have limited oil reserves, almost no mining and our oil industry is killed by this government ever since they came under the spell of the Green terrorists.
We will have to live with the consequences now. Despite all that inflation, natural wage increases barely moved for many (an indication of bad economic planning or deep seated structural issue).
The world has moved on without us and we were the ones choosing it to be that way.
Thanks Jenee. Can you comment on the accuracy of the below (paraphrased from NZH): Our CPI reflects the increase in both tradeable and non-tradeable commodities, with the former being largely imports. IIRC the split was 50/50. Hence it was misleading for the PM to state inflation was a global phenomenon and not something we could control. In this the PM ignores the impact of QE and proposed taxes/levies and increases to minimum wage.
Like others I support the amendment to tax thresholds for low income earners and cut Gov taxes on petrol or cessation of regional fuel taxes.
As I have said earlier, most of the newly generated kiwis are a greedy lot including some who came here in past generations. Most of them made their fortunes on debt and they spread this virus to others. Now is the time to stop the spread of this virus or this will kill our nation.
A few would be sacrificed ( the ones why took stupid decesions of drowning themselves in debt in last two years). They saw the cheap candy of debt and started licking on it. But that candy is not all sweet, it gets sour when the top sweet layer finishes.
Now the sour part is coming.. Got to lick that too sour part too because you cannot spit the candy out now, it's stuck in the mouth.
-NGK
Getting rich is not bad. Get rich by working hard. Add some value to the economy. Be a contributor.
Without adding value and trying to be rich from the misery of others is really shameful. But then that is not taught these days.
Is taught to cut others throat to feed yours (may be bit harsh but true) . What kind of future are we creating?
It's not only not taught, the exact opposite is encouraged. Approx. 50% of the value of a house is non-value added. Most of the 23% increase in houses prices over the last year was non-value added increases.
People are making far more on the non-value-added increase in their house value, than whatever the added-value of their day jobs is.
As pointed out over the course of this week:
1) If you're on the bones of your arse, a new EV (or even used) is not a perfect substitute when petrol prices increase. You just keep paying more and more to fill the tank and take the hit somewhere else.
2) Our economy relies on discretionary spend, and so do many covid-battered industries. Kiwis will hunker down and just stop spending if inflation bites hard with no government/RBNZ action. The minimum wage increase is a strong signal we won't see anything other than token OCR increases, which have little effect on the cost of consumer goods given our dollar tanks even after we increase interest rates on offer.
3) The inflation figures are three months old already and we have another quarter with strong lifts in prices already underway. The minimum wage lift only catches people up on the last year, it's already out of date.
4) Good luck convincing recent FHBs who were screwed out of affordable housing that they should take a hit 'for the greater good' after being told for years they just needed to work harder while investors and their elders creamed it - the same people who will get a boost on cash and investments as the OCR lifts and those 30 year mortgages get harder and harder to pay down.
5) There's already a strong mismatch between the rate of increase in pay for middle class professionals, many of whom have seen their industries added to skilled shortage lists so migrants can be let in and dilute local supply, rather than wages meeting actual demand. Adjusted for experience and knowledge, many middle class earners are going backwards relative to the increases in minimum wage.
These are all structural things, and in the absence of political leadership and creative thinking from our leaders in solving these problems, the only way to be rid of them is for young Kiwis to leave NZ altogether. For many it will be their only chance at a house, retirement and family, instead of maybe possibly getting a shot at one of those things if they stay in NZ.
If interest rates do not increase now, no one wins. The past generation would have lost, the current one will loose and the future will have no future.
We will have killed our county and sooner or later will be worse than Greece.
Be careful for what you wish for with short term greedy thinking.
With all due respect, no one cared when it was my generation being told not having a house was simply just a question of having fewer cafe meals or just working harder. Millennials have families now, we have mortgages and the idea that one generation should just forever take the pain so that others can have it easier is just going to further compound issues for people whose sole mistake has been either not being born early enough or not having rich enough parents.
Like I say, creative thinking to resolve housing issues is the way forward. Just continually telling one cohort 'tough shit, you have to cop it again' isn't going to wash unless you want even further social unrest or a brain drain the likes of which this country has never seen before. The people who caused this mess and cashed out continuing to win while others endure negative equity after years of struggle to secure stable accommodation that we never recover from? Not good enough. Find a better way.
Nice post GV - if you read The 4th Turning you will understand why we have such weak leadership at present. The boomer generation want to continue to call the shots but they're losing power and it won't be until the millennial generation take control of society that we see real leadership that makes the future better for everyone (from a utilitarian perspective). The boomers don't know how to lead society, the only know how to make things good for themselves. And that isn't their fault - it was how they were raise to see the world and their experiences in the 60's and 70's formed their way of thinking (drugs, sex, rock and roll - don't get what you want...protest until you get it). Just like the grandparents of the boomers who caused the crisis of the 1920s-1940's. We're seeing the same pattern playout - think dotcom bubble, 2008 and now this.
Even if the boomer isn't in the position of power (e.g. prime minister) the policies being implemented are in the best interest of the boomer over other generations. By the end of this decade, boomers will have lost that demographic power and millennials will have gained the stronghold - and having witnessed this madness, will look to right the wrongs of the last 20-30 years and bring back financial and society stability - where the health of society/community is more important than the self and greed. Decades of stability will follow....but then the millennials will raise the next generation of boomers who will behave in the same self centered fashion and the cycle repeats.
Being a disillusioned boomer I would vote for Swarbrick in an instant. I dont think its about generations as much as who opts to move into positions of influence in any given era...and what drives them to do so...Muldoons barmy ideas fostered Lange...seems like Key fostered Swarbrick...Ardern is camp mother trying to look after everybody which we know cant happen...and she ll foster another partisan from one side or the other...toss a coin shall we...
Adern has classic Gen X traits - even though she is close to the border between Gen X and millennial. (Gen X follow boomers, until the end of the crisis and will realise the boomers no longer call the shots (or its hopeless in following them any further) and will then follow millennials - but in between they're a confused lot who want to do the right thing, but in the end only do what is right for the dominant group).
Yes what you say aligns with the concepts of the Strauss-Howe theory from The 4th Turning book.
None of this is intended to be abusive toward one generation or the other. Every generation has its darkside personality traits. During a crisis like this, each generation has to face its darkside. That is why everyone is a bit more angry, a bit more on edge, a bit more confused and disillusioned because what they thought what right and true is being questioned and corrected.
If you haven't read The 4th Turning, and want some clarity around what the hell is going on in society at present, then I'd defininately suggest reading it. Not everyone believes it as they think it has too many generalisations, but I found it give a very good big picture summary of what is happening and why. According to the theory there is a very high possibility of either civil war or a WW3 type event occuring in the coming years. And remember it was written back in the 90's and managed to pick the terrorist attacks, the 2008 financial market melt down, the rise of Trump around 2020 and now sees conflict before resolution in 2028 - followed by decades of stability once more.
Generation this….generation that… doesn’t matter.
Politics is a game that only the very gifted and lucky few who find favourable winds rise to be great…albeit only for a while. The rest are driven by lust for power and fame - they’ll sell there soul to get what they want.
It does and I think you've missed the point or I didn't articulate it clearly enough. Our politicians are driven to respond based upon the interaction between our generations. And if you think that doesn't impact you, or because you can't see or understand it (or do not want to), then ignorance is bliss.
Here's the book if you're a reader.
Perhaps the government should gift $500,000 to all non-asset owners for the damages post GFC? Or $200,000 per person for damages post April 2020?
And fund it by taxing all owners of rental properties properties at 50% with rents fixed at the rate of inflation?
Government is no worse off as it pays for itself and it solves our housing crisis as landlords sell and FHB buy with the funds that the rich landlords provide.
Of course this is a piss take - although unless something changes, crazy reforms like this could come into effects in the future when people stop caring about the poor landlords and the political pressure becomes too high.
Energy prices going up is predominantly a reflection in attempting to reduce the effects of Climate change. Evidently many people believe in man made climate but are unaware of the costs associated in reducing fossil fuel usage.
No need to be shocked. The same will happen here.
We've been talking about kicking the can down the road for a long time now - perhaps this time we actually need to address the problem (too much debt).
Given that we don't want to do that on a proactive basis, its going to be another crisis. Its only a matter of time.
Too much debt is not the root of the problem, it's the natural result of the price of debt (interest rate) being too cheap. This is about to change this year, as high inflation is forcing central banks (possibly against their will) to raise interest rates. The issue is that higher interest rates will lead to collateral damage, including for the people who didn't benefit from lower interest rates.
Which people will be the collateral?
If interest rates are the problem - how come we didn't see mass defaults and a depression in the 70s and 80's when interest rates went to 10-20%? Because we didn't have excessive amounts of debt....but agree you can only create the debt that we have by driving rates to zero...bit of a chicken and egg argument either way.
I suspect once this all plays out the term "supply chain problems" will look as silly as inflation being "transitory". I agree a lot of the inflation we are seeing is "cost push", but blaming it all on temporary supply side problems ignores the fact that the trillions of printed money has been flowing into commodities and other production inputs, pushing up prices - this all flows through as inflation eventually.
The importing of deflation, by bringing millions of "new" workers into the global economy from China, is a trend that is coming to an end. The rise of energy costs is not temporary thing if we are transitioning to a low(er) carbon future. The depletion of easy to extract metals and other key commodities is not going to abate once the interruptions from covid end. Inflation is not just temporary "disruption", it is likely here to stay.
Supply Chain issues are a red herring in the context that the easiest component input we directly control and is the biggest contributor to cost increase in housing, we don't give a shit about.
Namely land policy and how land restrictions exponentially increase the cost of it without adding any value. 1/3 to 1/2 of the value of your home is made up of non-value-added costs, which are costs that are only incurred due to monopoly restriction, ie it's a made-up value, due to poor policy, and added no amenity increase.
No wonder the next incarnation of this has been buying (with real money) imaginary clothes and houses in the Metaverse.
When no logic and reason are used or needed to make decisions, then anything can be done without care or the need for explanation.
Excellent article Jenee.
To sum it up, it is clear that No political party is interested in NZ but their own survival by hook or by crook.
Pandemic has destroyed the economic and social fabric and will need a visionary leader to put NZ back on track.
Misfortunate of NZ along with many other democratic countries is that we have politician, infact too many but no leader. Jacinda Arden had an opportunity to rise above but failed, proving that power corrupts.
Either a leader will be born out of the crisis or current democratic system will change.
All the blah blah here won't change a SINGLE thing for the working poor or all the kids living in povidy. It is good to discuss but it's way past time for decisive action of some sort. Looking at you Adrian Poor, JA and GR.
I think the next protest at Parliament should focus on the economy. We have learnt so much already about how to do it and can give it more bells and whistles.
I will be surprised if this comment appears.
Decisive action is buying up big tracts of land and offering sections for under $100k...mass producing 2 bedroom transportables expandable to 3 bedrooms For under $200k...bending all the bulls#@t rules to make it happen...$300k is still a huge mortgage for a young family on minimum wage but better than paying off some rich persons house for them...
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
Sums up whats wrong with the current Labour government pretty well really.
The major left and right parties (labour and national) know that critic spirit is uncommon and most of the people "vote by family tradition". Not much different that cheering for a soccer team.
What the current government is losing is the right to claim to be antropologically/ideologically superior (typical left). In the case they became opposition they will need to find new topics, they will not be able to even speak anymore about inequality or housing issues or defence of minorities. They will be condamned to just shut up. A new (much more dangerous?) real leftist party will emerge in that case (not the green for sure, given they are not even doing opposition), able to channel the orphans, and tied to the mandatory despise of the moderate-left (cause proved dishonesty of intents)
I really need anybody to give me one, just one, real reason why I should vote (or anybody should vote) for the labour party at this point. Please don't say that you don't want the right to govern, that is a vote against, not for.
I think the RBNZ is correct that 6% mortgage rates are going to cause stress for FTH buyers and highly leveraged, just like 9.8% caused stress just before the GFC.
But the world will not end, some people who did not borrow at the top will step in and buy houses at lower rates, this cycle is not new just new to far too recent many property investors.
I just got the mortgage calculator out.
A 400K mortgage over 30 years at 10% is a weekly payment of $810 (2007-2008 scenario)
A 900K mortgage over 30 years at 6% is a weekly payment of $1244 (2022 scenario).
Incomes now are probably on average about 40-45% higher than 2008, though, so maybe fairly comparable.
You don't get a new house for 900k now in 2022. You could easily get a high spec new house in 2008.
So yes if new houses are 900k with 600+ sqm section than your comparison is good.
Otherwise it's fake news and looking at current valuations and prices, yours is fake news aand manipulate comment.
I assumed 25% deposit on a median price in Auckland. It was pretty quick and dirty, and approximate, to he honest.
On a $1.2 million property that's a 900k mortgage.
But you are probably right, there should be a bigger divergence in what I quoted, perhaps a 600-700k divergence in mortgage rather than 500k.
In which case 6% would certainly be worse than 10% in 2008, for sure.
Growth is a good thing and we all grow with time. Growth should be genuine and natural.
Any unnatural growth in humans is mostly cancer and it needs to be cut out if person has to survive.
The unnatural growth in equity created by current politicians because of their policies is equivalent to cancer. This needs to be treated.
So yes if the house prices were growing at their natural growth, the they should be between 800-900k in 2022 as compared to 2008. But they are 50-70% more than their natural growth. This means RE cancer.
Now you tell me what's the way to treat it or we let it grow and kill the country and economy.
Got it thanks. But i hope you agree that 400k mortgage then and 900k mortgage now is not natural growth scenario anyway.
Average and even above average salaries have not increased that much, unless someone is working in a high margin kiwi business which are great at ripping off the fellow kiwis. These are not my words, a few of people i know have bought business from others who were retiring and they told me that older generations have really created a business model which is very high margin but people have no choice but to deal with them anyway.
Yes I agree.
My main point I wanted to show was that in terms of impact, 6% rates now are similar to 10% in 2008.
It's a useful yardstick, because house prices and house building dropped significantly from 2007 (pre GFC) and 2008 once interest rates were close to 10%.
And the upshot of that is you can cut interest rates a lot more from 10% than from 6%, if you want to try and salvage the economy.
Any business that can be easily replicated is going to have low margins, something with "high" margins (which I'd call over 20% net profit) usually needs to hold some sort of niche position.
You can earn more money owning/running a business than working for someone else, but the trade-off is a lack of security and the high risk of failure, particularly for new businesses.
The good news is NZ is one of the easiest places in the world to start a business so everyone is well within their rights to put their talents to work for themselves and see how easy it is.
Even with current inflation, consent costs & significant material delays - my company still builds a 4 bed, 2 bath brick & tile with double garage for $450,000.00inc gst - excluding land cost. Cost of land has, for some years, been the major cost hurdle - & those making the money are those holding the land!
Visited US last December, the CPI is 7.5 as per current data, and here in NZ it's 5.9.
This seems not at all in contrast, while spending in US I feel the amenities are cheaper in comparison to what I pay here in NZ.
I didn't understand why the inflation is calculation came to be so low over here, are we using different parameters?
Should be pretty obvious to everyone by now that the wrongs things are in the CPI basket in New Zealand. I think its intentional, makes it all the easier to keep inflation in a band when your not looking at the high movers and shifters. People amaze me how they get get fed the official narrative and believe every word of it. Still if the person running the country cannot tell you the price of a 1kg block of cheese who really even cares about inflation?
Our inflation rate has been fudged for years to beget low interest rates and support the housing ponzi. The RBNZ, stats NZ, and the last 2 parties in power are in bed with the property lobby. In fact the leader of the opposition has 6 properties, so don't expect real inflation figures or realistic interest rates any time soon. Ardern campaigned on a capital gains tax when she came to power and reneged on the promise in office.
Saying that high inflation is the result of SUPPLY ISSUE is repeating the same stunt that central bank used with TRANSITORY INFLATION to cover up their failure and deflect with hope that God will help them.
Supply is an issue but not the only reason as reserve banks and economists are trying to portray.
What could possibly happen if productivity reduces, supply of goods and services reduces, while markets are flooded with cheap money and stimmy cheques....
The irony could well be, as some of the commentators note, that the central banks start hiking interest rates as the deflationary bust occurs as predicted by yield curves.
It is all going to come crashing down. Worldwide. The government will rush changes to travel restrictions to bring in more property market cannon fodder.. But may not be quick enough. People may well arrive and see what you get for a million bucks and know that it will be worth 800k in a year. They may turn round and leave again.
If Ukraine happens, an already dire set of economic prospects will be a whole lot worse.Inflation and tightening in the middle of an energy spike..
Sorry to be so doom and gloom, but this is the other side of debt based economies, and the piper always gets paid. If the Russians start snipping undersea cables in response to sanctions, as US intelligence is indicating, bitcoin is gonna struggle too. Good time to live on a farm and invest in precious metals perhaps.
This is a fair and uncontroversial analysis, thanks Jenée. There aren’t a lot of quick fixes to large problems that have built over years of political neglect and short-termist thinking from governments of both stripes. Great to see you pointing to the need for structural changes (eg, market design and market power), rather than whether the MPC can chant the right incantation when setting monetary policy.
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