Decades ago, politicians decided they couldn’t be trusted with inflation targeting and so they outsourced that responsibility to independent central banks.
But letting go is hard to do and politicians just love to talk about inflation anyway.
Finance Minister Nicola Willis put out a press release on Wednesday saying Consumers Price Index (CPI) data “shows we are turning our economy around and winning the fight against rampant inflation”.
She didn’t say exactly who was included in the royal “we” but perhaps she was referring to the Reserve Bank and households making sacrifices to meet their mortgage repayments?
The press release continues: “Today’s data confirms that our approach in Budget 24 was the right one — prudent government spending, lower taxes for hard-working New Zealanders and laying the foundations for New Zealand’s economic recovery”.
It is hard to see exactly how data from the June quarter could affirm Budget 2024, which only took effect at the end of the three month period. Any impact on inflation will only be visible starting in the next quarter, and it could be positive due to income tax cuts.
There was a mini-budget which cut government spending by $7 billion! But those savings were spread over a five year period, with only $228 million happening by the end of June.
That didn’t stop Act Party leader David Seymour from using it as an example for what the new Government had contributed to the lower inflation numbers.
He told reporters that “massive amounts of borrowed cash” had swelled the economy and led to inflation — failing to mention the pandemic that accompanied the borrowing.
“[The coalition] came into power, put through a mini-budget which cut $7.5 billion straight away, put in place a budget with a spending allowance of just $2.4 billion over the next four years,” he said.
Those things do mark a significant change in fiscal policy between the two governments but they mostly haven’t happened yet. Any impact on today’s inflation must be minimal at best.
Inflation will be dead and buried before the full $7 billion of spending cuts and the budgets with smaller operating allowances are delivered.
Nevertheless, Prime Minister Christopher Luxon thought the data was significant enough that he took a break from his vacation to tweet a line from Willis’ press release. Why not!
Readers, please don’t interpret this as a partisan attack on the current Government.
When the Labour Government decided to join the inflation war, it inexplicably chose to fight on the side of inflation — but you wouldn’t have known it from their press releases.
A statement in June 2023 said Labour was “taking pressure” off inflation with “careful and targeted spending” despite having increased spending by $5 billion one month earlier.
It’s okay that politicians aren’t tackling inflation, the system has been designed to deal with their malarkey, but it might be nice if they didn’t have to pretend to be in the driver's seat.
26 Comments
It is hard to see exactly how data from the June quarter could affirm Budget 2024, which only took effect at the end of the three month period.
I suppose all politicians should know when stand out and claims points, and they always do.
but to be fair, The government should look ahead to understand what the economy needs, rather look backwards. that's why I believe the budget 24 should fit for purpose in a lower inflation environment.
Politicians do what politicians do, that's not why I wrote the above
The question is how do we react to their BS? That is in our power. And pretty much the point of the article, I would say
Calling them 'smart' for being deceitful is not the society I want to live in. Calling you out on perpetrating this behaviour is the least I can do
You're not wrong Dan. But this is why it is so shocking that Orr is still in his spot.
Fiscal policy moves to meet what the government thinks the needs of the day are. Monetary policy should then respond to keep inflation in check. They didn't, and we got this massive cock up. Yet somehow Orr still has his job. RBNZ has even had the audacity to blame fiscal policy! lol.
He had both hands tied behind his back? Now, perhaps he has been freed to just have one mandate using the only tool he has. Let's hope so.
"In December 2023, the Minister of Finance changed our Remit to remove maximum sustainable employment and focus on maintaining low and stable inflation. "
https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy
He only ever had one mandate - price stability.
What people don't understand is that maximum sustainable employment is a function of optimal interest rate settings. The employment target thus had no effect on decisions within the framework of interest rate targeting. The mandate introduced was one of the great political missdirections of recent times, and evidently seems to have fooled many an armchair expert who thinks they are smarter than the average bear.
Christopher Luxon - 6 days ago on Facebook:
For the first time in 6 years, annual food prices have dropped.
Luxon is of course responsible - Facebook post today:
Inflation is down to 3.3%. We are turning our economy around and winning the fight against rampant inflation.
Aye, there's the rub.
And it's not just Climate, that's just one of many Limits - some call them Boundaries - that we are overdrawing. The energy cost of energy gets evver-higher from now on, and as a knock-on, so does everything else. Add in ultimate scarcity and unprecedented demand (for essentials; discretionary will mostly be gone-burger) and it's either inflation (rampant) or recession (which renders much debt moot, even if rates were zero).
It works quite well. People know to expect it and can plan accordingly.
Trying to be clever about it would result in biased decisions and leave a mess.
The game is simple to play... low inflation = low ocr = boom. Inflation= high ocr = bust . Rbnz simply use the ocr as a blunt tool to be always nudging inflation back into it bozx.
Using the ocr as a tool is really only an issue for those that don't plan for a cyclical economy... those that spend and borrow too much in the boom or don't manage their career/business for the bust are in trouble in the bust. Changing the rules won't change their outcomes in the long run as they simply don't manage risk well.
For nz our issue is our economy is heavily reliant on houses... which is nuts. The ocr isnt used that well. And govts don't plan for the busts.
Ps. If the government and local govt were really keen to tackle inflation they would have had the brakes on spending a long while ago and have all sorts of controls on house price growth. But they just spend to give the swing voters what they want.
With the two wars in the northern hemisphere which have impacted trade, supply routes, shipping costs and disruptions to manufacturing across the globe. Imported inflation is still a thing. Add them together, tradable and non tradable, inflation will be 5.5%+. Real inflation!
With the US election in November, the two Wars that are ongoing. Rate cuts arent a sure thing.
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