Matthew Hooton: UK lessons for National and Labour

OPINION:

There are lessons from the UK this week for both main parties, hopefully to be absorbed before the full superficiality and desperation of election year.

The first concerns National's tax cuts promise.

There's little doubt we face a fully-fledged economic crisis, beyond the current cost of living crisis.

Ultimately, Finance Minister Grant Robertson must take responsibility. It was he who changed the Reserve Bank's mandate from inflation alone, appointed Adrian Orr as governor and then transferred Orr's remaining personal responsibility for price stability to a committee.

Robertson then stood by as the committee started printing money and then recklessly threw it out the door with his overly generous wage subsidy scheme and other fiscal stimuli, including this year's cost of living payment.

Treasury warned Robertson of the eternal law of economics that "inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output".

Yet he casually oversaw both massive monetary and fiscal stimulus just as maximum potential output plunged due to lockdown - and washed his hands of the $1 trillion of house-price inflation it inevitably caused.

When inflation moved to consumer prices, Robertson spun a tale of "imported inflation", something theoretically impossible and empirically rare for countries with free-floating currencies.

Our currency correction is now under way. In six weeks the kiwi dollar has collapsed against the renminbi and euro; the Australian, US, Singaporean and Hong Kong dollars; and the yen, won, rupiah, baht and ringgit.

Of our billion-dollar-plus export markets, the kiwi holds its own only against the crashing UK pound.

That may be good for farmers and tourism operators, but means even higher prices at supermarkets and the petrol pump for everyone else.

Orr is sanguine. On Tuesday he told union bosses — apparently off the cuff — that the bank's monetary tightening programme is already "well advanced" with only "a little bit more to do before we can drop to our normal happy place".

His remarks implied only modest further increases in the official cash rate — perhaps good news for property owners but terrible for those already struggling with grocery bills.
Of course, Orr and his committee tend to be wrong about everything.

Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson.

A year ago, on October 6, they said inflation might go above 4 per cent "in the near term" but return to the 2 per cent midpoint "over the medium term". They blamed offshore factors rather than their own monetary policy for the mess and insisted "measures of core inflation and medium-term inflation expectations remain close to 2 per cent".

Days later, Statistics NZ reported annual inflation had already reached 4.9 per cent over the previous three months, led by housing, transport, food and recreation.

It has since surged to 7.3 per cent, with little hope we'll see 4 per cent any time soon, let alone 2 per cent.

The Beehive and bank continue to blame foreign causes. But other countries are experiencing similar house price inflation and cost of living crises only because they followed the same disastrous policy prescription as Robertson and Orr.

It seems the world forgets, every 50 years, both the causes and harms of inflation, and how horrible its cure, especially for the low-paid, thrifty and young. Sadly, the 1920s and 1970s are playing out again in the 2020s.

Robertson and Orr disagree. Beehive strategists think inflation will be under control by the election, with wages catching up and mortgage rates falling. Orr's comments to the unions suggest he agrees.

Yet, while Robertson and Orr have caused the calamity, National's tax cut promises risk making it worse.

Perhaps guided by the same political strategists, National's Christopher Luxon and the Conservatives' Liz Truss launched their leaderships with bold promises to cut tax, including abolishing their countries' top rates.

National strategists argue that a big, bold tax policy was necessary to wake up its base. At least initially, it worked politically, without real-world economic effects.

Unfortunately, being in power, Truss and her Chancellor Kwasi Kwarteng could act on the advice, announcing the biggest tax cuts since 1972.

With Citibank already forecasting UK inflation of 18.6 per cent in January — the highest since 1976 — the last thing needed was another £45 billion ($85b) stimulus.

Despite much higher UK interest rates now being certain, the pound tanked and the Bank of England was forced into a £65b pledge to buy government bonds to stop retirement funds collapsing.

Ironically, were Robertson and Orr's tales of "imported inflation" true, then more is on its way.

National's Nicola Willis has astutely built wiggle-room into Luxon's original tax cut pledges. But, if inflation remains high in 2023, neither Willis nor Luxon should be taken seriously if they promise the magnitude of tax cuts their pollsters seem to demand.

Not even Ruth Richardson or Bill Birch thought about tax cuts until Don Brash had brought inflation under control. In the UK, no less than Margaret Thatcher increased taxes in 1981 to help crush inflation.

Willis' first job is getting rid of Orr and his committee, appointing a more orthodox governor like current deputy Christian Hawkesby, and making him personally responsible for getting inflation back to 2 per cent by a certain and relatively proximate date.

The alternative is prolonged misery and decline, empowering sinister political forces.

In New Zealand, that tends to mean the politics of race — and that should be Labour's lesson from the UK this week. Responding to Kwarteng's tax cuts, a junior West London Labour backbencher, Rupa Huq, accused the Chancellor of being only "superficially black".

Her leader, Keir Starmer, immediately called Huq's remarks racist, demanded she apologise, suspended her as a Labour MP and launched a full investigation.

Yet, the same day in Wellington, deputy Labour leader and third-ranked Cabinet minister Kelvin Davis accused junior Act backbencher Karen Chhour of being insufficiently Māori.

If anything, this was much worse than Haq's attack on Kwarteng, since Davis is not an obscure backbencher punching up to the Chancellor of the Exchequer, but a senior minister punching down to a first-term MP.

Chhour — a wāhine Māori who grew up in state care and in her maiden speech spoke of her experience of racism — needs to "cross the bridge from her Pākehā world into the Māori world and understand exactly how the Māori world operates," Davis charged.

"It's no good," he said, "looking at the world from a vanilla lens."

To his credit, Davis eventually apologised.

But, unlike Starmer, Jacinda Ardern took no action.

Shame on her. In difficult economic times, it's more important than ever to call out those who stoop to the politics of race.

- Matthew Hooton is an Auckland-based public relations consultant.