Prime Minister John Key cut to the heart of his political and economic strategy this week when he said: "If a political party tells you they are going to spend a lot of money, ask them how much it is going to cost your mortgage."

New Zealand's experience from 2005-08 looms in Key's thinking as National bids for a third term. Before the 2005 election, when Labour was striving for a third term, a straining economy generated inflation pressures that forced the Reserve Bank to hike the official cash rate from 5 to 6.75 per cent.

Then-Prime Minister Helen Clark unleashed a Working For Families package and interest-free student loans to win over poorer families and students. The extra spending won the election but pushed the economy even harder, generating more inflation and forcing the Reserve Bank to hike the OCR to 8.25 per cent by mid-2007, which pushed floating mortgage rates to 10.7 per cent by August 2008.

The Reserve Bank says it is now growing faster than its potential, increasing inflation pressures. The OCR is expected to be 1 per cent higher by the September 20 election and mortgage rates are expected to rise to 8 per cent over two years.


Key knows homeowners in the electorally crucial mortgage belts of Auckland are nervous about rising mortgage rates.

The first question for voters is, who would get the benefits of increased government spending? Tax cuts for wealthier earners with big mortgages may see money go in one pocket and out the other. Tax cuts for older homeowners with term deposits may not over-stimulate the economy because they are more likely to save their windfalls. Or they may also benefit from higher interest rates on their term deposits. So Key's question about how much a lolly-scramble would put up your mortgage is not that simple.

Not everything is the same in 2014 as it was in 2005. The economy ran about 3 to 4 per cent "hotter" than its potential growth rate between 2005-08, but this time the Reserve Bank says the economy will run about 1.5 and 0.4 per cent hotter over the next three years. The hotter the economy, the higher the OCR's sensitivity to fiscal stimulus.

Back in 2005, household debt was about $115 billion but rising at 16 per cent per annum, suggesting an economy overheating. By election time this year, mortgage debt will be about $205b and growing at about 6 per cent. Term deposits in 2005 were worth just $59b, but are now $125b and rising at 9 per cent, so there would be plenty of voters cheering for higher interest rates.

Perhaps a voter should ask a politician promising more spending or tax cuts: "What type of spending and tax cuts are you planning, and who would get them?" Ultimately, some research into party policies would be better than the assumed answer to a rhetorical question.