Opinion: National poking holes in its own accounts, and its credibility again

National's finance spokesman Simon Bridges. Photo / Mark Mitchell

Opinion

OPINION:

Simon Bridges has done well over the past year. He has survived a brazen attack from his leader, and emerged as the latest National Party finance spokesman.

What he's clearly not done over this time is any economic study. That's what we can take away from his current attack on government investment.

Bridges believes government is the key driver of the current increasing inflation. "The more cash from government, the higher inflation will be," he states unequivocally.

But there's one small problem with Bridges' blunt-spoken truth. There's little real-world evidence to support that claim in a developed economy like New Zealand.

Evidence from an exhaustive study examining the relationship between fiscal policy and inflation found little relationship across 44 countries and 60 years of data.

This was particularly true of countries with a Reserve Bank like New Zealand. 2016 evidence from the US Federal Reserve Bank of St.Louis states that "across the board, we found almost no effect of government spending on inflation".

In recent economic history, the evidence supporting Bridges gets even thinner. Within the last decade in response to the Global Financial Crisis trillions of dollars were provided to financial institutions to keep them solvent.

The result – inflation fell during the five years after the crisis. Is this money somehow different to the money that is being spent now? Perhaps money only causes inflation if it goes to the wrong sort of person in National's view?

So what is actually going on?

Economists like to think about inflation in two flavours. The first of these, "demand-pull" occurs when demand for goods and services rises more quickly than the ability to produce them.

Prices rise as demand outstrips supply. The second, "cost-push" occurs when increasing costs (like oil, energy, or transport) drive increased product prices.

Right now we've got a bit of both, but mostly the latter. Reducing government spending in New Zealand doesn't stop the ANZ Commodity Price Index being at a record high.

Reducing government investment won't undo the 50 per cent increase in the global oil price last year. Or the 850 per cent increase in global shipping prices since the start of the pandemic.

These increases, along with higher rental costs and building materials is what's driving current inflation. It's not government spending. In fact, well-targeted government spending – such as support for coastal shipping to buffer transport costs, or underwriting of affordable housing at scale, or building essential public transport can actually reduce future inflation.

Reducing government investment won't undo the 50 per cent increase in the global oil price last year. Photo / Duncan Brown.

National's economic analysis is wrong. In order to restore some economic and fiscal credibility, National should be explicit about exactly what it intends to cut when they use terms like "rein it in a bit" or "pull it back a tad".

Using throwaway terms like these suggests that either they don't know what to cut or don't want the public to know. Either of these should worry New Zealanders. Treasury has identified an infrastructure deficit of $75 billion. What is National's plan to deal with that? Make it bigger?

We have had successive governments try to cut their way to prosperity – Labour in '84, National in '91 and 2008. All it has done is create bigger and more expensive problems for our people and for our economy.

Let's be clear here, Bridges would need to cut billions of dollars of investment to slow the economy down to achieve his inflation goal. That means fewer health workers. Fewer teachers. Fewer police officers. Fewer state houses.

At the end of his recent article, Bridge's used US President Reagan's famous quote "are you better off than you were four years ago?".

Compared to four years ago in New Zealand unemployment is lower, wages are higher in real terms, and fewer children are living in poverty. We have a government that is tackling the backlog of underinvestment in essential public services. So in comparison to when Bridges was last in government, yes the country is in many ways truly better off.

The New Zealand economy is by no means perfect. There's plenty more the government should be doing. From tackling housing to embedding a productive, sustainable, and inclusive future there is lots for an effective opposition to get stuck into.

But to criticise what the government has done to date is to ignore that we have had one of the best economic and public health responses to Covid-19 on the planet.

Under President Reagan, spending by the US government rose by an average of 9 per cent each year. Next year total government expenses in New Zealand will fall by 6 per cent. Fair enough, I suppose – Bridges' celebration of a Big Government spender in an essay about cutting government spending makes about as much sense as the rest of his arguments.

The positive New Zealand economic forecasts mean that now is the time to set out a long term vision of how we emerge from the shadow of Covid-19. That needs to be transparent about what National intends to cut, and what evidence it has that it will make any difference to prices today.

• Craig Renney is an economist and director of policy for the New Zealand Council of Trade Unions