Last week proved the truth of Prime Minister Harold Macmillan’s claim that the greatest challenge in politics is: “Events, dear boy, events”.
Chris Hipkins is giving a master class in how to manage events with a seamless transition.
Then on the day he is sworn in is the news that inflation is still at 7.2 per cent.
Hipkins used the inflation news to re-brand Labour, saying the cost of living would be “the number one focus of the Government.” It is a huge U-turn. It is just 11 months ago that Jacinda Ardern was denying the cost of living was a crisis.
In one press conference, Hipkins has reset the Government’s priority.
Then another event: a storm of biblical proportions.
Hipkins gave a text book response.
Norman Kirk’s advice to MPs was in a civil-defence emergency it was vital to put on your gumboots and be seen to be helping. People do like to see their mayor rushing out with buckets.
Hipkins was in Wellington. The only thing he could be seen to be doing was to go the Beehive civil defence bunker. The next morning he was in Auckland being seen observing the damage and offering central government assistance.
One of the Herald’s most-read articles is how you can use 15 days of annual leave to get 46 days off work. The review into the storm response will find that too many civil servants and council workers had taken annual leave last Friday.
The Transport Agency website on Sunday was saying my home at Lake Rotoma was cut off by slips. Contractors had already reopened the road. It is dangerous when government websites give out-of-date public-safety information.
It is going to be a struggle for Hipkins to re-focus on the cost of living.
The reason governments should never let inflation get to 7.2 per cent is because there is no painless way to reduce entrenched inflation. Policies like the untargeted fuel and public transport subsidies are hard to remove and work against Reserve Bank efforts to control inflation.
There is not a lot Hipkins can do to control the cost of living. Over half of all inflation is now coming from overseas. There are signs global inflation may have peaked but with China lifting its lockdown there will be new pressure on fuel prices. While Russia continues with its invasion of Ukraine there will be more global shocks.
The advice the IMF is giving is to stop deficient spending at a time of full employment. Hipkins is not going to do that in election year. Spending is popular.
Over the next eight months he cannot deliver on his cost-of-living focus. The Reserve Bank’s interest rate rises will bite home.
Commentators are missing what will have a bigger impact: The “poverty effect”.
Economists write about the “wealth effect”, how rising house prices make us feel wealthy. The average Auckland household has been amazed to discover they are millionaires. Of course, it is only on paper unless they sell their house.
But the wealth effect is real. People feel wealthier; they are more willing to invest and spend.
The poverty effect is just as real. Many Aucklanders have lost 20 per cent of their wealth in the last year. Despite Mayor Brown’s cost-cutting, the Auckland Council faces huge costs. The weekend’s rain event confirms that the city’s infrastructure deficit is enormous. Lower property values mean to raise the same income the council will have to increase rates.
People react to lower house prices by deciding not to sell. A static housing market has adverse effects on the economy and society. House sales drive retail sales as people refurbish their new home.
One of the advantages of our housing market is the willingness of Kiwis to move home. It makes for a flexible labour market. Downsizing in retirement means our housing stock is better utilised. A slowing housing market slows the whole economy.
For those forced to sell in a declining market, such as a divorce settlement, the house sale could be a life-changing loss in wealth.
As house prices have fallen all over the country, the poverty effect is countrywide.
There is nothing Hipkins can do about the poverty effect. Every month as the price of houses fall, home owners will feel poorer. Those with mortgages will have a double whammy, higher mortgage costs and a house that has lost value.
No matter how skilfully managed, it is events that overwhelm governments.
Rather than waiting to be overwhelmed, Chris Hipkins must be considering taking advantage of his honeymoon bounce and making some dramatic cost-of-living announcements. Then asking for a mandate for his new policies by calling a snap election.
- Richard Prebble is a former leader of the Act Party and former member of the Labour Party.