Taming inflation
Restoring price stability is the first challenge. Persistent inflation has triggered a cost-of-living crisis. Rising prices hurt consumers, workers and businesses alike.
Elsewhere in the world, central banks are having more success than the Reserve Bank of New Zealand in controlling inflation.
Last week, the US government reported that Consumer Price Index inflation had slowed to 3.2 per cent. This is down from a peak of 9.1 per cent in July 2022. Last month, the inflation rate in the UK fell to 4.6 per cent, after peaking at 11.1 per cent a year earlier.
New Zealand’s most recent official record is for the September 2023 quarter. It revealed inflation at a comparatively high 5.6 per cent. Massey University’s AI-driven inflation forecaster, GDPLive.net, suggests inflation in New Zealand persists at this level.
The RBNZ is largely responsible for letting the inflation genie out of the bottle. Conflicting targets, excessive money-printing, distracting grandiose aspirations and a lack of expertise have all contributed to its failings.
To address these shortcomings, the new Government must urgently narrow the RBNZ’s monetary policy goals to long-term price stability and restrain the Bank from wandering off on irrelevant ventures. Both are prerequisites to the Government convincing markets it is serious about restoring price stability.
Fiscal policy restraint
The Herald’s former economics editor, Brian Fallow, once memorably noted that monetary policy needs mates. Fallow’s observation reminds us that fiscal policy is a critical lever in achieving price stability.
Yet, since the outbreak of inflation in 2021, under Finance Minister Grant Robertson, fiscal policy has been expansionary. This has only made the RBNZ’s task more challenging. The new Government must move quickly to rein in excessive government spending.
Institutional safeguards in the Public Finance Act required the Government to publish a Pre-election Economic and Fiscal Update (PREFU) before the general election. Released in September, the update appeared superficially benign. The Government’s structural deficit was forecast to return to (a small) surplus by 2027.
But the PREFU projections required heroic assumptions about the then Labour Government’s forecast levels of spending. As the Treasury diplomatically put it, “significant trade-offs” in spending decisions would be required to achieve the projections.
The International Monetary Fund’s recent October 2023 outlook paints a bleaker picture. New Zealand’s cyclically adjusted budget deficit is the third worst among advanced economies next year.
National’s fiscally ambitious tax plans will provide incoming Finance Minister Nicola Willis with the most challenging budget to compile since Ruth Richardson’s mother-of-all-budgets in 1991. If National’s proposed foreign buyer tax fails to survive coalition negotiations, her task will be even harder.
Big social policy challenges
The country’s social policy challenges are also daunting. The crises in education, health and housing affordability present daunting policy and political challenges. I have written about all three in this column before. Most recently, in “The inequality debate we should be having”, I outlined policy solutions identified by The New Zealand Initiative’s research for each of these problems.
The signs are promising that a Luxon-led Government will adopt many of the initiative’s recommendations.
But success is not assured. Tackling these problems will require courage, persistence and strong political leadership.
Productivity problem
Longer term, the key to improving the country’s prosperity is improved productivity. As Nobel laureate Paul Krugman put it: “Productivity isn’t everything, but in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker.”
New Zealand has persistently failed to meet Krugman’s challenge. Productivity growth over the past two decades has been among the lowest in the developed world. On the OECD’s estimates, other small economies like Denmark, Belgium and The Netherlands enjoy GDP-per-hour worked more than 50 per cent higher than New Zealand’s.
Many factors contribute to New Zealand’s poor rate of productivity growth. Some of them are features we cannot change. These include our small size and geographic isolation from larger, more competitive markets. But that makes it critical to release the handbrakes on productivity growth where we can. Improving educational outcomes and addressing New Zealand’s other social policy challenges are critical here.
Red tape
Freeing the economy from red tape is also critical. New Zealand has too many regulations. Between 2009 and 2014, our Parliament produced four times more regulation than the UK Parliament. With only 1/14th the British population, that is some feat. There are few reasons for thinking the regulatory pace has slowed. Just consider the Labour Government’s 1000-page Natural and Built Environment Act. And that act is just one part of a suite of new laws and National Policy Statements that have replaced New Zealand’s complex planning laws with an even more complex regime.
Assimilating all that regulation imposes a huge cost on New Zealand businesses. That is cause enough for concern. But much of the regulation is neither fit-for-purpose nor well-crafted. As the Productivity Commission has noted, a survey of public sector CEs found that two thirds of them had to work with outdated or ill-suited regulations.
Simplifying New Zealand’s complex regulatory landscape must be one of the new Government’s top priorities. The trifecta of the country’s poor planning laws, hostile foreign investment regime and workplace relations laws would be a good place for the new Government to start.
Social cohesion
Generations of New Zealanders have enjoyed a society that is renowned for its resilience and cohesion. Our nation has also been a destination of choice for newcomers, and our migration and integration policies have been hailed as some of the best in the world.
Yet the incoming Government will face a country that feels more divided, less trusting and (at least for small businesses) less safe than at any time in recent history. Restoring social cohesion must also be a priority for the new Government.
It is commonplace to say the country stands at a crossroads in an election. In 2023, it feels more like the country stands on a precipice.
Once the new Government is sworn in, the real challenge begins. It can’t start soon enough.
- Written by NZ Initiative’s Roger Partridge.
