Steven Joyce: Winter is coming — ready or not

Get out your wet weather gear — the storm clouds are gathering. Photo / Sylvie Whinray

OPINION:

The weather and its impacts have naturally dominated the national conversation for the first two months of this year. It will dominate life in the affected communities for much longer.

For everyone else, attention is turning back to more universal, shall we say, bread and butter, issues. There, the storm clouds are also banking up.

The enduring problem is inflation and the cost of living, which doesn’t look like getting any better. The fervent hope of Americans that their inflation was coming under control is turning out to be a false dawn.

The US economy is still running too hot and the Federal Reserve will have to keep pouring cold water on it by further hiking interest rates.

Here the problem is the same, or worse. The economic stimulus during Covid from extra government spending and monetary policy was even greater as a proportion of the economy than elsewhere. The restrictions on the border were more disruptive to the labour market than in other countries, and the desire to crank nominal wages for political reasons more intense.

Since this Government came into office, the minimum wage has risen by a vast 44 per cent.

Ministers also hiked the effective minimum wage for migrants much higher, and both flowed through to increased labour costs. We were in a pro-inflationary environment long before the rest of the world.

All this was predictable and indeed predicted by some. Inflation has been made worse by unexpected things like the Ukraine war and now the weather events in Hawke’s Bay and Gisborne particularly, which will create further shortages in food and labour, but the base problem is poor economic policy choices both before and during the pandemic.

The question is, what to do about it? After all, the Government has declared the cost of living crisis will be its absolute focus this year (along with the weather events).

They have very limited options. If they play around with the Reserve Bank’s inflation target, as some have started to suggest, they would rightly be seen as waving a white flag to inflation.

They could encourage more immigration to un-gum the labour market, but they’ve spent so much time discouraging people from coming here that it will be hard to change the unwelcoming reputation we now have. Anyway, we are now competing with the rest of the world, who want grow their labour markets, so this won’t be a quick fix.

If they increase taxes to help slow the economy, they will make things worse for families. And if they introduce envy taxes, they won’t achieve much revenue, or much impact on inflation. They would just encourage more people to leave, which would be a brake on economic growth.

They could try to keep wage increases under control, particularly in the public sector where they have the most influence. However there doesn’t seem much chance of that, given the latest minimum wage increase (where they simply hiked it again to match inflation) and their likely capitulation in the face of public sector unions which are demanding above-inflation pay increases.

Which brings us to the one lever they could realistically pull. Government spending these days is more than 40per cent of economic activity. Restraining it would help reduce inflationary pressure on the economy. Restrain it enough and it would be possible to provide some tax relief to struggling families as well.

But restraint is the key. If the Government just borrows more to increase public spending or to give handouts to families, that will push inflation up further.

The good news is that there is huge capacity to cut public spending. Government expenditure has increased by an unbelievable 65 per cent since 2017. Some of it was for the pandemic, but that should be winding out by now. Blind Freddie can see we have a bloated public sector which has gorged itself on free money.

People have made much this week of consultancy spending, but however big that is, it’s small beer. The real problem is a general looseness with the public purse, and the hare-brained schemes ministers have been spending all the money on. There has been virtually no fiscal discipline for five years. Every brain fart of an idea has been funded.

The list of ridiculous flights of fancy is long and undistinguished. Bike bridges, illusory light rail projects, public-sector mergers, cancelled public-sector mergers, think big-style power schemes, the list goes on and on. We even had the spectacle of a minister this week defending spending $16 million on a cancelled project.

You can be sure what we see is the tip of the iceberg. As one who’s been there, I can confidently predict billions and billions will be able to be wrung out of the current Government’s spending and nobody outside the Wellington vortex would notice.

There could easily be enough money to both restrain government spending overall to help control inflation, and give the long-suffering taxpayer a much-needed downpayment on tax reduction. As a result of tax increases and bracket creep, New Zealanders are collectively paying more than $40b more tax this year than they did six years ago. No wonder they are feeling the pain.

The Government’s problem is that their mismanagement of core public services like health and education means that, if anything, the public and people working in those sectors will be wanting to spend even more money there. The health reforms have so far sent the health sector backwards if anything, and education performance is in a nosedive while the ministry in Wellington grows like Topsy. Plus, Hawke’s Bay and Gisborne in particular need money for cyclone recovery.

To meet the reasonable aspirations of New Zealanders, this year’s Budget will need to be crafted with the sort of surgical discipline that we haven’t yet seen from this Finance Minister. He will need to spend money in the right places, slaughter great herds of sacred cows, and provide something to alleviate cost-of-living pressures, all without increasing borrowing. He will also need to demand accountability from the public sector for performance.

If he took a zero-based look at the gargantuan increases in spending on his watch, then with a lot of hard work all that should mostly be possible. If he doesn’t, then I think we are in for a bumpy ride.

High inflation, high tax, squeezed family budgets, teacher strikes, people turned away from emergency departments and highly visible wasteful spending, could all add up to a looming winter of discontent.

- Steven Joyce is a former National Minister of Finance. He is director at Joyce Advisory.