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The Government is walking a tightrope as it tries to control inflation while keeping the country from slipping into recession.
Speaking to the Front Page podcast, NZ Herald business editor at large and Money Talks host Liam Dann says that governments around the world are trying to avoid dipping into the tools that usually help to quell inflation.
"Traditionally to get on top of inflation, interests rates are pushed up and the government cuts spending," says Dann.
"But governments don't want to cut spending right now. Austerity is not the fashionable way to do things right now, because governments are trying to avoid recession. They're trying to get through this without a major recession or really pushing up unemployment. And that's a really difficult balancing act."
Dann explains that lessons learned from the use of austerity measures during the Global Financial Crisis informed the moves made by governments in response to the outbreak of Covid.
"When Covid hit, we saw the opposite of austerity," says Dann.
"The fear was that there would be a huge recession if governments and central banks didn't act," says Dann.
"The lockdowns meant that everyone would stay home and stop spending. Businesses would go under and unemployment would rise.
"So we saw Governments borrow and they borrowed largely off the back of cash created by central banks. So used they quantitative easing, which is kind of like printing money, to the tune of $50 odd billion dollars in New Zealand but trillions around the world."
The thing is that we are now starting to see the impact of that money being poured into the global economy.
"It's flooded the world with cash and the side effect of that is you've seen asset markets, property, and sharemarkets soar … That money propped up the economy.
"Perhaps with hindsight, the world didn't need so much stimulus, but that's what's happened. And now you've got to kind of unwind that – and that's the part where we pay for it on the other side."
The problem, however, is that global crises aren't showing any signs of slowing down. Russia's attack on Ukraine has thrown yet another curveball, leading to a massive spike in petrol prices – and thereby the cost of living – in New Zealand.
This led the Government to take the recent step of forgoing hundreds of millions of dollars in tax earnings to give New Zealanders relief at the pump.
Having come off the back of the billions already spent keeping the economy afloat during Covid-19, this raises the question of whether the Government should be bailing the country out every time there's a crisis.
"I think it's important that the Government is able to," says Dann.
"Think about what's the Government actually there for. It's there to cover us when times get rough. Every finance minister I've spoken to back to Sir Michael Cullen understood that New Zealand faces regular external shocks, whether it's a global financial crisis or a major earthquake.
"We have a double whammy at the moment because we've got the pandemic and now the war effect. But we want governments to be able to smooth out those shocks for us and that's one of the reasons why Grant Robertson is focused on core crown debt. We need to get that core crown debt down so New Zealand can handle the next shock."
Dann says that the latest estimates suggest that the core debt to GDP ratio will peak at around 40 per cent in 2023 – up from 20 per cent before the pandemic hit.
While this is better than earlier estimates, which suggested the peak would be more than 50 per cent, Dann warns that we shouldn't rush into spending this money too quickly.
"It's almost like having a cap on a student loan, limiting how much you're allowed to borrow. So you budget your life around how much you're allowed to borrow, and then you realise you've got your food and rent covered. So, there's going to be some left over now and that's a gain to you because you've got this extra money. But it's still borrowed money."
Dann also says that we need to be careful of international comparisons, given that our private debt is so much higher than it is in other countries.
"Japan is sitting at something crazy like a debt to GDP ratio of 260 per cent. This is horrendous, but countries like Japan are much better on the private side than New Zealanders … The Japanese have much better private savings rates and much lower private debt levels. Because of our housing market and mortgages and all that, we have a much higher level of private debt."
The question of how much more we should spend and what we should spend it on is quickly becoming one of the biggest political talking points in the lead-up to next year's election, with Dann saying it will be a more important issue than the Covid response.
"This is the issue," says Dann.
"Where the economy is at and where it is going will drive voters.
"I think National and Chris Luxon recognised that, stopped arguing about borders and Covid, and shifted to tax cuts and dealing with inflation and the cost-of-living crisis."
The Front Page is a new daily news podcast from the New Zealand Herald, that will be available to listen to every weekday from 5am.