Seventy thousand people, roughly equivalent to the population of Rotorua, are forecast to lose their jobs as the Reserve Bank plunges the economy into recession in a bid to control inflation.
The Council of Trade Unions thinks this is unacceptable and has proposed the Government pass an Inflation and Incomes Act, to tackle the most pernicious parts of the inflation crisis and avoid the need for the Reserve Bank to bludgeon the economy by hiking its blunt Official Cash Rate.
CTU economist Craig Renney thinks the Government could do a better job by fighting inflation where it hurts most: food, rent, electricity, tax and transport costs, among other things.
He has proposed a suite of measures to bring these down, including bringing the partly-privatised power generators back into full public ownership so they could better invest in the transition to cheap, green energy rather than paying out dividends; reducing student loan repayments for some borrowers; and giving first-home buyers 25-year fixed mortgage rates for some properties.
Renney also proposed including a tax-free threshold so that the first part of someone’s income was not taxed at all. New Zealand income earners are taxed on every dollar they earn, unlike workers in Australia who are not taxed on their first AU$18,200 (NZ$19,240) of earnings.
These ideas come under what the CTU calls an Inflation and Incomes Act, which would be a new approach to targeting inflation.
The legislation would force the Government to target stable core inflation over ten years, rather than the broad inflation targeted by the Reserve Bank.
It defines this inflation as the inflation measured by the poorest 20 per cent of households, a measurement already taken by Stats NZ’s household living-cost price index.
Renney, a former adviser to Finance Minister Grant Robertson, said New Zealand needed to “start thinking about inflation differently”.
“Inflation is not a short-run thing but a long-run thing,” he said, noting that the poorest fifth of households had been experiencing high inflation for some time.
There was a risk, as New Zealand decarbonised that these households would be hit with even further price hikes if the cost of transitioning to a green economy were not distributed fairly across the economy.
The Reserve Bank would publish a letter setting out how the Government is delivering on, or failing to deliver on, this target. This will include an assessment of what the consequences of that failure are likely to be.
The Act would have a focus on rents, aiming to keep these below 30 per cent of the median household income. It would also require the Government to set targets to increase the disposable income of New Zealanders over time.
Renney proposed a suite of policies to bring inflation down for consumers including further incentives to move to electric vehicles so households were not so dependent on gas prices and moving to a better-funded, cheaper, electric public transport system.
A windfall tax on excess profits on energy, petrol and supermarket companies, “designed to disincentive price hikes, price gouging and protect workers’ wages”, and a levy on larger banks to ensure profits stayed here and contributed to economic development.
On tax, Renney wanted to see a tax-free threshold and a change to the way student loans are repaid. Currently, earners must repay 12 per cent of every dollar earned over the repayment threshold, which essentially acts as a 12 per cent super tax.
For people earning over $70,000 this means they are taxed at 45 per cent for every dollar earned above $70,000 - a far higher rate of taxation than high earners who are hit with a 39 per cent tax rate on income earned over $180,000.
Australia has more progressive student debt repayment rates, meaning people who earn less pay proportionately less and people who earn more pay proportionately more.
Renney also wants a first home buyer mortgage product, giving borrowers a fixed interest rate for 25 years on Crown-built new properties.
“A new State Advance loan would see mortgage holders benefit from stability of repayments. It would also create a pipeline of demand for new Crown construction through a Ministry of Green Works,” his report said.
Renney said New Zealand needed to focus on that core inflation basket, because at times in the last decade, incredibly low general CPI inflation has masked higher inflation for poorer households.
“General inflation is being impacted by things that the poorest aren’t buying. Computers and mobile phones get cheaper so general inflation gets better,” Renney said, noting that the declining cost of these goods masked increases in the cost of things like food and fuel.
“[If you target] rent, food, fuel - you’re keeping inflation lower for everyone by doing that because core inflation no one can avoid,” he said.
The Reserve Bank expects CPI inflation to peak at 7.5 per cent next year, before falling to 3.8 per cent in 2024 and 2.4 per cent in 2024. The target range is 1-3 per cent, with a target of 2 per cent over the medium term.
The OCR is forecast to hit 5.5 per cent by 2024 and the unemployment rate is meant to hit 5.7 per cent by 2025. It is currently 3 per cent.