Finance Minister Grant Robertson batted away remarks by Reserve Bank Governor Adrian Orr today that suggested Governments should look at trimming spending to get inflation under control.
Despite this, Robertson also suggested the Government would announce at the Budget a fiscal policy that would trim back on the level of stimulatory spending in the medium to long term, keeping a lid on debt.
Earlier on Tuesday, Orr told the IMF that central banks "are going to need support" to tame inflation.
Orr said this support would mean clear communication with "fiscal authorities" (meaning governments) and "how they could assist around more targeted effective fiscal policies".
Robertson said Orr's remarks were not directed at him and the Government, but were about the relationship between governments and central banks more generally.
"He made those comments in the context of all central banks around the world, and I agree with him that we have to make sure our spending is targeted," Robertson said.
The current inflation spike has highlighted the sometimes awkward relationship between the Government and the Reserve Bank.
The Bank is in charge of setting monetary policy independently of the Government with an overall strategy of keeping inflation in check and employment high. However one of the causes of inflation is Government spending (other causes include things out of the Government's control, like global fuel prices).
The awkwardness comes from the fact the Reserve Bank is using its Official Cash Rate to tame a problem that is, at least in part, caused by what the Government is doing.
Robertson argued the Government's incomes package, which took effect on April 1 and raised benefits and the minimum wage was an example of this targeted spending - he said this was better targeted than National's tax package.
Robertson said the Government did not want to "cut our nose off to spite our face and cut back on health, and education, and housing".
He alluded to the shape of the forthcoming Budget, which will be delivered on Thursday May 19.
Robertson has come under fire for the size of the operating allowance, which is the money allocated for new spending in the budget. Despite the current inflation spike, Robertson has set aside $6 billion for new operating spending in this Budget.
He defended this today, saying a large chunk of that spending was for the "one-off" reform of the health system, and aside from that the Budget had similar operating allowance to previous years.
'"In this Budget, for example, we are completely rebuilding New Zealand's health system. There is a one-off component to the operating allowance which is for that purpose, other than that the operating allowance is similar to what we have seen recently," Robertson said.
The average operating allowance under this Government has been $3.4b, suggesting about half of the $6b operating allowance this year is for the health system, and the rest for other initiatives.
Robertson also suggested that the net level of Government stimulus would track down following the Budget, as one-off Covid measures ceased. Treasury is currently forecasting the Government's spending will have a net contractionary effect on the economy next year relative to this year.
Robertson also drew attention to the fact that in this Budget he will detail a longer-term fiscal strategy, as he is legally obliged to do. This strategy will include a debt target, which will mean the Government committing to reducing debt levels to a certain number by a certain date.
His remarks suggested this strategy would be contractionary overall, with a focus on reducing New Zealand's debt load, which has increased over the pandemic, but is still relatively low. Net core Crown debt will peak at 40.1 per cent of GDP in 2023, before tracking downwards.
Robertson said he was "on the record as saying that I think it's really important to use fiscal policy sensibly to make sure New Zealand has kept a lid on our debt".
"We will continue to keep a level on debt, it is important for NZ that our debt levels return down from where they are now," Robertson said.
In the short term, however, there would be no cutting back on planned spending.
"Government spending on the health system is important. If we were to cut that, we would not reduce the cost of fuel, or the cost of fuel," Robertson said.
Robertson said he believed New Zealanders were convinced the current inflation spike is "global phenomenon" and not one that was pinned on the Government specifically.
"They only need to see the headlines every night to see that inflation in the UK has gone over 8 per cent," Robertson said.
"I'm not surprised people are concerned about the cost of living because it really is affecting people," he said.
The Reserve Bank is currently hiking the Official Cash Rate. Currently the cash rate is at 1.5, but the Bank expects to hike it to 3.4.
Robertson and Orr have both talked about the Government and the Bank needing to "work together" when setting their fiscal and monetary policies.
When the Bank loosened monetary policy during the pandemic by cutting the cash rate "working together" was interpreted as meaning the Government needing to stimulate the economy by spending more.
Robertson was asked what "working together" meant in the opposite context, when the Bank was tightening policy as it is now.
"The Reserve Bank has its tool with the OCR that it uses, which is it's tightening tool," Robertson said.
"We do our job of making sure that the money we are spending is value for money," he said.
Robertson fired off a barb at National, saying their inflation package, comprised of $1.7b of tax cuts, committed National to the same level of spending as the Government.
"I do challenge opposition politicians, in particular the National Party who actually said over the last few weeks said they would spend exactly the same amount as we would just in a less targeted way," he said.