The government lacks a roadmap for a sustained economic recovery beyond tinkering with childcare rebates and payment surcharges.
In the satirical war novel Catch 22, a burnt-out World War II pilot covertly moved the red string on the battle map demarcating the front line, reasoning that this would somehow cause the army to have advanced in real life so he wouldn’t have to fly more missions. It’s a joke about confusing the map for the territory: our simplified models of reality are not the real world.
For most of 2024, US voters told pollsters they were angry about inflation and they’d kick out Joe Biden’s government if he didn’t do something about it. The Biden administration would exasperatedly reply, “We did do something! Look at the CPI. The rate of inflation was 9%, it’s now 2.9%.”
Voters were not persuaded. They felt the government was pointing to a line on the map, not the world. So they voted for Donald Trump, who vowed he would beat inflation. Core CPI is now lower than it was under Biden, though this might change as the effects of Liberation Day’s tariffs kick in. But Americans are angry at Trump anyway, because their food prices are up, and expensive groceries and petrol are what most people mean by inflation.
US discourse is focused on eggs. In New Zealand, we’re upset about butter. Both might seem trivial, but these are things we can point to in the world and shout, “Forget the CPI. Your map is wrong. Prices are still high!” Prime Minister Christopher Luxon and Finance Minister Nicola Willis are trying to walk a fine line between congratulating themselves on their incredible work in defeating inflation and introducing bolder policies to tackle inflation because the public is clearly not convinced by the first claim.
Rebate boost
The flagship policies include the tax cuts passed last year – stealthily being clawed back as wages rise alongside prices via the infamous fiscal-drag mechanism – and FamilyBoost, a rebate scheme for early childhood education. This has simultaneously been a triumph and a failure, depending on your perspective.
The policy has significantly lowered the cost of childcare, because the government is subsidising 25% of weekly ECE fees. But it has simultaneously lifted the price of childcare – because the government is subsidising 25% of weekly ECE fees, providers have every incentive to charge more.
We’ve recently learned the scheme has fully benefited only 249 households instead of the 21,000 predicted by IRD’s model. Willis’s solution is to extend the rebate to 40% and make this available to households earning up to $229,000 a year. This makes political sense – National can hardly abandon a key campaign promise in the middle of a cost-of-living crisis.
Council rap
After a spate of dire polls and yet another round of rapacious rates rises contributing to an increase in the CPI last quarter there’s talk of a rates cap on councils. Local Government Minister Simon Watts claims to want the policy in place “as fast as possible” and has introduced legislation along those lines; but neither Act nor New Zealand First appear convinced. There’s also a plan to ban payment surcharges for in-store electronic transactions “by May 2026 at the latest”. If they’re voted out of office in late 2026, National will look back in astonishment at how little they did to address the key issue that won them the 2023 election ‒ the cost of living.
In the US, there were two popular theories to explain the disconnect between voter perceptions and the economic data, and both feel true for New Zealand. The first came from The Atlantic journalist Annie Lowrey, who explained that most of us anchor cost expectations to the price tags we got used to during the pre-pandemic era of low inflation. Washing powder was $20, now it’s $30. Even if the price hasn’t changed in the past year, we still register it as an increase every time we pay the higher amount.
The ‘vibecession’
The second theory is from economic commentator Kyla Scanlon, who coined the term “vibecession”. She argues years of instability caused by Covid, inflation, layoffs and the housing crisis have created a profoundly negative mood about the state of the US economy. This was amplified by social and mainstream media, reinforcing pessimism even during the recovery.
Prices here might be more stable than they were three years ago, but the overall vibes are terrible. New Zealand feels broken in a way that banning credit card surcharges will probably not resolve. Both theories are grounded in psychology rather than microeconomics. Both will need a broad, sustained economic recovery to solve them – something National has promised but not yet delivered, a failure the Prime Minister loudly blames on Labour, although local government and the media also seem to be complicit.
When Luxon was opposition leader, he assured voters our problems were caused by former prime minister Chris Hipkins and former finance minister Grant Robertson, and they’d be solved when he was running things. They all say that.
But incoming governments usually have some kind of plan to address the more serious challenges they’re confronted with – such as a sustained economic downturn. Luxon seems to have assumed his mere presence in the Beehive would sort this out. Two years in, it’s still hard to see any kind of plan. He doesn’t seem to occupy the same bleak territory the rest of us live in, nor does he have a map to guide him or us anywhere.
John Maynard Keynes used to mock economists who “can only tell us that when the storm is long past the ocean is flat again”, but even that is preferable to political leaders who squander their time in power whining that the storm is everyone else’s fault.
Update: A previous version of this column claimed that the full subsidy would be eligible to households on double the median income. This was incorrect. Family Boost begins to abate at $140,000. Households earning above $229,001 are not entitled to the subsidy. The Listener regrets the error.
