Hayden Munro: Reserve Bank, government and opposition ponder pandemic economics

OPINION

New Zealand’s successful response to Covid has given us two years of strong economic performance and low unemployment, but with the Omicron outbreak now raging, all of that is in jeopardy.

This week’s ANZ trade outlook
showed a 30-point drop in business confidence, the specter of inflation hitting 8% and the growing risk of a recession as businesses and households cut spending. And that’s before the impact of the invasion of Ukraine on oil prices is felt.

How best to answer this is a question that will plague all of our leaders in the weeks to come – causing problems for the Reserve Bank, the government and the opposition.

Indeed, pandemics in a globalized world are far more complex than ordinary economic downturns. There is no playbook and very few historical precedents to rely on.

They are particularly tricky because pandemics hurt economies on both the demand and supply side. Consumption and the supply of goods fall. This means a world of complexity for policy makers.

Start with the Reserve Bank. Their job is to water down inflation, but the key tool they have to do that is to raise interest rates, which does nothing at all to solve the pandemic-induced supply constraints that are making drive up prices. Raising interest rates does not prevent workers from getting sick or help move goods faster through congested ports.

In fact, raise rates too high and all the bank will do is further stifle demand at a time when businesses need people to spend money.

That’s why, globally, other central banks are raising rates much more slowly than we are, and why many financial market participants are betting that the RBNZ won’t go through with all of the planned rate hikes.

And as far as the government is concerned, there is no doubt that a constrained economy and rising prices are very bad news indeed. Just ask Jimmy Carter or Bill Rowling what a spike in inflation can do to a politician’s fortune.

It is particularly difficult for Labour, who came to power promising to redress long-term underinvestment in health, education, housing and infrastructure.

Now they find themselves politically vulnerable when it comes to the cost of living, with each new investment easily touted as an increase in demand in an already overheated economy, but equally aware that they will be hit for non-delivery. they don’t fund those areas properly.

National rightly points out that Grant Robertson’s $6 billion in new operating allocations for the 2022 budget is the largest addition to permanent new spending in our history. The heat will be on Robertson on budget day to convince the public that they are getting a dollar’s worth for every dollar spent.

But not everything is easy for National either. They have been adamant about blaming government spending for rising inflation, but they have been unable to identify which specific spending is driving inflation, or which programs they would cut.

The tricky thing is that the bulk of new spending in recent years has been on things the National and the public strongly support that were needed during the pandemic — think of the $22 billion spent on the wage subsidy and the income support or money spent on the health response or on things like pay rises for doctors and nurses.

Any budget cut big enough to credibly curb inflation would have to mean an unprecedented cut in areas such as health or education, which would likely hurt the economy as well. There is no easy way to stack the numbers.

Likewise, the usual tax-cut move is unlikely to work in this environment – ​​borrowing to finance tax cuts only pumps more money into the constrained economy, drives up debt and worsens the crisis. inflation.

So here we are all, a country facing a major outbreak, businesses facing blows, government and opposition facing tough questions with no easy answers, and the Reserve Bank caught between the devil and the big blue.

Welcome to Pandemic Economy, New Zealand.

● Hayden Munro was the campaign manager for Labour’s successful 2020 election victory. He now works in corporate public relations for Wellington-based firm Capital Communications and Government Relations.