A painful journey ahead to ‘normalize’ a staggered economy


By Jenée Tibshraeny

“It is easier to cool an overheated economy than to revive a frozen economy”.

This was the approach taken at the start of the pandemic, as the government and the Reserve Bank (RBNZ) pulled out all the stops to support economic demand.

But now that it’s time to take the punch bowl out of the party, it’s become apparent that it’s going to be hard to ensure we walk away with only a mild headache and not a debilitating hangover. It will be difficult to raise interest rates to calm inflation, without bringing the economy to a screeching halt by eating too much into the disposable income of mortgage holders or causing the housing market to collapse.

Nevertheless, even a relatively soft landing will produce guarantees.

People with lower disposable income are already disproportionately affected by the rising cost of living. Many of these people could also be asset-poor, meaning they haven’t benefited from the price boost the RBNZ has given in 2020 and 2021 (and previous years).

Meanwhile, higher interest rates will bite recent homebuyers with mountains of debt the hardest.

The problem is that there is no quick and easy way for government policy to protect the vulnerable people, currently designated as safeguards, in our next journey to “normalize” a very outdated economy.

Of course, there are longer term solutions. It is important that these remain at the center of the concerns of political decision-makers.

But without an obvious way to smooth the descent over the next year or two, it’s hard to see the government step in for the most vulnerable, especially if that group is small and powerless enough not to reduce the odds. of Labor to be re-elected in the 2023 elections.

Let’s go back – what’s the problem?

All the stimulus provided by central banks and governments around the world since the start of the pandemic has increased demand, while the Covid-19 disruptions have reduced supply. This drives up the prices.

While the goal of central banks was to drive up inflation, they did not expect their measures to be so effective. Meanwhile, it was difficult for them in 2020 to predict that supply chain disruptions and labor shortages would persist this far into the pandemic.

Thus, the cost of gasoline, food, building materials and labor is rising.

Low-income people will feel these price increases the most. If you only have $100 to save each week, you will notice a $30 increase in your grocery bill more than if you are able to save, say, $500 per week.

Also, as the cost of building new homes and the cost of buying existing homes have increased, so have rents. Again, those with lower disposable income will feel it the most.

Increase in social assistance and wages

Finance Minister Grant Robertson will struggle to support these people using social benefits – increasing the value of existing payments or widening the criteria for eligibility for aid. He would be criticized by the opposition for borrowing and spending more at a time when we are trying to calm inflation.

As for the left, which is calling for higher social benefits, Robertson can point to the fact that he has already lifted social benefits.

Then there is the minimum wage. The government announced on Friday that it would increase from $20 to $21.20 an hour starting April 1.

The 6% increase aligns with rising consumer inflation, which means Robertson can deflect criticism (using at least this measure) that “wage growth is not keeping up with the cost of the life”.

He will also be able to deflect criticism “there is not enough separation between the government and the RBNZ” because a 6% minimum wage increase arguably does the opposite of what the RBNZ is trying to do, by cooling inflation.

Nonetheless, the case will give the opposition a chance to say it is contributing to inflation and hampering hospitality, tourism and retail businesses already struggling due to Covid-19 restrictions.

No clear answer

It’s hard to find other quick fixes to ease the pressure on low-income people.

There will be readers who align themselves with National and ACT and suggest that the government relax the rules it has put in place to make life harder for homeowners – Healthy Homes Standards, the removal of interest deductibility and the extension of the clear line test.

While evaluating these policies would see this piece take many tangents, the reality is that the government will not backtrack on these policies.

Green Party supporters will call for rent control. Again, the merits/problems associated with this are best addressed in a separate article. Nonetheless, Robertson ruled it out last week.

There are of course also structural changes that need to be made to increase the supply of housing, improve competition in supermarkets, fuels and building materials, and make the tax system fairer and more efficient. Productivity also needs to be improved; people actually need to be encouraged to improve themselves, innovate and work hard, rather than trying to get rich by buying and selling assets.

It is absolutely crucial that the government remain focused on addressing these longer-term issues. It’s made a start on a number of fronts, but there’s a long way to go.

While short-termism can be dangerous, it remains difficult to look at the rise in the number of people in need of emergency food and housing subsidies, and not think, what can we do about it – now ?

The problem is that there is no easy solution, both practically and politically. It will simply be difficult to soothe the pain associated with inflation and the tightening of monetary policy needed to deal with it.

Those already on the margins of society will be hardest hit. They are unlikely to make a huge dent in the left’s base of support. Although their disenfranchisement will erode the social fabric of the country.


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