Political Roundup: How much of our cost-of-living crisis is due to incompetence?

It’s ordinary people who are suffering the most from the current cost of living crisis. In other words, working people and the poor are paying the price of higher prices.

Rising living costs have greater consequences for those in the bottom half of the wealth hierarchy, who are pushed into the type of financial difficulties that politicians and the wealthy just don’t have to deal with. Hence, we are likely to see significant human damage arising from the growing crisis, such as families losing their homes, people paying a higher proportion of their incomes in rent, and having to make difficult choices about which of life’s necessities they can do without when cash is scarce.

The reverberations of this crisis will be felt for a long time – in the form of declining quality of life, worsening health statistics, housing affordability, and so forth.

Accountability and passing the buck

It’s only natural to ask what has caused this situation. It’s an issue of political accountability, to say nothing of the need to learn some lessons and hopefully avoid this occurring again.

Ruling politicians will do all they can to pass the buck and point the finger elsewhere. Minister of Finance Grant Robertson is blaming New Zealand’s inflation on decisions made by politicians in other parts of the world. Of course, he’s partly correct – other leaders have made incompetent and self-serving decisions that are causing global problems, and contributing to our own local cost of living crisis. But that doesn’t let local decision-makers off the hook.

Covid stimulus spending

Although few politicians or even economists want to acknowledge it, the decision to launch massive Covid stimulus spending has played a central role in the current crisis around the world, including New Zealand. Politicians and central banks unleashed a flood of money, but the stimulus primarily drove increases in asset values, thereby making inequality even worse. The K-shaped recovery enriched the already-wealthy, while those without large assets to begin with – houses, share portfolios and so on – are left to struggle with the consequences of inflation.

The massive Covid expenditure may have had some justification – they were trying to ward off a recession – but politicians and the central banks targeted this spending in ways that advantaged the rich, and continued to pour money into those economies well after the Covid economic crisis was stabilised. Similarly, the Government’s Wage Subsidy Scheme was set up to meet genuine need, but poor design saw much of the $20bn flow into the bank accounts of the rich.

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Some of these criticisms can be more easily made in retrospect, but much of it was also obvious at the time. For example, even Treasury warned the Minister of Finance in early 2020 that the proposed Covid stimulus policies would produce worsened inequality.

Economist Professor Arthur Grimes of Victoria University of Wellington has been scathing today about what has led to current inflation levels and the cost of living crisis. Grimes has been both Reserve Bank chairperson and its chief economist, and he’s also credited with creating the innovative practice of “inflation targeting” in the 1980s, which helped get inflation down near zero. What he says carries a lot of weight.

Grimes has not minced his words about the Reserve Bank: “They’re completely to blame for allowing this to happen… They’ve been incompetent, they’ve been really incompetent”. And he’s been reported by Thomas Manch as believing “with better management, New Zealand could’ve had inflation akin to Switzerland, at 2.9%, or Japan, at 2.1%.”

Manch reports Grimes’ explanation for the domestic inflation disaster: “the Reserve Bank had ‘misread the conditions’ of the Covid-19 pandemic and in the past three years, it had loosened monetary policy too much, causing a massive increase in asset prices, and cut the official cash rate ‘more than they should have’.”

According to Grimes, ordinary people will now suffer: “There’s going to be people who made plans and interest rates are going to be a lot higher than what they budgeted on, and they’ll have to be higher, because of the mistakes the [Reserve] Bank’s made, and it’ll catch people unawares: bankruptcies and people losing their houses”.

Are the politicians also to blame?

To what extent are the politicians to blame? Grimes points the finger at the 2018 decision to water down the Reserve Bank’s sole target of controlling inflation, by adding employment stability as another goal. He says that Labour “completely mucked that up”.

Financial journalist Bernard Hickey has also written today about the central role of the Reserve Bank, saying they “should be first in the firing line”, and pointing out that Grant Robertson should also be held accountable, because he signed off the money printing, the cheap bank lending, and the removal of LVR controls in 2020.

Hickey argues that initially some of the $100bn money printing and other loosening of monetary policy was understandable, given the circumstances. However, he argues this direction should have been halted soon after the first lockdown, especially when it became apparent that the economy was bouncing back strongly, and house prices were rocketing upwards.

Although some other countries made the same mistakes, Hickey says the New Zealand mistakes were worse: “the Reserve Bank had already printed as much, if not more, in proportionate terms to GDP, than those other central banks, and took the extra step of relaxing LVR controls.”

What can now be done? First, Hickey says New Zealand should initiate a review like Australia: “There must be a serious, deep and independent review of the Reserve Bank’s actions in 2020 and 2021, if only to win back the trust of the generation of renters (without generous parents) who are now fleeing to Australia to find renewed hope of home ownership and family lives.”

Second, the Reserve Bank “could start by ending and unwinding the $12.7b of cheap loans to banks through its Funding for Lending programme. It could also further tighten LVR settings and unravel its bond-buying programme much faster.”

What else could the Government do? A Windfall Profits Tax?

Acknowledging that the current crisis is largely one of quickly increasing wealth inequality, Labour could act like a traditional party of the left and redistribute wealth in a significant way, perhaps even implementing a Windfall Profits Tax. Even the British Conservative Government has recently announced such a tax on UK oil and gas profits to partly fund cost-of-living support to households.

New Zealand corporates have certainly been highly profitable during the last two years, profiting from the Government’s stimulus policies while workers have been squeezed and the cost of living crisis has been biting hard.

According to researcher Edward Miller, of First Union, Treasury’s corporate tax data shows that in “the year to March 2022, corporate profits in this country had spiked by a pretty staggering 39 percent” or $20 billion dollars. Miller says: “Profits jumped up to $72b in that most recent year. They hadn’t been at that level prior. And it’s the biggest increase that we’ve ever seen, both in terms of the raw dollars, whether that’s inflation adjusted dollars or non-inflation adjusted dollars, and it’s also the biggest percentage increase that we’ve seen, ever.”

Miller points to sectors such as banking, construction, and supermarkets where there is very little competition, that could easily pay a windfall tax given their mega profits over the last two years.

By contrast the Government’s current cost-of-living strategies seem feeble. In particular, the announcement on Sunday of an extension of the transport subsidies has been widely seen as cynical. As broadcaster Tova O’Brien says today, the fact that the unscheduled press conference was called on Sunday just prior to the following day’s announcement of the inflation rate, shows how rattled Labour is, and how ill-equipped to deal with this crisis.

O’Brien has rightly called for the Government to take the crisis seriously and develop some proper measures: “It’s time for some long-term planning. It’s time for the Government to start looking seriously at fare-free public transport in perpetuity rather than saving it up as an election bribe. Or a tax-free threshold on income. Or anything – any decent long-term policies that the Government’s army of officials can muster.”

If such steps aren’t taken, or if Labour feels the need to implement austerity measures – as some politicians on the right are urging it to do – things are likely to get much worse.

Inevitably some will try to blame wage increases for inflation, despite all the evidence showing that wages are not driving the crisis. But certainly, wage increases will soon be the central focus of the situation.

As economist Arthur Grimes says, workers’ wages need to increase by at least the level of inflation, or they are effectively getting a wage cut: “This is going to be a real problem. It really is a choice now between wage earners suffering by not getting 7% wage increases, or, if they do get 7% wage increases, it’s just gonna keep on pushing up future inflation. So it’s just going to be a mess, whichever way it goes.”

The problem is that none of the political parties seem interested in fixing any of this. They are more likely to continue to argue futilely about whether the inflation problem is due to global or local issues. It’s time to move beyond that debate and find some local solutions.

Further reading on inflation

Thomas Manch (Stuff): ‘More pain’ expected as inflation runs hotter than a Government can handle
Bernard Hickey: Who’s to blame for 7.3% inflation and what (not) to do about it(paywalled)
Tova O’Brien (Today FM): Government’s last-minute efforts look ill-equipped, inadequately prepared and knee-jerk
1News: Inflation has peaked, question is how fast it will fall – commentator
RNZ: Is the inflation in NZ because of profits?
Claire Trevett (Herald): Inflation: National, Act, NZ First call for more than ‘band-aids and gimmicks’
Tom Pullar-Strecker (Stuff): The case for taking a ‘chill pill’ on high inflation
Jamie Ensor (Newshub): Inflation: National, ACT call on Government to ‘take responsibility’ over rising prices
Liam Dann (Herald): Inflation data is ugly but has it peaked? (paywalled)
RNZ: Cause and effect: Economist, policy analyst, businessman and beneficiary advocate talk inflation
1News: Michael Wood slams ‘band-aid economics’ criticism as ‘out of touch’
Mark Quinlivan (Newshub): Economist Cameron Bagrie confident inflation ‘technically’ peaked, warns getting it ‘anywhere near’ Reserve Bank target could take years
Daniel Smith (Stuff): Winners and losers at a time of high inflation
Eva Corlett (Guardian): New Zealand inflation hits 7.3%, the highest rate since 1990
Oscar Jackson (Today FM): Courgettes cost how much!? Finance Minister Grant Robertson reacts to rising inflation
Mark Fowler (Herald): When will the Government realise that fiscal spending is inflationary? (paywalled)
Thomas Manch and Glenn McConnell (Stuff): Opposition parties call for tax cuts and slashed spending to fight inflation
Mary Jo Vergara (Spinoff): A brief history of inflation in Aotearoa
Dan Bidois (Stuff): What the Government should do to help rein in inflation
Gyles Beckford (RNZ): Cost of living soars: Inflation hits 7.3% – highest in 32 years
Jayden Holmes (Today FM): Should taxpayer money fund fuel tax cuts, road user charges, half-price public transport?
Jonathan Mitchell (NBR): Red hot inflation may have reached boiling point (paywalled)
Amelia Wade (Newshub): Inflation: Economist Brad Olsen expects another big OCR jump after latest inflation figures
Giles Dexter (RNZ): Record inflation: Govt ‘needs to front up and do its bit’ – Willis
Jonathan Milne (Newsroom): Fuel companies pocket record margins, thanks to Govt excise cuts
Giles Dexter (RNZ): Record inflation: Govt ‘needs to front up and do its bit’ – Willis
Grady Connell (Today FM): Inflation sees the cost of construction rise
Zarina Hewlett (Today FM): National’s Nicola Willis says Labour needs to ‘take responsibility’ for soaring cost of living
David Farrar: Inflation up, up, up
Melanie Carroll (Stuff): Inflation by the numbers – how NZ hit an unwanted 32-year high
Andy Fyers (BusinessDesk): Inflation: What’s behind the headline numbers (paywalled)

Other items of interest and importance today

RNZ: Accommodation supplement review needed as rents double – Salvation Army
Jayden Holmes (Today FM): Two Sides: Should New Zealand implement rent controls, yay or nay?
RNZ: Tertiary students spend more than half of income on rent – survey
Paul Conway (Listener/Herald): Property plunge? Why housing is no longer a one-way bet (paywalled)
Catherine Masters (One Roof): Why the New Zealand housing market is nowhere near crash point
Mike Hosking (Newstalk): Govt housing failures continue to pile up
Geraden Cann (Stuff): House prices will take ‘back seat’ for Reserve Bank for some time: CoreLogic
Niall Robertson (Herald): Why a sledgehammer approach to houses in special character areas? (paywalled)

Adam Hollingworth (Newshub): Nurses Organisation says staff so overworked that hospitals have become unsafe workplaces
Ian Powell (BusinessDesk): Why change the health structure before the culture?(paywalled)
Kirsty Frame (RNZ): Wairarapa Hospital emergency department’s critically low staffing ‘more than a crisis’
Andrew Bevin (NBR): Aged care crisis brings success of health reform into question(paywalled)
Duncan Garner (NBR): Allow unvaxxed nurses back as world flips us the bird(paywalled)

Tova O’Brien (Today FM): This book about National shows how bad things can get… Labour should read it
Newshub: Blue Blood: New book gets inside story of how Jacinda Ardern brokered deal with Winston Peters to seal 2017 election victory
Andrea Vance (NBR): Blue Blood: The inside story of the National Party in crisis(paywalled)
Thomas Coughlan (Herald): Winston Peters lashes out at new book on National turmoil
Brent Edwards (NBR): National’s political upheaval detailed in ‘Blue Blood’ (paywalled)

Chris Trotter: An Unvarnished, straight-talking working-class man?
Simon Wilson (Herald): The absurd wedge politics of Wayne Brown, Leo Molloy(paywalled)
Martyn Bradbury (Daily Blog): The cancellation of Guy Williams for ‘platforming’ Leo will probably win Leo the election
Newshub: Guy Williams’ interview with Leo Molloy attracts praise from Newshub’s Patrick Gower
Bernard Orsman (Herald): Comedian Guy Williams says Leo Molloy’s response on his satirical show was ‘very angry’

Laura Walters (Stuff): Local Government NZ on racism and gender discrimination in politics
Gavin Beattie (Stuff): Getting elected to council: It may be easier than people think
Janine Rankin (Stuff): Local government conference kicks off a full season for Palmerston North
Stephen Ward (Stuff): Slashing latest twist in election signs saga

Thomas Coughlan (Herald): Left wing Green Party faction wants to change party rules, lengthening coalition talks
Maiki Sherman (1News): James Shaw brushes off Greens leadership challenge
Robert MacCulloch (NBR): How the ‘Depression Election of 2023’ will be fought(paywalled)
Thomas Coughlan (Herald): Ex-deputy mayor Jill Day to become Labour President
Hayden Munro (Herald): School lunches, petrol savings, mental health support make a big difference (paywalled)
Muriel Newman (NZCPR): Policy failure
Aaron Smale (Newsroom): The political liability of Matt Tukaki


  1. So can anyone explain how inflated assets values such as housing and shares impacts the price of a loaf of bread? I get that money pouring into housing will cause building materials to go up and those materials are included in the cpi basket. But is the pandemic stimulus that has benefited the 1% really driving up food? How many loaves of bread can the 1% eat!? Surely food costs are likely more impacted by petrol prices, and possibly weather, than local quantitative easing?

    This article talks about inflation but then seems to hone in on assets and the gap between the haves and have nots. Those asset values are heading south big time. Food is not.

  2. Hmm, sounds like if they don’t do anything to redistribute the windfalls, the winter before the general election might be like a cross between the Springbok Tour and ’51. That thought ought to concentrate the politicians’ minds.

  3. If anyone has an idea and a bit of effort then we have to test test test. Innovation doesn’t happen in a vacume. It needs new technology, refurbished tech, and cash to be paired with idole hands. Fortress Aotearoa does exactly that.

  4. NZ business is largely unregulated or light touch so does and charges exactly what it pleases….

    get used to it, invest in Vaseline now.


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