National leader Christopher Luxon and Deputy leader Nicola Willis on the recession forecast. Video / Mark Mitchell
If Labour loses next year’s election, commentators could point towards Wednesday’s Monetary Policy Statement (MPS) as the moment it became clear things were beginning to unravel.
The headline number from the Reserve Bank, a
75 basis point Official Cash Rate hike, was expected in advance and no surprise. What was a surprise were the numbers contained in the book of forecasts the Bank published with the cash rate, showing a perfect storm of high interest rates, high inflation, high unemployment and a recession.
Irony of ironies, while the National Party has relentlessly critiqued Governor Adrian Orr’s response to inflation, Orr might play a key role in handing the party the election. Labour will find it very difficult to win an election during a recession.
The situation is bad, and worsening rapidly. CPI inflation will be 7.5 per cent in the year to March next year, a revision from 5.3 per cent in the last set of forecasts published in August.
The unemployment rate is expected to rise from a near-record low of 3.3 per cent now, to 3.6 per cent next year and 5 per cent in 2024 and an astonishing 5.7 per cent in 2025 – the last time unemployment was that high was 2013, with the country slowly clawing itself out of the Global Financial Crisis.
And worse of all, the forecasts show the Reserve Bank thinks the economy will slide into recession next year.
Treasury will publish its own set of forecasts next month, giving another view on what the economy will look like next year, but the picture is likely to be similar: the outlook is bad.
Labour needs to return to a pandemic-era war footing. It needs to get the tone right. Minutes after the MPS dropped on Wednesday, MPs were asking jokey patsy questions about Movember to each other in the House.
Finance Minister Grant Robertson, easily one of the best performers in the House, found his Achilles’ heel exploited by National. Robertson is the sort of MP who loathes his political opposites (hard as it is to believe, some MPs really don’t care all that much about the other side).
National’s finance spokesperson Nicola Willis exploited this in the House, chiding Robertson for “political point scoring” until he cracked, thundering opprobrium at her: “Lessons on political point scoring from the Olympic champion in that regard are not ones that I’m going to accept.”
National leader Christopher Luxon, not the strongest Parliamentary tactician, also scored a win.
He risked a telling-off from the Speaker by interjecting repeatedly to Robertson’s answers, winding the Finance Minister up.
“Mr Luxon; just listen. Mr Luxon, just listen,” was Robertson’s response.
Robertson was a different man when taking questions from journalists a few moments later, lacing his comments with much-needed empathy. He was lucky that television stations took that footage instead of what was recorded in the House. National’s attacks seem to have prompted Robertson to briefly forget he’s talking to New Zealanders when he speaks in the House, not staring down Luxon and Willis.
It was a similar picture across Bowen St at the Reserve Bank, where Orr held a testy press conference, clapping back at reporters for stories they’d written and data they’d allegedly misinterpreted, while cracking blithe jokes with members of his committee.
The podium lacked the sobriety you’d expect from an institution that plans to strangle the economy of credit to the extent that unemployment rises to levels not seen in a decade. The fact that the Bank’s own mismanagement now means it has to move harder only adds to the sense of frustration. The economy is looking to the bank for stability – jokes and put-downs are cheap, regardless of the cost of credit.
The day got even better for National, who had the opportunity to do what the party has probably wanted to do for a while.
A bad news day for the Government is an ideal day for the opposition to bury bad news. In an interview with the Herald this morning, and later following Parliament, Luxon essentially said his policy of axing the 39 per cent top tax rate was dead.
The policy is expensive, polls terribly, and appeals only to voters who already split Tory. The policy was always going to need u-turning on – Wednesday was the perfect day for it.
Act immediately rushed out a press release mocking National for its lack of spine. Leader David Seymour makes a very interesting point. For fiscal policy (that is the part of the economy that the government controls with spending and policy settings) to help get inflation under control, you need to tax more than you spend, sucking money out of the economy (Act promises to achieve this with tax cuts paired with even bigger spending cuts).
But Act’s fiscal policy is not something National can live with, largely because it’s quite unpopular. For National, it means high-ish taxes and lower spending. Not exactly a vote-winner. National proposes lower taxes and increasing health and education spending.
Oddly enough, Act’s difficulty making that argument about National is also a problem faced by Labour. For weeks now, Labour has been trying to make the counter-intuitive but economically correct argument that tax cuts paired with spending increases will make the inflation problem worse.
It goes like this: tax cuts are a form of economic stimulus, inflation is caused by excessive stimulus, therefore tax cuts worsen inflation.
There are ways to kill that argument (Seymour has found one: cutting spending), but National hasn’t really had to bother because the argument Labour is making is simply too abstract to have much effect. Labour’s strongest tactic is using the remarks of former Reserve Bank Governor (and ex-National leader) Don Brash against his former party, noting that Brash thinks tax cuts are the wrong prescription right now.
Robertson was famously part of the backroom team that vanquished Brash by trotting out the interest-free student loans policy in the 2005 election.
Labour faces a massive political problem, which is that there is now political pressure to reduce rather than increase public spending, meaning a similar policy is probably off the table next election. Government spending as a percentage of GDP is shrinking as Covid-19 stimulus comes off – but Labour will face pressure to continue this trend by delivering a parsimonious 2023 Budget and election manifesto.
There are spending proposals that can dampen inflation, at least temporarily. The fuel tax cut is one, looking at childcare subsidies as Labour has done is another (that is, unless the current migration settings simply mean staff shortages cause the cost of childcare to rise). Overseas, governments are looking to blunt the edges of inflation with policies that do in fact require spending. It’s possible – and even advisable, given much-continued inflation is coming from a war that interest rates will do nothing to solve – but it’s a very difficult case to make electorally.
An election in which Labour faces pressure not to unveil new, expensive social policies is deeply unfavourable. Robertson pointed to the party’s record on Covid-19 on Wednesday, saying Kiwis “know we’ve got their backs”.
That was certainly true of the 2020 election, but a lot has happened in the years since. Whether New Zealanders see the inflation crisis through the lens of the pandemic or whether they see it as a mess the Government has in part contributed to is likely to be a key determinant of how they’ll vote next year.