The Budget and the Economy – Have We Done Enough?
VIEWS FROM OUTSIDE THE APIARY
Apiculture industry consultant and former top bureaucrat IAN FLETCHER gives his monthly “Views from Outside the Apiary” as a non-beekeeper but deep thinker on the plight of New Zealanders.
First came Covid, then inflation. During the first, the Government’s underlying strategy was ‘lock down until we get a vaccine, then open systematically’. It worked and enjoyed a wide measure of support (as shown by the last election, giving Labour the ability to govern alone). I certainly thought they got it right. It’s been a government that managed crises well, as the Christchurch massacre and Whakaari/White Island also show. But now it’s the economy.
This is a different story: it’s all about inflation. From housing to heating, prices have been going up, and people are struggling. The housing story has been alarming for a long time: low interest rates have fed directly into prices, in what is still a relatively low wage economy for most of us. A lot of us are priced out of the market or stuck with houses (and debts) we can’t move on from.
Now it’s food and other day-to-day costs, leading to the cost-of-living focus in the budget earlier this month, and the associated political debate. How should we think about all this?
Inflation erodes savings (though shares may, over time hold value). It also erodes the real value of debt, and sometimes allows relative prices to adjust (so some prices rise more than others, shifting the ratio between them). Inflation is controlled by raising interest rates, so people save more and spend and borrow less, bringing overall demand for things and services down. Economists around the world are wondering whether rates can be raised by enough to quell inflation without putting the economy into a recession, where so much spending is choked off that the overall economy shrinks. Economists whose opinion I trust (like Martin Wolf in the Financial Times), think this is too optimistic: we must expect that a recession is on its way. I agree.
This is a global issue: Covid saw inflationary pressure as demand for goods surged around the world, enormous financial stimulus was applied in many economies, supply chains were disrupted, and the Ukraine war has caused disruption – especially because Ukraine turns out to be a major grain and oilseed grower.
Covid has also seen shortages of workers everywhere – pushing up wages and adding to costs. This is no surprise: Bank of England research at the start of Covid showed that every big (over 100,000 deaths) pandemic since the Black Death (1349 was the first wave of many) has raised real wages for at least the thirty-year period following – often longer. Basically, if you survive, you get a pay rise.
Will New Zealand See a Recession?
Maybe: yet, high commodity prices will help cushion the economy (via dairying and forestry especially). Tourism may recover too (though fuel costs will cap returns). And our unemployment is often soaked up in Australia (a more benign Australian government may help). So, we might get away with a shallow-ish dip. Uninterrupted growth is probably too much to ask for.
The big unknown is China, where there is a crisis: Covid lockdowns are having a big effect on the economy, and a financial crisis in the over-developed property sector continues. Underpinning that seems to be a population falling faster than we had thought.
This matters: New Zealand’s economic prosperity depends overwhelmingly on China and Australia more than all other markets, and both those markets depend at least for now on the Chinese Communist Party staying successfully in power. As tensions build around Taiwan that’s a risk. The Chinese have shown a clear willingness to penalise Australia through market access for political reasons. We have no reason to imagine they would treat us differently. Market access closure would worsen any budding recession, a lot.
And finally, does this month’s budget help? National sees it as inflationary. It might be, a little (most of our inflation is imported, or transmitted through the labour market). I’ve looked especially at the so-called cost of living package, against recent research on recessions. I was surprised: recent research suggests the government has done roughly the right thing – perhaps just not enough of it!
The research is by the Bank of International Settlements (the central bank for central banks – they’re clever, well-informed people) published under the snappy title “Inequality Hysteresis and the effectiveness of macroeconomic stabilisation policies” is 122 pages of mind-numbing economic statistics. But its conclusions really matter: they show that income inequality makes recessions worse, and the effect of a recession on inequality in turn lasts for years.
Governments should do everything they can to avoid getting into a loop where deep recessions feed inequality, which feed deeper recessions. The good news is that policies to keep money in peoples’ pockets, especially lower income people, benefit everyone. This month’s budget may be the right thing. The real question may be, is it enough?
Ian Fletcher is a former chief executive of the UK Patents Office, free trade negotiator with the European Commission, biosecurity expert for the Queensland government and head of New Zealand’s security agency. These days he is a commercial flower grower in the Wairarapa and consultant to the apiculture industry with NZ Beekeeping Inc.