Cost-of-living package: Will the pain outlast the remedy?

Prime Minister Chris Hipkins (RNZ Photo by Angus Dreaver)

Analysis: The politics of crisis management

Venu Menon
Wellington, April 4, 2023

Prime Minister Chris Hipkins has reprioritised the “bread and butter” issue of cost of living by introducing a package of counter-inflationary measures.

Critics might see in that move a bid to divert attention from the controversies raging around former minister Stuart Nash’s breach of Cabinet protocols and the Green Party’s Marama Davidson’s sweeping utterance on gender violence.

But the prime minister was touching base with an issue that was top of mind when he took office in January.

Over a quarter of New Zealanders are eligible for cost-of-living support from the government with “an inflation adjusted lift in the minimum wage, superannuation, benefits, veteran’s pensions and student allowances.”

There is more largesse in store. From May 1, the winter energy payment will go to all beneficiaries and superannuants. From July 1, child support will be extended to sole parent beneficiaries.

Nurses are now getting 15 per cent more in their take home pay. Over 10,000 children are eligible for child care subsidy, a move initiated by Jacinda Ardern when she was the PM back in November 2022.

Making his maiden statement in Parliament on February 21, Hipkins had fallen back on the adverse weather events that lashed the country to shore up his political capital.

It was a strategy that appeared to work   for the new PM who had taken over the shaky mantle left behind by Ardern with a general election looming on the horizon.

Hipkins showed political astuteness by equating the human cost exacted by natural disasters with the economic cost of rebuilding in their aftermath.

The prime minister managed to take the heat off the cost-of-living debate by making a case for increased spending to the tune of $50 million towards an interim recovery package.

But this time around, tackling inflation promises to remain a sustained challenge well past the election date in October.

High inflation has upended household budgets, particularly in food, housing and transport, and was the direct fallout of the Covid-19 pandemic, which disrupted supply chains and drove up prices. The government pumped more money into the economy which drove up demand, while the pandemic dampened supply, spawning inflationary trends.

Domestic inflation was compounded by global factors, such as the war in Ukraine, which pushed up commodity prices worldwide, as well as by natural calamities such as floods and cyclones.

Food and fuel prices went up as a consequence, with householders feeling the pinch at the supermarket and the pump.

Contrary to public perception, wages grew over the past year with staff attrition rates also going up and businesses struggling to fill vacancies. Processing delays in immigration hit overseas hiring, though the flow has picked up now, as per government claims.

All of this drove up the cost of producing goods and services, and those overheads were passed on to consumers.

The conundrum at the heart of the cost- of-living crisis is that increased spending by the government in critical sectors, such as healthcare, as well as in alleviating the impact of natural disasters, is both the solution and the problem.

But while the government manages the economy, the Reserve Bank of New Zealand (RBNZ) is left with managing inflation. The RBNZ does this by raising interest rates and keeping inflation within the 2 per cent limit.

But monetary policy is a slow-acting remedy for runaway inflation. Each time the RBNZ changes the Official Cash Rate to slow the economy and bring inflation under control, it requires a year at least for the results to be felt.

But the link between monetary policy and government spending is at best tenuous.

The Labour government’s latest slew of measures to ease the cost-of-living pangs of New Zealanders must perhaps be judged on intentions rather than results.

No one can forecast which way the inflation graph will turn between now and election day.

Venu Menon is an Indian Newslink reporter based in Wellington.

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