Major New Zealand drive to fight inflation

Most countries, big and small, rich and not-so-rich, feel the need to cut government expenditure after the COVID-19 interruption followed by extreme weather conditions which caused extensive destruction. New Zealand is one of the small not-so-rich countries which is now concerned with bringing down government expenditure, and that too under a Labour government.

Prime Minister Chris Hipkins, who has succeeded charismatic Jacinda Ardern, is determined to take the bull by the horns as it were in pruning governmental spending to rein in inflation which is around 0.4 per cent. This despite the fact that extreme weather events have destroyed public assets to the tune of US$5.51 billion, which is NZ$9 billion.

There were flash floods in January which hit Auckland, New Zealand’s largest city, and Cyclone Gabrielle tore through the North Island in February. Hipkins said that there would be no new taxes in this year’s budget. Addressing the Employers and Manufacturers Association, Hipkins said, “For our part, the government is committed to reducing our proportion of spending to dampen demand in the economy.”

That is a very radical statement coming from the head of a government anywhere at any time because the aim of all governments is to boost demand in order to increase economic growth. But of late, governments all around are afraid of inflation and they would do anything to control it, even if it means sacrificing growth, at least temporarily.

According to Treasury estimates, inflation in March was around 0.4 per cent because of extreme weather events. At the same time, farm output is expected to fall between NZ$400 to NZ$600 million in the first half of the year. This is likely to put greater pressure on the rate of inflation. The government’s core expenditure at the end of June 2022 was 35 per cent of the GDP and it is expected to fall to 32.8 per cent of GDP this financial year.

Hipkins said, “This will be an orthodox, no-frills Budget focused on funding the things most important to New Zealanders like support with the cost of living and cyclone recovery.” The focus will be on infrastructure, especially the parts destroyed by the cyclone, apart from building new hospitals and schools. Hipkins runs the political risk because the country is going into elections later this year, and his austerity measures are likely to be unpopular with the people. But the prime minister seems convinced that he cannot afford to indulge in any kind of populism because that would take the economy as a whole of the country into stormy waters as it were.

Earlier this month, the central bank of New Zealand had raised the interest rate from 4.75 per cent to 5.25 per cent, the highest rate in the developed world. The inflation is running at a high of 7.2 per cent, far above the targeted limit of 2 per cent. The central bank’s Monetary Policy Review Committee said that inflation was much too high while employment was beyond the maximum sustainable level. The unemployment rate was at a low of 3.4 per cent.

The bank explained the problem: “…Demand continues to significantly outpace the economy’s supply capacity, thereby maintaining pressure on annual inflation.” The bank further said, “New Zealand’s economic growth is expected to slow through 2023, given the slowing global economy, reduced residential building activity, and the ongoing effects of the monetary policy tightening to date. This slowdown in spending growth is necessary to return inflation to target over the medium term.” This would seem a paradoxical situation because in other countries, slowdown in the growth of the economy is an issue of concern. But New Zealand wants a slowdown because people have the means to buy and spend, but the supply is lagging. And the only way to cool the economy is to cut down on expenditure.