Wednesday, December 6, 2023

Inflation the most concerning issue in NZ by a country mile

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While New Zealanders are expressing real concern about the climate, though sentiment towards it is still dwarfed by inflation worries.
The bill for Cyclone Gabrielle, which has highlighted structural deficiencies across infrastructure, will not be small says Cameron Bagrie.
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Last month I commented about a scribe who wrote in the NZ Herald that the cost of living will not be the biggest election issue. 

Inflation is easing, the article said. I wrote that the author should talk to any business or farmer.

We now have some results, bearing in mind that the year ahead still has many months to go.

Farm inflation is still running around 15%, roughly double the rate of general inflation, according to the farm expenses price index. Key contributors include fertiliser (+28%), fuel (+33%), and interest rates (+45%). Dairy farm inflation is running at 17%.

The headline inflation rate is 7.2%. Even if it eases from 7% to 5% over 2023 as the Reserve Bank is projecting, 5% inflation is still well above the target, or where the Reserve Bank is supposed to have it, which is 1-3%.

The Ipsos Issues Monitor shows the mood of the nation, and just released the latest results. Hardly surprising that inflation/the cost of living remains the top concern for New Zealanders. 

That sets the agenda for the 2023 election.

A staggering 65% of respondents consider inflation a top-three issue, up from 58% in September 2022. Inflation is not just the top issue, it is the top issue by a country mile. Housing is next at 33%.

You need to be over the age of 50 to have seen the destructive impact of a decent bout of inflation. Society is waking up to inflation’s awful sway.

The cost-of-living crisis will therefore continue to dominate the political agenda. Expect the political parties to offer solutions. 

There will be temptation to put more money into people’s pockets via tax cuts, or to push up wages to match. 

That just drives a hamster-on-a-wheel situation, where more costs lift inflation and inflation compensation lifts costs and prices, and the spiral is in motion. More government money into pockets adds to spending and inflation.

Getting rid of inflation is cruel. You need to make tough decisions and tighten the belt.

The temptation to do something with tax will be huge in 2023. Targeted support might be appropriate, but recent weather events have highlighted failings in our infrastructure, and we face a major re-investment bill. 

Keeping tax rates unchanged, and not going up, might be the benchmark for success. There are murmurings of a levy to pay for cyclone damage. 

Borrowing will need to rise. Core government net debt is around 22% of gross domestic product or 42% under the old definition, which excludes the assets of the Super fund. We have some balance sheet capability, but tough choices are ahead.

Cyclone Gabrielle will not be cheap. It has highlighted structural deficiencies across infrastructure. 

We cannot eliminate the challenges around climate change but need to manage the risks a lot better. 

That requires a reinvestment programme, not just a rebuild programme.  

More government spending – which will be needed – will make the Reserve Bank’s job more difficult. 

The Ipsos Issues Monitor delivers a reality check on other levels.

The survey was taken amid one of the biggest natural disasters we have ever seen. 

That likely contributed to climate change moving into fourth equal spot with healthcare. Twenty-seven percent of people put both as a top-three issue. Climate change rose from 21% to 27%. The environment is the sixth biggest concern in Australia, with 18% putting it as a top-three issue.

So New Zealanders are expressing real concern about the climate, though sentiment towards it is still dwarfed by inflation worries.

Of real concern is the steady rise in people’s concern over crime/law and order. It is now second, equal with housing, and above healthcare. One in three New Zealanders now rate crime/law and order as a top-three concern.

 Political polls have suggested the election will be close.

The Ipsos Issues Monitor gives an indirect read on polling. It asks which party is most capable of handling key issues.

The government has made ground, and the National Party has lost it.  National remains the party viewed as best placed to handle inflation, crime/law and order and the economy, of the top six issues.

But the margin or perception of their ability to handle inflation has gone from a gap of +14 to +3.  Late last year they were assessed as best to handle housing. Labour has regained that top spot. On crime/law and order, a +11 gap has closed to +5. The government has widened the gap on who is assessed best to handle healthcare.

There is a lot of criticism about what is wrong, but not a lot coming out of opposition parties about how to fix it. At some stage, you need substance, policy and ideas. People are looking for it.

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