Kiwiblog

Labour are campaigning against the GST increase (yet being careful not to promise to reverse it), saying it will hit households hard. Well Stats NZ have calculated that the impact of GST going to 15% will be a one off increase of 2.0% in the CPI.

Now let’s see how that compares to the CPI increases under the last two Government’s.

In December 1990 the CPI was 731 and in December 1999 it hit 837. That was an increase of 14.5% over nine years – an average of 1.5% a year,

From December 1999 to December 2008 the CPI went from 837 to 1072 – an increase of 28.1%, and an average of 2.8% a year.

The difference between inflation under Labour and under National is around 14% – or seven times greater than the one off 2% increase caused by a GST increase.

Now if one takes just food prices, it is even worse. The food price index increased only 9.9% under nine years of National. Under nine years of Labour it shot up a massive 37.1%.

So if you hear a Labour MP talking about the impact increased prices will have on families, remind them of the 37% increase in food prices and the 28% increase in all prices that occurred under Labour.

The Dom Post has a guest column by Stephen Kirchner from the CIS:

The idea that New Zealand can ignore inflation and grow faster through easy money and a lower exchange rate is a tempting, but short-sighted view. It ignores the fact that higher domestic prices would ultimately undermine rather than promote international competitiveness. Economic growth and export success must ultimately be built on real factors such as productivity growth, not easy money and exchange rate depreciation.

It is like cheating on an exam – only works for a while

The Reserve Bank’s primary focus on inflation recognises that monetary policy needs to be based on a single instrument and policy objective. Pursuing multiple objectives with multiple instruments, as Labour now suggests, is a recipe for incoherent policy and poor economic performance such as New Zealand experienced before its path-breaking reforms of the 1980s.

TVNZ is a good example of having multiple conflicting objectives. Either none of the objectives are achieved particularly well, or some of them are just ignored.

It would also undermine the transparency and accountability that were important objectives of the Reserve Bank of New Zealand Act. Under the current framework, the governor of the Reserve Bank is personally accountable for realising the inflation target under a policy targets agreement with the finance minister. Sustained breaches of the inflation target can result in the non-executive members of the Reserve Bank board recommending dismissal of the governor to the minister. This is no idle threat, but it would be difficult, if not impossible, to hold the governor accountable for achieving multiple objectives instead of a clearly defined inflation target.

An excellent point. More objectives will mean less accountability. The Governor will always have a get out of jail card.

Since the first PTA was entered into in 1990, the inflation target has been progressively watered down. Most notably, the inflation target has been relaxed from 0-2 per cent to 1-3 per cent and given a medium-term focus, so there is now greater tolerance of short-term breaches.

I actually believe it should go back to a 0% to 2% range. Over time even 3% inflation is too much.

Roger Kerr writes:

A gains tax on housing would not reduce inflation. Inflation is an ongoing increase in the general level of prices, not a one-off change in some prices.

The introduction of the Goods and Services tax resulted in a one-off increase in the consumer price index – it did not lead to ongoing inflation.

Similarly, a capital gains tax might reduce property prices initially but it would not affect longer-term inflation.

True, and any increase in GST would be a one off bump.

Moreover, if such a tax on housing were applied only to realised gains as is likely, house prices could even rise. This is because of the lock-in effect, with owners holding on to homes to defer the tax on gains. Anything that reduces supply is likely to lead to an increase, not a decrease, in price.

One could do it on unrealised gains, but that would be pretty draconian.

Evidence confirms what theory suggests: the inflation performance of countries with a capital gains tax doesn’t differ systematically from countries that don’t.

Australia, the US and Britain, which tax capital gains, have all had large and volatile house price movements this decade.

I always like a look at empirical evidence.

A second mistaken assumption is that investment in rental housing enjoys tax privileges.

As the deputy commissioner of Inland Revenue, Robin Oliver, told a select committee in 2007: “Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income, are the same for investments in shares or anything else. In fact under the housing case … there are tighter rules regarding what is a capital gain.”

People are misled into thinking that rental housing is tax-preferred since highly geared rental property may record tax losses. This is because the full economic income (including the change in the market value of the assets) earned on rental property is not taxed.

However, this is a quite general feature of the taxation of real assets, including plant and equipment and farms.

A real issue though is whether it is sensible to allow property owners to claim 3% depreciation on their property annually, when the empirical evidence is that almost no residential property depreciates in value – in fact it appreciates.

Paul Walker has blogged Zimbabwe’s new annual inflation rate.

It is 10.2 quadrillion precent. That is 10.2 million billion or 10,200,000,000,000,000%.

That makes me feel better about NZ hitting 5.1%. But only slightly.

The Reserve Bank has dropped the Official Cash Rate by 100 basis points, as many had predicted.

This is the biggest ever single movement – previous moves had been as high as 50 basis points but never a 75 or a 100 before.

The Governor says:

“With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to 3 percent around the middle of 2009. However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.

The domestic inflation is what causes the risk of stagflation.

“Consistent with the Policy Targets Agreement, the Bank’s focus will remain on medium-term inflation. Should the outlook for inflation evolve as projected we would expect to lower the OCR further. However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out.”

I can think of some domestic costs that could be reduced!

Labour is making a habit of leaving office with economic problems for the new Government.

Stats NZ reveals that inflation for the year to September 2008 was 5.1% – its highest level since June 1990. Major contributors:

• Household Energy 7.5%
• Hospital Services 7.1%
• Private Transport 21.5%
• primary and secondary eduction 5.7%

The monthly food price index also came out today – and it is also at an 18 year high of 10.8%. Major contributors:

• Vegetables 22.3%
• Mutton/Lamb 17.3%
• Bread 16.5%
• Pasta 18.2%
• Cheese 42.3%

All fairly common items, to say the least.

The Reserve Bank has dropped the cash rate a full 50 basis points from 8.00% to 7.50%.

Reserve Bank Governor Alan Bollard said: “The New Zealand economy is experiencing a marked slowdown, led primarily by the household sector. The outlook for the global economy has deteriorated further in the wake of continued financial market turmoil. In addition, the New Zealand business sector is coming under pressure from both rising costs and falling demand. While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth.

I almost feel sorry for Bill English, if he becomes Minister of Finance in a few weeks.

I also remain concerned that inflation will remain too high for years to come.

Matt Nolan at TVHE has some nasty grpahs of inflation expectations. This convinces me the Reserve Bank lowered rates too soon.

Okay this oen isn’t an official one. I got it from Paul Walker.

This one however is real, but alas it may be short lived. The Herald reports:

A Tui billboard saying “When Winston says no, he means no – Yeah, right” has brought a warning that it may breach the Electoral Finance Act.

The billboard is in the Tauranga electorate Winston Peters is desperate to win, and the Electoral Commission told the Herald it would write to brewers Tui saying it could be “election advertising” against him.

I am not surprised. It was pointed out during the hearings on the then EFB that commerciakl advertisements could be caught up. And alas satire is also covered.

Tui brand manager Jarrod Bear said the brewer had not received any correspondence from the Electoral Commission and was not considering taking the billboard down.

Asked if Tui was aware of the legislation when it came up with the billboard, Mr Bear said, “Not particularly, no, not the finer details of it.

“It sounds a little bit crazy and it’s definitely not our intention to be campaigning in favour of one or the other.

Also intentions have little to do with the application of the law.

The possibility that Tui billboards making satirical political references would breach the act was raised while it was being put through Parliament last year. Whether the Tui billboard is an election advertisement depends on whether it can reasonably be seen as trying to persuade people either to vote for Mr Peters, or against him.

Let us look at the exact clause – good old s5(1)(a)(i):

means any form of words or graphics, or both, that can reasonably be regarded as … encouraging or persuading voters to vote, or not to vote, for 1 or more specified parties or for 1 or more candidates or for any combination of such parties and candidates:

Now note the test is not what the intention of the creators is. The test is simply whether that particular form of words or graphics ends up encouraging or persauding people not to vite fir Winston.

And it is hard to argue that a billboard which suggests he does not tell the truth, or is evasive or deceptive does not have an effect in encouraging people not to vote for him. It is a very negative attribution.

So alas the end result maybe that all of election year, Tui can not do billboards which take the piss out of a politicans. Says who? Well the politicians who passed the law.

Before I get onto the main topic, I noted on the Reserve Bank website there has been a new appointment to the Board of the Reserve Bank. Dr Chris Eichbaum. Dr Eichbaum recently published a fascinating paper on the role of Ministerial Advisors.

I have absolutely no view on the suitability of Dr Eichbaum’s appointment. I do note however that the Minister forgot to mention that Dr Eichbaum worked in the Ministerial offices of Steve Maharey, Mike Moore and Geoffrey Palmer. That would have been useful to disclose.

The Government has been busy with over a hundred appointments in recent times – they also just appointed four Labour/left people to the new Land Transport Board.

Anyway back to the official announcement:

“Recent oil and food price increases mean that annual CPI inflation should peak around 5 percent in the September quarter of this year. However, we expect that inflation will return inside the target band in the medium term. The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.

So the cash rate dropped 25 basis points to 8.00%. I would like to know exactly when the Reserve Bank thinks inflation will drop back to under 3%? 2009? 2010? 2011?

TVHE comments:

Even ignoring inflation, it appears that the Reserve Bank values the livelihood of those who have mortgages above people who are struggling to pay their food and fuel bills (which will go up, as a lower exchange rate will increase the New Zealand price of both).

I predict inflation will remain outside the target band for some years.

Colin Espiner looks at what he calls the horrible inflation data:

Labour will be happy that this week’s truly horrible inflation data came out during the Parliamentary recess.

After all, the highest inflation in 13 years and the biggest quarterly increase in food prices since June 1990 isn’t something either Prime Minister Helen Clark or Finance Minister Michael Cullen particularly wishes to be quizzed on.

It’s amazing how quickly things have turned. It seems like only yesterday that ministers were asking each other patsy questions in the House so they could in turn stand and brag about record low unemployment, growth rates higher than Australia’s, or some other positive fiscal indicator.

It never ceases to surprise me how quick any government is to claim the credit when things are going well, and how fast it is to distance itself when things are not.

Take Cullen’s prepared lines yesterday: “It is important to remember that our economic challenges are not of New Zealand’s making. The global increase in the prices of petrol and food are outside New Zealand’s control.”

Now whether you agree with Cullen or not depends, I guess, on whether you subscribe to the free trade market economy we operate in. But assuming he’s right, it’s still ironic. Can you imagine Cullen saying, after delivering one of his whopping surpluses of yesteryear: “It is important to remember that our economic good fortune is not of New Zealand’s making. The global rises in commodity prices are outside New Zealand’s control.”

Um. Don’t think so.

So true. The reality is that international forces will always have more of an impact than anything we do domestically. However Governments can and do make a difference around the margins – especially by focusing on increasing productivity and havign sensible fiscal and monetrary policy.

However, Cullen can distance himself all he likes from the causes of inflation running at 4% and heading for 5%. He can blame all the Middle East unrest and growth of developing nations he likes for the fact that petrol is up a whopping 25% in the last year. He can moo about the rise in the value of dairy prices that has seen milk up 22% in a year and cheese 62% until the cows come home.

The fact is it’s happened on his watch and voters, rightly or wrongly, expect him to do something about it. Cullen recognised this yesterday, referring to the October 1 tax cuts package which, he said, “will provide some relief”.  Actually, as Cullen knows only too well, it will deliver very little.

The cruel reality of inflation is that the value of his $16 a week for the average wage-earner is eroding by the day. By the time October 1 rolls around, the increase in the price of petrol alone since the Budget would have accounted for half of the extra Cullen has promised. Fresh increases in the price of milk, bread, cheese, and fruit and vegetables will take care of the rest.

And people know deep down Dr Cullen is not giving tax cuts to help people out. He cancelled tax cuts just over a year ago, and his u-turn on tax cuts was poll driven. Now u-turns are part of politics, but to then claim the u-turn as a virtue goes too far with some people. It would be like National trying to take credit for income related state rentals, when everyone knows they prefer market rentals.

We could always have a debate about it, if the Opposition would engage. Yet all I know of National’s plans for the economy is that it will reduce taxes, “cut red tape”, spend more on infrastructure, reduce government spending “so that interest rates track downwards” and improve education standards.

There’s almost enough apple pie in those statements to feed a starving family of five for a week. But the polls show voters are still happy with this level of detail from National, for the meantime anyway.

That’s a great line – enough apple pie to feed a starving family of five. And some truth in Colin’s criticism. He has however overlooked the fibre to the home policy which is a major point of difference with Labour, and is intended to be a significant foundation for lifting NZ’s productivity and economic growth.

Bernard Hickey takes a close look at public sector wages:

He finds that average wage in the public sector has increased a staggering 9% (hence high inflation and high interest rates) compared to 4.6% for all sectors.  He also finds the gap between public and private sectors wages has grown from $4 and hour to $8 an hour.

Stagflation is the nightmare of the 70s – high inflation and negative economic growth.

NZIER has just put out its quarterly survey of business opinion.

Statistics New Zealand recently reported that real Gross Domestic Product (GDP) fell by 0.3% in the March 2008 quarter. Indicators of domestic trading activity from the latest QSBO suggest economic activity declined further in the June quarter and is likely to decline again in the September quarter which will make it three quarters of negative economic growth in a row.

That takes it beyond a technical recession to a full recession. They says firms are more negative abotu their own activity and their trading activity since 1998 and 1982 respectively.

Now what about inflation:

The net balance of firms intending to increase selling prices in the next three months has increased. The balance was 45% in the March survey and 49% in the June survey. The 49% figure is the highest since March 1987. The net balance expecting an increase in costs has increased from 62% in March to 71% in June. The 71% figure is the highest since December 1986.

This is why their press release refers to stagflation.

Stats NZ released the May 2008 monthly food price index results today, and it confirms what everyone knows. I’ve graphed below food inflation since the last election. It has been trending up almost constantly for the last three years.

Bernard Hickey has a blog post on how office rentals in Wellington have increased by 14% in the last year. This is around four times the rate of inflation and well above the rate of increase in Auckland. Why?

[Wellington] office vacancy rates are around historic lows. Encouragingly, vacancies are low across the board with the prime and secondary vacancy rate at 1.4% and 3.5%, although some low quality buildings are struggling to find new tenants after being vacated by large government occupiers.

Bernard explains this means they are going from $197 a square metre buildings into $330 a square metre ones.

This is not a one off either, rents have gone up a staggering 66% in the last five years. Why? Because of the massive growth in the public service.

There are few people who qualify better for the label rich prick, than Wellington commercial property owners. And one of them told me a few months ago that since Labour came to power he had made $400 million just in Wellington.  Yes $400 million. He said it was almost enough to make him vote Labour!

The sad thing is these massive profits have not just come from the taxpayer, but all business owners in Wellington are getting clobbered as rentals keep increasing.

I suspect there is also a flow on effect to the costs of residential tenancies in the inner city as property owners can convert from business to residential and vice versa.

Karl du Fresne calls the Media 7 show on the Pacific immigration debate a gang-up on Dom Post Editor Tim Pankhurst.

Steven Price points out to the Ministry of Justice that their site for court decisions of public interest, is missing all the interesting ones. To be fair I think it is up to the Judge to tick the box on whether it should go there, but regardless someone in the Ministry should use their common sense and make sure the EFA judgements and the abortion law one go up asap. The latest EFA is here for those who want it.

JafaPete asks whether people are just voting for change for change’s sake. He agrees with Chris Trotter that the anti-smacking bill may have been a turning point. He also says the EFA may have had an impact on the Government’s unpopularity.

No Right Turn covers the abortion debate and High Court decision. I am not surprised with the High Court ruling – it has been apparent for some decades that we have a de facto abortion on demand regime, despite a legislative framework that reserves it for serious danger to physical or mental health. Now I support abortion (up to a certain date) on demand and even though it would probably be a very heated debate, the proper way to change laws is through public vote or the legislature – not through the back door. The issues were covered on this blog back in March, and in a sign of hope it was a reasonably rational debate with analysis, not just name calling.

Graeme Edgeler covers issues in the Criminal Procedures Bill, and does a summary of each of the dozen or so changed. Excellent.

Colin James is not a blogger (in fact I would call him an anti-blogger!) but his op ed on inflation is worth reading.

For that long Sunday afternoon:

The NZ Book Council have a very cool website to encourage reading. They’ve done it as a Windows operating system.

Scrubone does a fisking of No Right Turn’s outrage at National over citizen juries. Also on that issue, Russel Norman at Frog Blog agrees with some of my suggestions around Citizen’s Juries – specifically the need for multi-partisan agreement not narrow agreement.

Paul Walker responds to Matt McCarten’s hysteria over the Business Roundtable.

Whale Oil likes his stats comparison with Kiwiblog. Obviously girls and guns work

Craig Foss looks at how Dr Cullen is financing his tax cuts – he is borrowing $6.4 billion and also selling $6.4 billion of financial assets breaking one of his four tests. This last one is particularly cunning as it allows him to claim gross debt remains on track. This si why net debt is the better indicator.

Colin Espiner reviews the Reserve Bank MPS and the polls.

Bernard Hickey believes Alan Bollard has gone soft on inflation, as does the Westpac Chief Economist.

I’ve been going through the data on which the Reserve Bank based their announcement today that they intend to lower the OCR later this year. It is not pretty:

• Inflation projected to hit 4.7% by September 2008 – this will be the highest inflation has been since December 1990.
• Economic Growth to slow to under 1% in 2009
• The lowest level of house sales in 18 years
• A drop in the TWI from over 70 to around 60
• A rise in unemployment from 3.6% to 6%
• A drop in house prices of 13%

I almost pity Bill English who is likely to inherit this. Not as bad as 1990 but nothing like the booming economy Dr Cullen inherited in 1999.

The summary is NZers will have almost big price rises, low economic growth, around $70,000 knocked off the value of their family home, and around 50,000 more unemployed

The MPS noted:

Faced with lower nominal income growth and higher consumer prices, households must decide whether to take on extra debt or lower their standard of living.

What a lovely choice. However the Reserve Bank hints at an answer:

Many households will need to devote a high proportion of their income to debt servicing costs, limiting their discretionary spending. High global food and energy prices will have a large impact on the spending power of households. The domestic prices of these goods will be pushed up further by a weaker New Zealand dollar. The tax cuts and increased transfers announced in Budget 2008 will provide some offset to these rising costs over late 2008 and early 2009.

So further tax cuts would provide further assistance to households facing a choice between extra debt or lower living standards. Labour is crying that further tax cuts will mean cutting of public expenditure. So they seem to be saying that households should cut their standard of living, rather than have the Government cut its expenditure!

Both Clark and Cullen appear desperate to talk down interest rates, and are telling all the professional currency traders that they all have got it wrong, and that there is no risk of a delay in interest rates coming down.

The amount of political pressure on Alan Bollard will be immense in the next few months and it will be a test of his independence whether he ignores the clear wishes of the PM to cut rates before the election, even if it means he breaks his legally binding target of inflation under 3%.

A few journalists are saying it is only tax cuts that could keep interest rates high, and this is silly. It is the combination of both tax cuts and extra spending. If you replace a billion of spending with a billion of tax cuts, then in fact it will be reduce inflationary pressures as a proportion of tax cuts are saved not spent.

Martin Kay in the Dom Post reports on Cullen:

Finance Minister Michael Cullen has accused money markets of over-reacting to his tax-cut programme after a blip in the interest rate at which banks borrow for mortgages.

The two-year wholesale rate jumped from 7.7 per cent to 8 per cent after Dr Cullen announced his $10.6 billion, three-stage cuts on Thursday.

Well I know who I trust to be right!

EPMU National Secretary Andrew Little is warning of a desire for wage rises of around 5%. This is understandable with inflation so high, but risks a vicious cycle where inflation continues to get higher and higher and our wage levels relative to Australia drop. Closing the gap with Australia needs wage rises which reflect improved productivity – not wage rises which are just to compensate for prices rises. That is not to say people should not have wage increases to stop their incomes falling in real terms – just that it won’t close the trans-Tasman gap.

Little also calls for clarity over tax cuts:

He also hit out at the government’s “dithering” over tax cuts. One week the government was saying the cuts would take place this year, and then the next week it was suggesting they would be next year. “People are looking for some sort of relief now. People need it, and the government should understand that very clearly.”

Indeed.

The Weekend Herald finds supermarket food prices for an “average” trolley have gone up 29% in the last year.

Now this is more than the official food price index, which is weighted to what people actually buy, but both the official and the unofficial surveys show that food inflation is strong and growing.

The Dom Post shows how much more effective a picture can be to highlight a problem.

The Dominion Post reports that economists are forecasting inflation to be close to 4% for the year to March, with the official figures out on Tuesday.

The target is 2% (it should be 1%) with the allowable range being 1%  to 3%. Bottom line is no drop in interest rates for a while.