Non-tradeables or domestic inflation was 3.5% in the first three months of the year, putting overall inflation at 3.1%, higher than forecast and now outside the Reserve Bank\u2019s target band for six months.<\/p>\n
But even if we were back on track, we have clearly been driven off it again by the war in the Middle East, and the voters who decide elections don\u2019t much care why. Their votes are decided by what they experience in their everyday lives in the months before election day. That is undoubtedly worsening.<\/p>\n
Reckless borrowing<\/a> by every Government since 2008, combined with the Luxon Government running a structural deficit of 2% of GDP, means there is no scope to increase government spending to get over the bump without immediately fuelling inflation and driving up interest rates and the cost of new government debt.<\/p>\n Already, two of the three ratings agencies have downgraded New Zealand\u2019s creditworthiness, with Moody\u2019s<\/a> yesterday joining Fitch<\/a> in giving the Government\u2019s fiscal management the thumbs down. S&P is sure to follow. Yields on our Government\u2019s 10-year bonds immediately rose on the news.<\/p>\n The March quarter inflation data means the Reserve Bank\u2019s monetary policy committee cannot simply \u201clook through\u201d inflation as imported and war-related. Inflation was already embedded in the domestic economy before the first missile was fired.<\/p>\n Worse, inflationary expectations are surely rising even if driven by no more than the high numbers being bandied around. Talbot Mills reports that two-thirds of people think petrol prices will reach $5 per litre. They almost certainly won\u2019t, but the fact that people expect they will would nevertheless alarm any prudent central banker.<\/p>\n Interest rates are certain to rise<\/a> before the election, perhaps as many as three times. Governments were re-elected in 2002 and 2014 despite rising interest rates, but they were driven by growing economies at risk of becoming overheated. This year\u2019s interest rate hikes will be accompanied by GDP falling in at least one quarter, with a recession and rising unemployment both possible.<\/p>\n Election uncertainty itself will further worsen economic confidence.<\/p>\n Strong, credible and communicative political leadership is necessary to put all this in a context in which voters do not blame an incumbent regime and accept the measures required to turn things around.<\/p>\n Act also seems content to vote for what will almost certainly be the highest-spending and highest taxing Budget in New Zealand\u2019s history<\/p>\n Matthew Hooton<\/p>\n With fiscal policy already highly stimulatory, the Government dares not borrow and spend more for fear of even bigger interest rate hikes.<\/p>\n In the current circumstances, its best strategy would be to immediately slash government spending enough to eliminate the deficit \u2013 or close to it \u2013 to crush inflationary expectations, drive down the Government\u2019s borrowing costs and enable the Reserve Bank to maintain or even lower interest rates to fuel new investment and employment.<\/p>\n But it\u2019s not just NZ First that would refuse to even consider such a move. Luxon\u2019s National Party is also committed to the slow, steady, incrementalist approach that it thinks worked so well for the Key-English Government. Act also seems content to vote for what will almost certainly be the highest-spending and highest taxing Budget in New Zealand\u2019s history, with even more borrowing and higher debt than December\u2019s big forecasts.<\/p>\n Luxon\u2019s decision to call a confidence vote in his leadership on Tuesday was tactically necessary but nevertheless takes him back strategically. As Winston Peters notes, Luxon risks another vote being called if National remains below or even just above 30% in the polls next month and beyond.<\/p>\n Hence, the Prime Minister\u2019s immediate priority is to stop and hopefully reverse National\u2019s bleeding to NZ First, with around 130,000 National voters from 2023 already having shifted loyalties to the smaller coalition partner.<\/p>\n Luxon and his loyal deputy, Nicola Willis, thus launched an extraordinary public attack on NewstalkZB<\/a> against Peters\u2019 decision to back Labour in 2017, nine years ago.<\/p>\n The exchange between National and NZ First sent a message of Government instability just a day after instability in National had boiled with the confidence vote, but was calculated as worth it. If any more National support flows to NZ First, the two parties risk looking like they may converge in the 20s. What Luxon really needs is for 100,000 or so of the 2023 National voters who have since drifted to NZ First to come back home, pronto.<\/p>\n Nothing less will be effective in preventing the next set of polls causing a fresh round of speculation about whether he can deliver any kind of meaningful National-led Government on November 7, rather than something closer to a partnership of equals with NZ First or an unequivocal defeat to a Labour-led alliance.<\/p>\n Unable to run on its economic record, National is thus set to campaign not against Chris Hipkins\u2019 blancmange small-target Labour Opposition but against the Jacinda Ardern Government\u2019s Covid response in 2021<\/a>, the year of the delayed vaccine rollout, the long Delta lockdown in Auckland and the inflationary spending that drained her support.<\/p>\n Campaigning against decisions taken five years ago is a novel approach, and National will need to be careful to distinguish between events in 2021 and the happier days of the 2020 lockdown and Covid-free spring and summer that followed.<\/p>\n Depending on your perspective, National\u2019s mission will be helped or hindered by the focus on the Prime Minister movie about Ardern\u2019s time in power, especially if it wins an Emmy Award in May.<\/p>\n It\u2019s a bold bet for National to assume that five-year-old memories of the horrors of August to November of 2021 will outweigh in median voters\u2019 minds the more immediate horrors that lie ahead from now until November 2026.<\/p>\nChristopher Luxon speaks to media after facing a vote of confidence into his leadership. Photo \/ Adam Pearse<\/p>\n