Economist proposes alternative solution to inflation as up to 70,000 people forecast to lose jobs

Up to 70,000 people are expected to lose their jobs as the Reserve Bank of New Zealand deliberately engineers a recession to bring down inflation - but one economist thinks there is a better way. 

In November RBNZ Governor Adrian Orr admitted the bank was trying to manufacture a recession in the face of increasing inflation. It came after the bank repeatedly hiked the Official Cash Rate (OCR) from its lows of 0.25 percent in August 2021 to 4.25 percent in November this year. 

Despite the drastic increases, Aotearoa's inflation rate has only slightly dropped from its June peak of 7.3 percent down just 0.1 percent to 7.2 in September. 

The OCR is now expected to peak at 5.5 percent and the bank is forecasting inflation to increase again along with a year-long recession from April. And thousands of Kiwis are expected to lose their jobs as a result with the unemployment rate forecast to rise from the current rate of 3.3 percent to 5.7 percent in 2025. If the unemployment rate rises above 5 percent between 50,000 to 70,000 New Zealanders will be out of work. 

But New Zealand Council of Trade Unions economist Craig Renney said the root cause of inflation is a lack of a long-term economic plan. Renney said better planning could help mitigate inflation without causing unnecessary suffering for New Zealanders. 

He is calling for the Government to implement an Inflation and Incomes Act which would provide a framework for managing inflation in the longer term. 

"Inflation is viewed as a short-term crisis, when in reality, it's a long-term problem associated with New Zealand's present economic model," Renney said. 

"Right now the main tool for controlling inflation is increasing the interest rate - that takes money out of working people's pockets disproportionately and increases unemployment - mostly for low-income Kiwis. That makes New Zealand's already dire wealth gap worse and hobbles our long-term economic growth.

"Every New Zealander is grappling with inflation and the cost of living. We need to be having a new conversation about how we address these issues not just now, but in the long run. We need a new approach that builds greater resilience to inflation and develops a more equitable economy in the process."

Renney is proposing a suite of changes under the Act including a tax-free threshold so the first part of someone's income isn't taxed. Australia has a tax-free threshold, unlike New Zealand. In Aotearoa, every dollar earned is taxed but workers in Australia are only taxed on income over AU$18,200. 

Renney is also calling for the Government to fight inflation in key areas including food, rent, tax, electricity and other main costs. 

He proposed better investment in green energy, reducing student loan repayments for some borrowers and 25-year fixed mortgages for some first-home buyers. 

Renney said the Act would "better marshal" the country's economic development, infrastructure, and public service needs so New Zealand can better respond to economic challenges and change. 

"The Act would pave the way for the kinds of investments that we need to tackle inflation in the long run. Investments in home insulation, electrifying the vehicle fleet, and building the homes we need. Making sure that supply-chains are resilient, and that there is genuine competition in markets. And doing so in a way that manages the cost so that it is simply borne equitably by New Zealanders."

Renney said inflation isn't a new problem but it's one the poorest New Zealanders bear the brunt of and it's time for that to change. 

"It will continue to be an issue for all Kiwis unless we change how we approach it. We need to look towards alternative measures of curbing inflation that don't just call for higher unemployment," he said.