The four big things the new Government needs to focus on, according to an economist

The Government needs to take back control of the economy from the Reserve Bank, a prominent economist says, because the Bank's monetary policy is driving up house prices and increasing inequality.

The election of a potentially single-party Government provides an opportunity to do that and more, says Cameron Bagrie. 

"There's opportunities, but there's also a hell of a lot of work that needs to be done," he told The AM Show on Tuesday.

At the weekend, Labour won enough seats to govern alone, if it so wishes. Bagrie says without having to compromise with other parties, there are "four big priority areas I'd be targeting to get runs on the board pretty damn quickly".

"Fix the mix - that's bout fiscal policy doing a bit more, monetary policy less; right people in the right places - if you want to deliver, you've got to promote some people and that also means you need to demote some others; infrastructure needs to be at the epicentre; and some pretty hard questions asked I think in regards to education."

The Reserve Bank is in charge of monetary policy, and is largely independent. It controls things like the official cash rate (OCR), which was dropped to a record low in March to encourage borrowing and spending through the COVID-19 pandemic. 

Fiscal policy is how the Government raises revenue and what it's spent on. 

"Things are getting a little bit more out of economic balance out of economic balance, social balance... Monetary policy's doing too much of the heavy lifting," said Bagrie. "What's that driving? More income inequality and more unaffordable houses.

"Fiscal policy should be doing more. What does that mean? Some of that $14 billion they've got temporarily parked, push it out in the economy. Get it there. It's going to be a lot more effective at creating jobs."

Jacinda Ardern.
Jacinda Ardern. Photo credit: Reuters

The Government has set aside $14 billion in case of another wave of COVID-19 in the community. It's already spent about that much on the wage subsidy this year. National had promised to spend some of it on tax cuts and infrastructure development.

Bagrie said if it's spent, it should be on projects that would create jobs. Treasury is forecasting unemployment to rise to 7.8 percent over the next 18 months - an improvement on an earlier forecast of 9.8 percent, after New Zealand's success at eliminating community transmission of the virus.

Cameron Bagrie.
Cameron Bagrie. Photo credit: The AM Show

Despite the efforts of the Labour-led Government over the past three years, there is debate over whether it's managed to close the gap between the haves and have-nots. While the minimum wage has gone up considerably and benefits were increased in response to the pandemic, house prices have continued to skyrocket - fuelled by cheap borrowing costs as a result of the Reserve Bank's determination to keep the OCR low.

"If we want to reduce poverty and improve the social side of the ledger, you need a ruthless fixation in the next 12 to 24 months with job creation," said Bagrie. "Fiscal policy should be the prime anchor and monetary policy should be the supporting anchor. At the moment, she's probably a little bit of the reverse."