Prime Minister Jacinda Ardern 'absolutely refutes' that high spending led to record inflation

Prime Minister Jacinda Ardern "absolutely refutes" claims the Government's billions of dollars in spending on COVID-19 led to record inflation. 

The price of goods and services in New Zealand increased 5.9 percent in the last three months of 2021 compared to the same period in 2020, according to Stats NZ. It was the biggest jump since a 7.6 percent annual increase in 1990.

According to ASB Bank, petrol prices saw a whopping 30.7 percent annual increase, while construction costs grew 15.7 percent, and rents went up 3.8 percent. And it's not going away anytime soon. 

"Our view has long been that high inflation in NZ is not transitory. Capacity bottlenecks, supply constraints and resilient demand conditions are expected to keep inflation elevated," said senior economist Mark Smith. 

Meanwhile, 42 percent of New Zealand workers did not get a pay rise at all in 2021, according to Stats NZ, and more than 80 percent of workers are getting pay rises less than inflation.

The latest results from Retail Radar show that in the fourth quarter - October, November and December - 57 percent of retailers increased prices. Nearly three-quarters of retailers expect to increase prices over the next three months by around 7.5 percent.

National's finance spokesperson Simon Bridges and ACT leader David Seymour both blame it on the Government's record spending during the COVID-19 pandemic - around $60 billion to pay for things like the wage subsidy, an $18 billion policy. 

"Grant Robertson's spending has been 40 percent higher throughout his time as Finance Minister than it was under National. This year he's planning to increase that to a staggering 68 percent at $128 billion, with $6 billion in new spending," Bridges said on Thursday.

National's finance spokesperson Simon Bridges.
National's finance spokesperson Simon Bridges. Photo credit: Getty Images

"While elevated spending was appropriate through much of the pandemic, some easing off and greater focus on the quality of spending is now required."

Seymour added: "The Government's relentless borrowing and spending has added to the cost of just about everything. Locking the economy down and borrowing $50 billion so far has left us with a mountain of debt and rising prices."

But Ardern disagrees. 

"I refute that, I absolutely refute that," she told reporters. "The alternative, if they're proposing it, is that we should not have had a wage subsidy in place, and that is what has helped cushion the blow of the pandemic in New Zealand.

"There's a reason the United States has even had inflation surpassing these rates announced today. Particularly what we're seeing in oil prices and international tensions that affect those oil prices, are a contributing factor."

What's causing inflation?

The recent inflation increases have prompted a wave of criticism about the Government's big borrowing to pay for the COVID-19 response, made possible by the Reserve Bank's programme of bond buying, or 'money printing', which has since winded down. 

The Reserve Bank also dropped interest rates to ensure banks kept lending during the crisis, which helped to keep employment up, but led to meteoric house price inflation. The Reserve Bank has now tightened lending rules and is expected to continue lifting interest rates.

Economists agree that stimulus-spurred consumer buying is a reason for inflation. But it's not that simple. COVID-19 has also disrupted supply-chains across the globe, and when too much money is available to purchase too few goods and services, demand outstrips supply, forcing prices up. 

Prime Minister Jacinda Ardern speaking to reporters at Tamaiti Whāngai vaccination centre.
Prime Minister Jacinda Ardern speaking to reporters at Tamaiti Whāngai vaccination centre. Photo credit: Newshub

And it's not unique to New Zealand and not always controllable. The Government cannot help, for instance, that global supply-chains have been disrupted due to COVID-19. 

Inflation in the United States, for example, is the highest it's been in nearly four decades. It's been attributed to supply-chain disruptions, a shortage of goods and materials, along with strong demand from consumers flush with the benefits of government stimulus.

"New Zealand is not alone, with many other OECD countries experiencing higher inflation than in recent decades," said Stats NZ consumer prices senior manager Aaron Beck.

Nevertheless, Bridges believes the Finance Minister needs to focus on "the quality of his spending" and "reining it in so that everyday Kiwis don't keep getting burnt by price rises that far outstrip wage increases". 

According to economic commentator Bernard Hickey, homeowners and businesses are $900 billion richer since the onset of COVID-19 and the Government's interventions, while the poorest are now $400 million in debt thanks to wage deflation and rents rising faster than incomes. 

Green MP Chlöe Swarbrick wants a wealth tax.
Green MP Chlöe Swarbrick wants a wealth tax. Photo credit: Newshub

Green MP Chlöe Swarbrick, spokesperson for finance, says it's time for a wealth tax - an idea Ardern shut down ahead of the election. 

"Inflation hurts those who spend most of their incomes on basic essentials, like power, food and rents. Meanwhile, those who own property have seen huge wealth increases," she told Newshub. 

"In the same way that $1 trillion wealth transfer has been manufactured, it can be remedied. The Government must introduce a wealth tax and ensure a guaranteed minimum income for all, at one of the most uncertain times in human history, for the benefit of everyone."

With COVID-19 cases expected to isolate for 14 days and household contacts 24 days under the Government's plan to combat Omicron, the Government will come under more pressure to keep the economy ticking. 

But Robertson says New Zealand is "in a strong position" to respond to the outbreak, due to the "better-than-expected" financial accounts.

The Government's deficit was $8.4 billion, $1.2 billion better than forecasts in December, according to data released on Thursday. 

Tax revenue was $300 million above forecast at $41.1 billion, due to higher than expected corporate tax, while expenses stood at $52.8 billion, $400 million below forecast. Net core Crown debt was 34.5 percent of GDP, $600 million less than forecast. 

"New Zealand is in a stronger fiscal position compared with other developed nations and our accounts continue to outperform forecasts," said Robertson.

"This gives us the fiscal headroom to continue our balanced approach to meet the costs of Omicron while continuing to deal with long standing challenges such as climate change, housing and child wellbeing."