Saturday, May 27, 2023

Peter Wilson: The Week in Politics - Reserve Bank raises OCR, Budget reaction continues

Ahead of Wednesday's Monetary Policy Statement there was much speculation about how the Reserve Bank would react to the government's budget spend-up.

Would it increase the Official Cash Rate by more than the expected 25 basis points? Would it say further hikes were needed because of the inflationary effect of increased spending?

Opposition parties warned that mortgage rates would be higher for longer, more pain for struggling homeowners.

They were eagerly awaiting anything that could be interpreted as "we're raising interest rates because of the budget".

None of that happened.

The Reserve Bank's Monetary Policy Committee raised the OCR by 25 points to 5.5 percent, and governor Adrian Orr said the inflation-controlling cycle had ended.

Media headlined his comment that the government's fiscal policy was "more of a friend than foe to monetary policy".

The result was a surge of favourable publicity the government had been sadly lacking in recent weeks.

"Labour feared the worst but got the best it could hope for," Stuff reported.

Political editor Luke Malpass said that crucially the Budget did not cause the Reserve Bank to revisit its interest rates estimate, it had not revised it upwards.

"In other words, the budget has not meant that rates will stay higher for longer, and the National Party has got robbed of a potentially massive cut-through campaign line," he said.

"While the Nats will continue to make that claim in some form no doubt, for the time being it is not the case."

In a separate report, Stuff contrasted Infometrics economist Brad Olsen saying there would be "a bit of a sigh of relief" coming from a lot of mortgage holders with National leader Christopher Luxon's reaction that they had been kicked in the guts.

"You've got two people to blame for higher interest rates. It's Chris Hipkins. It's Grant Robertson. It's a kick in the guts," Luxon said.

National was, as Malpass predicted, running the same blame game regardless.

The Herald reported that Orr had denied government spending was hindering the Reserve Bank's efforts to cool inflation.

"Overall, real government spending as a share of the economy is assumed to decline over the medium term," Orr said.

"As a result, government spending will be less inflationary than in recent years. We totally understand the challenges that society's going through and the government spending/investment that's needed."

On Thursday morning, Orr faced Parliament's Finance and Expenditure Select Committee to be questioned about the MPS, and National had a crack at him.

"National Party finance spokeswoman Nicola Willis asked a series of questions that appeared designed to force Orr to admit that the May Budget would prove inflationary, at least in the year ahead," Stuff reported.

"However, Orr did not appear willing to give ground."

That was the government's second win of the week.

The first was the announcement on Sunday that NZ Steel was going to be given $140 million to recycle scrap metal using electricity instead of coal in a new $300m furnace.

This had been kept quiet, and the announcement was made by Prime Minister Chris Hipkins with Energy Minister Megan Woods and Climate Change Minister James Shaw alongside him.

There was no doubt it was a big deal, and RNZ's report has all the details.

"This project dwarfs anything we have done to date," Hipkins said.

"Alone, it will eliminate one per cent of the country's total emissions."

It would also mean New Zealand businesses would have access to locally produced, cleaner steel, while high value jobs were protected that otherwise might have gone offshore.

Shaw said it would put New Zealand in a much better position to meet its climate target of net zero carbon by 2050.

The money is coming from the Government Investment in Decarbonising Industry Fund, which draws funding from the Emissions Trading Scheme.

Shaw said that meant polluters were paying for it.

The Sustainable Business Council said it was a smart move for the government to partner with NZ Steel to reduce emissions and it would have a huge impact on emissions reductions.

Ministers said the conversion wouldn't have happened without the government's help, but National and ACT didn't think NZ Steel needed any help.

Luxon described the announcement as outrageous, Newshub reported.

"Just this week the budget couldn't find money to actually help support Kiwis going through a tough cost of living crisis but all of a sudden they can find $140m as a subsidy paid for by Kiwi taxpayers and give it to a large foreign, multinational, profitable company," he said.

Luxon said he applauded what NZ Steel was doing, but it was quite capable of fronting up with the $140m itself.

He added that Bluescope, NZ Steel's parent company, used the electric technology in the United States and elsewhere, so wasn't unfamiliar with it.

ACT described it as a handout and called it corporate welfare.

"Every dollar the government gives to private businesses could be spent elsewhere," said party leader David Seymour.

"The government should cease its various corporate welfare schemes and focus on letting Kiwis keep more of their money through tax relief."

NZ Steel chief executive Robin Davies said without the government's contribution the project wouldn't happen.

Reaction to last week's Budget flowed through into this week, and National's Willis was in the firing line for saying her party would bring back the $5 prescription charge abolished by the government.

After an initial outcry over that, Luxon told Morning Report it wouldn't be universally re-introduced. Pensioners and people with community cards wouldn't have to pay it.

Labour was reported to have launched attack ads within hours of Willis making the call.

"Nicola Willis' knee jerked so hard to the news Labour would remove prescription fees she smacked herself in the face," said Stuff's Andrea Vance.

"Out came National's most miserly National budget offering since Bill English's 2012 paper boy tax: as finance minister she would snatch back the $5."

In her article Vance said National was in the "wrong fight" as it scrapped for votes with ACT.

"While Hipkins is camped firmly in the centre ground … National is allowing ACT to drag it further to the right: The miserly medicines policy, 2-for-1 farming revocation (originally a Rodney Hide idea); scrapping the firearms registry, resurrecting live export shipping; the revival of no-cause rental terminations; youth crime boot camps, and its war on Wellington bureaucracy," Vance said.

An interesting take on National's current circumstances came this week from Philip Burdon, a National MP from 1981 to 1996 and a former cabinet minister.

Writing in article written for Stuff, he said the party faced policy and leadership challenges that lacked the precision and appeal of other parties.

"Unless it can address these perceptions its prospects of electoral success look increasingly challenging," Burdon said.

"Luxon has successfully united the National caucus after four leadership changes in five years, but has conspicuously failed to personally inspire the electorate. His continuous loss of popularity in opinion polls, if it continues, will become a dangerous negative."

That was published before Thursday's poll showed Luxon's fall in popularity had ended.

Tax reared up again this week, as it's likely to continue to do until the election.

Stuff reported Hipkins at a meeting with business people in Auckland to discuss the Budget, where he said any tax cuts or changes to income tax brackets would need to wait until inflation had come under control.

The Reserve Bank has said it expects inflation will come within its mandate of 1 percent to 3 percent around September next year, so Hipkins comment could mean there won't be any firm tax cut promises in its election campaign.

On the other side of the political divide, RNZ reported the Council of Trade Unions had thrown down the gauntlet to National, saying an analysis had shown the party had under-estimated the cost of its tax-cutting plan by at least $1.5 billion.

When National promised to adjust tax brackets in March last year it costed the policy at $1.66b annually, or $6.64b over four years.

CTU economist Craig Renney said the new wage growth forecasts from last week's Budget showed the cost would blow out to $8.2b, and National should publish its calculations to show how it would make up the difference.

This was widely reported, and Luxon was questioned on Morning Report.

He said the $8.2b figure was "about right" and showed just how much inflation had got out of control as government spending ballooned.

"It's been obvious for some time it'll cost slightly more," he said.

Willis said the CTU analysis showed Labour's economic mismanagement meant "continued sky high inflation is pushing even more Kiwis into higher tax brackets, even though the spending power of their wages has gone backwards for three straight years".

A 1News-Kantar poll published on Thursday spoiled the end of the week for the government.

It showed National and ACT could form a government if an election was held now.

Those two parties would have 62 seats, sufficient for a majority, while Labour, the Greens and Te Pāti Māori would have 58.

It was taken after the Budget and followed Labour's problems with Meka Whaitiri and the Greens losing Elizabeth Kerekere.

It also followed Luxon's announcement that National would have nothing to do with Te Pāti Māori after the election.

Labour dropped one point, National gained three, ACT was steady but the Greens lost the four points gained in the previous poll.

Luxon's personal popularity was at 18 percent, up one point but still well behind Hipkins' 25 percent.

The Herald's political editor, Claire Trevett, said the poll could reflect "a shrug of indifference at the offerings in the Budget" or could show National hit pay dirt by ruling out working with Te Pāti Māori.

"The one point drop for Labour is far from catastrophic," she said.

"It does not amount to a big thumbs down for Hipkins, the race remains close and a small resurgence for Labour or the Greens will pull them back into the game."

Trevett said the three-point lift for National would boost its morale as it again overtook Labour, and it was bad news for Labour as Hipkins headed into the party's weekend conference.

"It is a stark reminder that times of high inflation and rising interest rates are a field day for opposition parties," she said.

"It is hard for any government to get away with high inflation for too long without paying a price in the polls. National knows that, which is why it has been using the 'addicted to spending' line on repeat, to ensure Labour cops as much of the blame for the situation as possible."

Peter Wilson is a life member of Parliament's press gallery, 22 years as NZPA's political editor and seven as parliamentary bureau chief for NZ Newswire. This article was first published HERE

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