Richard Prebble: A black cloud in the blue sky Budget


“Nothin’ but blue skies do I see”. The Finance Minister must have been listening to Willie Nelson. The Budget is forecasting nothing but sunny skies. Believe the forecasts and you will love the Budget.

The Covid pandemic is raging. New Zealand is one of the least-vaccinated countries in the world. We are just a quarantine failure away from lockdown.

New Zealand is a small, open economy on the other side of the world. We experience frequent economic shocks.

The next economic shock is already underway. There is a black cloud in those blue skies.

The Budget is predicting inflation to be 2.4 per cent this year falling mysteriously to 1.7 per cent, never to exceed 2 per cent. The whole Budget depends on believing inflation is going to pass through and disappear. When has that ever happened?

The Consumer Price Index is an artificial construct. If ministers did not live rent free and be chauffeur-driven they would know there is raging inflation.

Food prices went up a whopping 9.5 per cent last year and continue to increase.

Rents are rising.

Petrol this time last year was $1.96 a litre. Today it is $2.29.

The building industry is over-stretched with a record number of building consents. There are shortages of tradesmen and materials. Costs are rapidly increasing.

The blue sky Budget’s proposed infrastructure spending is in addition to last year’s 150 “shovel-ready” projects costing $2.6 billion. Half have not yet started. These government-funded projects will be competing for the tradesmen and resources.

Australia also has announced significant infrastructure spending. With Covid restrictions, New Zealand will be targeted for skills.

A lot of prices are connected to energy. The Biden administration is rapidly reversing Trump’s energy policies that made America a net energy exporter. World energy prices are heading upwards.

Power bills are predicted to increase this winter. The Government is not to blame for the dry year but it is for the shortage of gas.

There is a worldwide shortage of shipping and airfreight space. It is not going to be solved anytime soon. Being on the other side of the world, the freight price increases will have a disproportionate effect.

Labour has given up trying to solve the housing crisis. It will be four years before RMA changes will take effect. Increasing landlords’ costs just puts pressure on rents. Increasing benefits has just removed the only restraint on rent rises, the tenant’s ability to pay.

Economists who just six months ago were predicting negative interest rates are now predicting the Reserve Bank will increase interest rates.

The Reserve Bank is still printing money that is causing galloping asset inflation. Service inflation is next. Cashed-up households that are unable to travel further than Australia or the Cooks but able to go out will this year splash out on services. Services are basically labour costs.

Benefit rises makes work is less attractive. The service industries will have to increase wages.

The 2021 Budget was exactly the wrong Budget.

The first priority should have been Covid. We are not safe until the country is vaccinated. Jacinda should get the jab, go overseas and use her fame to get us the vaccines we need.

Beneficiaries are in trouble because of the housing crisis. You do not solve a problem with a leaky roof by buying new carpet.

The Budget should have announced a practical plan to solve the housing crisis. Urgent reforms to the RMA, incentives to councils to fund infrastructure and the removal of regulations that prevent factory-built housing.

The Government should be cancelling projects with low cost benefit such as virtually all of the “shovel ready” projects.

The Reserve Bank’s reckless bond purchases that are funding this political blue skies deficit spending Budget must stop.

Once inflationary expectations get established, it takes very tough measures to eradicate them. In the battle against inflation, interest rates reached their all-time high of 67.32 per cent in March of 1985.

Who thinks this government has the fortitude? Their wage freeze for civil servants did not last 24 hours.

What is scarier than economists’ predictions that the Reserve Bank will raise interest rates is the thought that the bank will not. The Finance Minister took time in the Budget to take aim at Ruth Richardson. It is Ruth Richardson’s Fiscal Responsibility Act that laid the foundation for 30 years of fiscal prudence and economic growth.

The Government has broken every one of its promises to be fiscally prudent. Why would it keep its promises on inflation?

Grant Robertson was 13 in 1985. He has never experienced inflation. He has never seen how devastating inflation is, especially to those on fixed incomes. He is a politician. Robertson knows increasing mortgage interest rates in election year will be electorally fatal.

This political blue skies Budget has taken us on another giant step on the road to Argentina.

• Richard Prebble is a former leader of the Act Party and former member of the Labour Party

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