Bryce Edwards: Politicians and the Reserve Bank are being blamed for an escalating economic crisis

Bryce Edwards: Politicians and the Reserve Bank are being blamed for an escalating economic crisis

Will the looming economic recession kill off Labour’s re-election chances? Is the Reserve Bank making things worse? And could a National Government do any better? These are some of the big political questions floating around after the full extent of the economy’s plight was made clear by the Reserve Bank yesterday.

Authorities are now clearly in the firing line for their handling of the economy and especially inflation. Politicians and officials are rightly being scrutinised because the public’s economic pain is worsening, and looks set to become more severe over the next three years.

The big news yesterday was the Reserve Bank’s unprecedented big increase in the Official Cash Rate, which will lead to higher interest rates. The Reserve Bank’s intention is to make the public feel poorer and therefore to stop spending so much.

Those with big mortgages will be hit particularly hard – with calculations a $500,000 loan will require an extra $12,000 in annual repayments. Many highly leveraged homeowners will struggle. Renters, too, will be punished, with costs being passed on by landlords in the form of rent increases.

That bad news doesn’t end there. The Reserve Bank says much more pain is on the horizon. They forecast the OCR going up to 5.5% next year, and they predict that New Zealand will be in recession for a year from June 2023. Some are now comparing this in scale to the Global Financial Crisis of 2008.

Not only will real wage growth go backwards, but the Reserve Bank also says unemployment is going to skyrocket – going as high as 5.7 per cent. Astonishingly, an estimated 130,000 more people are going to be out of jobs. And, to make things worse, the cost of living crisis is expected to deepen, with inflation now forecast to go even higher.

As always, the economic pain will not be evenly distributed. Young people, the already-poor, and recent home-buyers are all about to be severely tested and punished.

Is the Reserve Bank making things worse?

In terms of the forecast economic recession, there is no doubt that this is by design rather than just a forecast by the Reserve Bank. Governor Adrian Orr has said today that the bank is purposefully engineering a recession in order to bring down the inflation rate. He told MPs today that “We are deliberately trying to slow aggregate spending in the economy.” And he called on workers to accept lower wages to help the economy recover.

Of course, the big headline figure from yesterday is the Bank’s decision to increase the Official Cash Rate by 75 points to 4.25%, which has been labelled as “hawkish” by numerous economists.

In fact, many economists are going on record as saying that such a large OCR increase is a mistake, and will further damage the economy because it over-tightens monetary policy, reducing economic activity. For example, KiwiBank economist Jarred Kerr reacted negatively to the OCR rise, saying “We are looking at a Reserve Bank that is hell-bent on getting inflation down, but I think they are risking overcooking their response.”

Similarly, Westpac’s chief economist Michael Gordon questioned the necessity of the large rise, and BNZ’s head of research Stephen Toplis said that his bank would have raised the OCR by less.

Economics professsor Robert McCulloch of the University of Auckland also stated yesterday that the rise “is probably one gigantic mistake”, saying he would have “recommended a far more modest rate rise”. McCulloch argues that the Reserve Bank are playing politics and public relations rather than making decisions in the best interests of the country.

According to McCulloch, Adrian Orr has gone with a big increase primarily to stave off criticisms of the Bank’s performance: “The Reserve Bank has been profoundly stung by criticism… that it didn’t react to surging inflation last year and was asleep at the wheel. Now it wants to look tough, talk like it actually does care about inflation and make itself out to be really, really serious about meeting its target of 1 to 3%.”

McCulloch argues that the Reserve Bank, having been accused of being too soft on inflation for too long, is now recklessly going overboard to correct this: “The Bank is best likened to a drunk driver that has got the economy into skid and now is jerking the wheel in the opposite direction, but in doing so is over-reacting and will end up crashing the car. The car in this story is, of course, the Kiwi economy and everyone who has a mortgage.”

Another colourful analogy of the direction of the New Zealand economy comes from business journalist David Hargreaves, who worries that if we don’t see an improvement in inflation soon, “then we are probably all in a very small boat heading down a fast moving waterway without means of steering.” And he concludes his analysis of the latest Reserve Bank announcement rather ominously: “As far as the RBNZ is concerned inflation must be killed. Whether that will also kill the economy, we will find out.”

Robertson and Labour under scrutiny

How much is Labour to blame for the current economic mess? There’s no consensus on this, but commentators are starting to speculate on how much Labour will be punished by the electorate when it seeks re-election next year.

Financial journalist Bernard Hickey writes today: “The central bank just made it massively more difficult for the Labour Government to win a third term, which was already in serious doubt.” And political journalist Henry Cooke adds sarcastically, “If there’s one thing voters love it’s a recession, high interest rates, and inflation – all at once!” Cooke says that Labour’s path back to re-election “became significantly more difficult yesterday” and “the Reserve Bank may have just decided the election”.

Herald political journalist Thomas Coughlan believes yesterday’s announcement is something of a turning point, showing Labour’s economic management has unravelled. He rightly points out that “Labour will find it very difficult to win an election during a recession.”

Coughlan explains that Finance Minister Grant Robertson now has a huge headache, because immense pressure is building on the Government to reduce spending, so as to bring down inflation. This isn’t good timing for election year, when Robertson wanted to be able to spend large on social policy. Instead, Coughlan suggests Labour will need to deliver “a parsimonious 2023 Budget and election manifesto.”

Stuff political editor Luke Malpass agrees that all the economic signs are now very bad for Labour’s re-election: “For Labour this is potential disaster territory heading into election year – with a poll expected in November”, and “next year should be the perfect climate for a centre-right party to be re-elected.”

Malpass predicts all sorts of economic pressures will make voters think twice about trusting Labour with their vote. For example, “the spectre – now likely – of nearly 8% mortgage rates on election day next year, will be a sobering one for many voters.”

In response, Labour is going to be under pressure to come up with some big economic changes. “Steady as she goes” won’t be an option. Labour may need to re-examine some of its core policies, especially in areas such as immigration. The role of Government policies in blocking immigrant workers from the country is now set to be a key area of debate.

Newshub political editor Jenna Lynch is also pessimistic about whether Labour can navigate the coming economic storm: “A world of pain is coming. They were hoping this inflation crisis would be short and sharp, but it turns out election day may well be an economic doomsday with the Reserve Bank forecasting these dark economic clouds rolling into the end of next year.”

She also reports that Labour is heading towards austerity: “Newshub understands the government is now running a massive ruler over its spending and looking at cutting loose some of the nice-to-haves rather than necessities.”

The notion that the Government is currently contributing to the inflation problem, means that Labour may feel the need to over-correct this by suddenly pushing the austerity brakes on their spending.

National and Luxon under scrutiny

Despite all the criticism of the incumbents, no commentators are putting much faith in National being able to manage the economic crisis any better. As Malpass says, despite Labour’s problems, “None of this is to say that National will romp in, or even that it is giving particularly compelling solutions.”

In fact, National is simply abandoning its own core economic policies in response to escalating economic pain. Yesterday it capitulated on tax cuts, with leader Christopher Luxon signalling its plans to drop Labour’s top rate of tax are now gone.

Coughlan explains that jettisoning the tax cuts policy was inevitable, and so National took advantage of the chance to get rid of an embarrassing policy: “A bad news day for the Government is an ideal day for the opposition to bury bad news. In an interview with the Herald this morning, and later following Parliament, Luxon essentially said his policy of axing the 39 per cent top tax rate was dead. The policy is expensive, polls terribly, and appeals only to voters who already [vote] Tory.”

Increasingly National’s election pitch is simply that they are “not Labour”. But is that really enough during an economic recession? Does National have any policies of substance that might help navigate the current economic crisis? Even if voters punish Labour for mismanaging the economy, there are no signs that they should have confidence that National would do any better.


Dr Bryce Edwards is Political Analyst in Residence at Victoria University of Wellington. He is the director of the Democracy Project.

This article can be republished under a Creative Commons CC BY-ND 4.0  license. Attributions should include a link to the Democracy Project.  


Further reading on the Economy

Thomas Coughlan (Herald): Governor Adrian Orr admits Reserve Bank engineering recession, warns cutting wage demands needed
David Hargreaves (Interest): Orr: ‘We’re sorry’
Thomas Coughlan (Herald): Labour’s chances of winning in 2023 took a beating today(paywalled)
Luke Malpass (Stuff): Adrian Orr lines up Labour’s nightmare election inflation scenario in Monetary Policy Statement
Robert MacCulloch: The Real Reason why the RBNZ did a 75 basis point rise in the Official Cash Rate
Bernard Hickey: The RBNZ throws a wet blanket over the economy (paywalled)
David Hargreaves (Interest): The Reserve Bank’s going for broke. Hopefully we won’t be the ones going broke
Susan Edmunds (Stuff): Reserve Bank statement shows ‘things are worse than we thought’
Frances Cook (BusinessDesk): Here comes the pain (paywalled)
Tom Pullar-Strecker (Stuff): ‘Significant risk’ Reserve Bank causes more pain than necessary with OCR move
Henry Cooke: The Reserve Bank may have just decided the election
Jenée Tibshraeny (Herald): Mortgage holders warned to ‘brace for impact’ after Reserve Bank’s OCR rise (paywalled)
Susan Edmunds (Stuff): Rising interest rates could add $12,000 a year to $500k home loan: Corelogic
Herald: Mortgage repayments set to jump higher as Reserve Bank charts new path
David Hargreaves (Interest): RBNZ now sees bigger fall in house prices – 20% from peak to trough
Tina Morrison (Stuff): Reserve Bank telling Government to slow spending to bring inflation under control, economist says
1News: Kiwis urged to reassess spending habits amid OCR surge
Mark Quinlivan (Newshub): OCR: Economist Tony Alexander doesn’t believe economy will slip into recession despite Reserve Bank forecasts
Gareth Vaughan (Interest): The RBNZ is ‘forecasting a downturn on a similar scale to the Global Financial Crisis’
Jenna Lynch (Newshub): Christopher Luxon rethinks top tax cut as situation changes ‘big time’, Grant Robertson, David Seymour take jabs
Jessica Mutch McKay (1News): Opinion: OCR spike triggers National to pull planned top tax cut
Russell Palmer (RNZ): National’s tax policy under review post-OCR hike, Luxon says
Bridie Witton (Stuff): Christopher Luxon walks away from tax cuts plan as inflation and interest rates soar
Thomas Coughlan (Herald): Government must help Reserve Bank fight inflation – Christopher Luxon
Alexa Cook (Newshub): Christopher Luxon says Kiwis ‘need’ National Party after Reserve Bank lifts OCR by record 75 basis points
David Hargreaves (Interest): Reserve Bank raises Official Cash Rate to a level not seen since 2008
Rebecca Howard (BusinessDesk): Reserve Bank forecasts a year-long recession as it tries to curb inflation (paywalled)
Jonathan Mitchell (NBR): RBNZ delivers a jumbo-sized 75bp OCR increase (paywalled)
Tess McClure (Guardian): New Zealand forecasts recession in 2023 as it delivers largest rate hike in history
1News: Reserve Bank states NZ economy ‘likely’ to enter recession
Jamie Gray (Herald): NZ wholesale interest rates shoot higher on hawkish statement from RBNZ (paywalled)
James Perry (Whakaata Māori): Aotearoa not immune to global economic pain – PM
Idealog: Academics launch inflation tracker tool


Other items of interest and importance today

Peter Dunne: The Supreme Court’s decision on the voting age is a godsend to Labour
Luke Kirkness (Stuff): Lowering the voting age a smart decision for New Zealand’s future(paywalled)
Anna Whyte (Stuff): Securing a Parliament ‘supermajority’: Why changing the voting age is hard
Erin Johnson (Stuff): Kiwi who voted overseas at 16 says young people here deserve to have their say
Marcus Roberts (Stuff): When it comes to the voting age, 16 should not be the new 18
Lucy Walton (Stuff): I’ve dreamed of voting since I was 12. Lower the voting age
Martyn Bradbury (Daily Blog): Lowering the voting age to 16? Shouldn’t we cap voting at 75?
ODT: Lower voting age backed by leaders; poll disagrees (paywalled)
Waatea News: Education before voting says Jackson
Waatea News: Give rangatahi vote says Te Pāti Māori

Sophie Harris (Stuff): 40% of young Kiwis considered suicide or self-harm in past year, survey finds
RNZ: Mental health system struggling to keep ahead of demand for acute services – Little
Mark Quinlivan (Newshub): Andrew Little says Labour has done a lot to improve mental health services despite no acute beds being added in five years
John MacDonald (Newstalk ZB): When it comes to mental health, the Government is failing us
Emile Donovan (RNZ): The inconvenient tooth about a trip to the dentist
Virginia Fallon (Stuff): Now the helpers call for help in New Zealand’s Not-A-Health-Crisis
Ruth Hill (RNZ): Paediatric surgery in Wellington will not be fully-staffed until 2024
Sophie Harris (Stuff): Only 14% of Kiwis say life is back to normal since Covid-19, study finds
ODT Editorial: Dreaming of a Covid Christmas
Herald Editorial: Happy birthday to Omicron, the unlikely Covid hero (paywalled)
Rowan Quinn (RNZ): New Zealand GPs more burnt out than their overseas counterparts, survey shows
Kristie Boland (Stuff): International nurses told to prepare a year in advance to work in NZ
1News: Immigration crucial to fixing GP crisis – Luxon

RNZ: Government moves to address Three Waters ‘confusion’
Brent Edwards (NBR): Minister allays concerns Three Waters upgrades will be delayed(paywalled)
Richard Harman (Politik): Three waters entities may be too small (paywalled)
Michael Fallow (Stuff): Latest Three Waters moves clarify only how imprecise Govt planning is – Mooney
RNZ: Boil water notice issued for two Clutha water schemes due to treatment plant issue

Herald: Climate Change Minister James Shaw to review 1.5C ‘obligation’ in climate law after High Court judgment
Kate Green (RNZ): High Court rules against climate change action case over commission’s advice to government
Ric Stevens (Open Justice Reporting): Lawyers seeking steeper emissions cuts lose High Court challenge to advice given to Government
Greg Hurrell (BusinessDesk): Court upholds climate recommendations (paywalled)
Todd Niall (Stuff): Will Auckland’s new mayor and a ‘fiscal storm’ slow action on climate change?
RNZ: Firm fined after ‘forever’ chemicals discharged into Whangārei Harbour
James Perry (Whakaata Māori): More Jobs for Nature mahi on offer across the motu

Olivia Wannan (Stuff): Government removes its own handcuffs on coal mining, oil and gas
No Right Turn: Climate Change: Fixing the Crown Minerals Act?
Sam Sachdeva (Newsroom): ‘Fiscal risk’ in farmers’ preferred pricing plan – Treasury
Greg Hurrell (BusinessDesk): Eat more broccoli and save the planet (paywalled)

Michael Neilson (Herald): NZ resettles first six out of 150 refugees from Australian detention centre in Nauru under resettlement deal
Bridie Witton (Stuff): Prime Minister Jacinda Ardern meets with World Trade Organisation boss
Sam Sachdeva (Newsroom): NZ’s Belt and Road deal with China extended
Wena Harawira and Will Trafford (Whakaata Māori): Henare visits Kyiv, reiterates Ukraine commitment
Katie Scotcher (RNZ): Greens demand consistency over Ukraine President Zelensky invite to address Parliament
Caitlin Rawling (Newshub): Finland’s Prime Minister Sanna Marin to visit New Zealand, meet Jacinda Ardern in Auckland
Stuff: Finland PM Sanna Marin set for Auckland meeting with Jacinda Ardern
Herald: Finnish Prime Minister to visit New Zealand next week
Karly Burch (Newsroom): The consequences of nuclear imperialism and colonialism

Adam Pearse (Herald): ‘Reckless and irresponsible’: Govt urgently pushing through 24 bills after Queen’s death caused lost time
RNZ: Opposition parties question need for urgent sittings at Parliament

William Hewett (Newshub): Truancy: Christopher Luxon not ruling out penalising bad parents and principals in truancy policy to address NZ’s ‘abysmal’ attendance rates
Amelia Wade (Newshub): Jacinda Ardern targets Christopher Luxon over possibly punishing parents for taking kids out of school for funerals, weddings, holidays
William Hewett (Newshub): Greens co-leader Marama Davidson accuses Christopher Luxon of demonising parents over truancy comments
Mike Hosking (Newstalk ZB): What’s wrong with Luxon’s call for more responsibility?
ODT: Polytechnic staff fear heads could roll as cuts are made (paywalled)
Lee Kenny (Stuff): New Zealand Broadcasting School struggling to recruit new students

Robin Martin (RNZ): No evictions of unruly tenants by Kāinga Ora after receiving more than 6000 complaints
Felix Desmarais (Local Democracy Reporting): Fighting for Rotorua: End could be in sight for widespread use of motels for emergency housing
RNZ: Ministry proposes firm rules for meth residue in rental properties

Amy Williams (RNZ): Government road safety strategy fails on all but one target
Jamie Ensor (Newshub): Nearly third of New Zealand’s entire roading network past its estimated lifespan
Emma Hatton (Newsroom): Public pump brakes on lower speed limits
Jonathan Milne (Newsroom): Bugger! Police struggle to buy new utes as green mandate meets supply crisis
Stephen Forbes (Local Democracy Reporting): KiwiRail seeks feedback on new southern station designs

Ben Thomas (Stuff): Activist courts stepping on legislators’ toes
Aaron Smale (Newsroom): Quarantine and punish – our national response to trauma
Diane McCarthy (Local Democracy Reporting): Boot camps ‘one of the best things that ever happened’
Molly Swfit (Newshub): Sir Bob Harvey says we should put parents in boot camps, slams National’s ‘crazy’ proposal
Damien Venuto (Herald): The Front Page: Chris Hipkins on gangs, ram raids and New Zealand feeling unsafe

Thomas Cranmner: Labour reintroduces blasphemy laws
David Jenkins (The Conversation): Reading the room: with NZ’s hate speech laws postponed, where are the limits for comedy?
Paul Hunt (Herald): Drawing the line where fact becomes friction (paywalled)
Jody O’Callaghan and Maxine Jacobs (Stuff): Internet NZ apologises to Māori after fallout over racist video

Katharine Moody (Interest): Government’s ‘cumbersome’ RMA reform bills a base worth sticking with
Jonathan Milne (Newsroom): Quake rebuild agency takes over Govt infrastructure in major shake-up

Anne Gibson (Herald): After the Gib crisis: Megan Woods forms new critical materials taskforce (paywalled)
Rachel Maher (Herald): Foodstuffs’ use of facial recognition technology ‘raises significant privacy and ethical concerns’ – Consumer NZ
Oliver Lewis (BusinessDesk): Wellington philanthropist encourages businesses to support charities

Josephine Varghese (Democracy Project): From Obama to Sunak–do representational milestones mean anything more than symbolism?
Peter Dunne (Herald): We rely on volunteer firefighters – can they rely on us? (paywalled)
Phil Pennington (RNZ): Minister says FENZ work to complete local risk assessment plans ‘very slow’
RNZ: New legislation aims to make LIM reports clearer
Michael Fallow (Stuff): Smelter closure’s job losses would likely impact more than one generation – CTU
Hilary Calvert (Newsroom): Talk needed on co-governance
André Chumko (Stuff): Archives New Zealand services worst in decades say experts
Joseph Los’e (Herald): Dame Naida Glavish doesn’t mince words about Erebus Memorial
Lianne Dalziel (Newsroom): Living by a very different Sword