Our new Prime Minister Chris Hipkins plans to reprioritise policies and focus on the economy in his first year as leader. We at Positive Money New Zealand agree with the focus on the economy and would like to help him avoid the pitfalls from previous attempts at fixing the economy.
His stated number one priority is inflation, closely followed by the cost of living and there he has a dilemma. Traditionally, to get inflation under control you take money out of the economy, but that may exacerbate the cost-of-living crisis as money becomes harder to find, especially for those on the margins.
Ominously, Treasury is forecasting that real government consumption (spending) will fall by 8.2 percent over the next couple of years and this may trigger a recession.
To add to his troubles, Hipkins has also stated that climate change, education, health and housing are also priorities, which takes money, at a time when Government spending is tipped to reduce. With overall spending reducing, increased spending in some areas can only be achieved by cutting back spending in other areas, or taking money out of the economy by increasing taxes. The latter has already been ruled out in this election year.
We say that the answer lies in the past. Back in the 1930s the first Labour Government was under enormous pressure to provide jobs and lift the standard of living for ordinary kiwis, as the world was in the grip of the Great Depression. The Government, under Michael Joseph Savage, did that by having the Reserve Bank inject low-interest money into the economy for infrastructure projects and housing.
The Canadian Central Bank did this for 40 years (from 1935 to 1975) for infrastructure projects with no impact on inflation and the Chinese Central Bank has been doing this for some time, providing their economy with a huge advantage over their trading partners.
If Hipkins wishes to fulfil his promise of addressing inflation and the cost of living crisis then zero-interest Reserve Bank credit, rather than high-interest debt, can be used for targeted infrastructure projects. These projects will not be inflationary if there is capacity within the sector to take on the extra work.
The place to start is to speed-up the building of public housing. This will keep builders employed at a time when many are falling victim to the Reserve Bank’s boom-bust management of the economy. And it will increase housing supply, taking pressure off rent inflation and giving thousands more families a leg-up.