The unwelcome news that New Zealand’s inflation rate has hit a 30-year high of 7.3% has confirmed what most of us knew all too well: the country is in a cost of living crisis, where essential everyday items are becoming increasingly unaffordable.
Some, particularly the National opposition, argue that the government isn’t doing enough to halt price rises. On the face of it, that’s true enough. The recent pause on the fuel excise tax, for example, didn’t stop gas prices from rising. But hidden within that example is the chief cause of inflation – corporate super profit-making.
This week Newsroom’s Jonathan Milne revealed the fuel retailers were pocketing an unprecedented $0.64 margin on a litre of diesel. Petrol prices were up 36% year on year, even as the government’s pause on the excise tax removed (or should have removed, if the retailers passed on the savings) 25 cents a litre. Almost as soon as this scandal was made public, the major retailers dropped their prices, with some going below $2.99 a litre – a move that seemingly confirms a profit rort was taking place.
This went public at the same time as First Union revealed that in the year to March, corporate profits had increased an impressive 39%. In dollar terms that means the owners of capital banked an extra $20bn in profit – a tidy sum in tight times.
According to First Union researcher and policy analyst Ed Miller, that $20bn is “the biggest increase that we’ve ever seen, both in terms of the raw dollars – whether that’s inflation-adjusted dollars or non-inflation-adjusted dollars – and it’s also the biggest percentage increase that we’ve seen, ever”. The equivalent figure for working people, though, was significantly lower, with New Zealand’s total wage bill increasing only $12b. Considering these figures, where profit is increasing faster than wages, who should bear the burden of inflation?
This – as Clint Smith, a former Labour party staffer, points out – is the proper question. Non-tradable inflation, which measures domestic prices like construction, is up only 6.3%, while tradable inflation, which measures imported inflation like the cost of gas, is up 8.7%. There is very little New Zealand can do about the price of imported goods, and domestic inflation in sectors such as construction can largely be a consequence of imported goods.
The unpalatable figures pose some tough questions for both those who now lead New Zealand and those who would.
The government has answered them as any Labour government should. Working people receive more support. Last year the government lifted benefits, this year it’s releasing a cost of living payment for middle-income earners and, come November, the workplace relations minister, Michael Wood, plans to implement fair pay agreements (FPAs). These agreements would lift the wage floor in industries like supermarkets and security from, in most cases, the minimum wage to conceivably something closer to the living wage. A full-time worker whose FPA takes their pay from the minimum wage to the living wage would be paid an extra $98 each week.
But how would the opposition distribute the burden of inflation? Well, they would take almost the opposite approach, prioritising enormous tax cuts for CEOs and tax breaks for landlords. It seems moderately pathetic that, almost eight months into Chris Luxon’s leadership of the National party, the best idea he can summon is welfare for the wealthiest New Zealanders. That is, tax cuts.
Under the opposition’s plans the top tax rate – 39% on money earned over $180,000 – and the bright-line test, an effective capital gains tax on properties sold within 10 years, would go while interest deductibility, where property speculators can deduct interest from their taxes, would return. In the heat and light of Covid-19, a global pandemic exposing just how fragile middle-class living standards really are, and the war in Ukraine (an invasion disrupting food and fuel supply chains across the world), a tax cut in one of the most lightly taxed nations on earth seems silly.
This is especially so considering New Zealand’s housing crisis and its infrastructure deficit. In March the Treasury warned that the government faces a $210bn bill to build the infrastructure the country needs. In May the finance minister, Grant Robertson, committed $57bn to infrastructure over four years. This is obviously good, but it’s equally obvious that that figure – $57bn toward a $210bn deficit – isn’t good enough.
How, then, would Luxon – whose plan to cut the top tax rate would gift $2b from the total tax take and return it to the CEOs – continue closing the infrastructure deficit? At the same time the opposition criticises the top tax rate (and the bright-line test etc) they criticise debt, so presumably borrowing to fund urgent development is off the table. That leaves cuts to services which, as you can imagine, Luxon leaves deliberately vague, offering examples of spending that amount to rounding errors – like the Hamilton-to-Auckland train service – as items that his government would cut.
National’s plans seem particularly ill-advised when the owners of capital are doing so much better than working people. It also seems ill-advised when the rich can better bear the burden of inflation. The CEO who is paid over $180,000 hardly needs to forgo basics in the way that a minimum-wage or middle-income family would have to. But when you’re a former CEO leading the party of CEOs – that is, National – you’re likely blind to how low- and middle-income earners live.
Until Luxon can fix that blindspot, he doesn’t have the answers to inflation – or the merit to win the next election.
