Cost of living crisis: Which party would serve you better?
Inflation kills govts, so what are the parties’ solutions and how does it benefit voters? Photos / Getty Images
Danyl McLauchlan analyses the election promises parties have made to voters to tackle the cost of living crisis in an online exclusive story.
When most of us think of inflation we think of higher grocery prices, higher rents, paying more at the petrol station: a general increase in the cost of living. But the majority of economists see things differently: to them inflation is when the value of our money declines. It seems like prices are going up, but what’s really happening is that your salary, and the cash in your bank account, is worth a lot less than it used to be. So is all the money in your savings and your retirement fund.
Inflation is one of the central problems in macroeconomics. A period of high inflation is a crisis in which wealth is transferred from people who have saved money to people who hold high levels of debt: both the savings and the debt lose value. It’s often advantageous to the rich, who hold high levels of cash debt and it’s a tax on the poor, who are the least able to adjust their incomes to match rapid price rises.
British economist John Keynes suggested three mechanisms for combating inflation. A government could reduce spending, raise taxes or increase interest rates. All of these have the effect of sucking money out of the economy. By making money scarcer you’ve increased its value. Viola: you’ve solved inflation.
Unfortunately, all of these solutions are deeply unpopular with the public. The 1970s was a prolonged period of high inflation across most of the OECD – it hit 20% in New Zealand during the oil crisis – partly because political leaders feared the voter backlash from spending cuts, higher taxes or high interest rates. The cure would be worse than the disease. At least for their careers.
During the neoliberal revolution of the late 20th century a consensus formed that inflation should be solved by central bankers raising interest rates. The bankers weren’t directly accountable to the voters so they could – and did –make the decision to plunge an economy into deep and sustained recessions in order to tame inflation. And this was such a successful technique that we’ve enjoyed very low rates of inflation for three decades.
But now here we are: ever since a bout of Covid-era money printing combined with a spike in oil prices in early 2021 our inflation rate has been outside the target band of 1-3%. And the Labour government’s decline in popularity has correlated strongly with the subsequent cost of living crisis. Inflation kills governments.
What are the parties’ solutions?
When Chris Hipkins succeeded Jacinda Ardern as Prime Minister he promised to focus on inflation. “Bread and butter issues”. And he’s done exactly that. Labour has a 10-point plan to help people deal with the cost pressures caused by high inflation.
So far, they’ve boosted Working for Families, introduced subsidies for public transport and removed the $5 prescription charge. They’ve promised to take GST off fresh and frozen fruit and vegetables; extend the early childcare subsidy to two-year-olds, roll out free dental care for under 30s and they’ve still got a couple of as yet unveiled cost-of-living promises to go.
- Winners: Lower- and middle-income families with children. Potentially under 30s who need dental care. No one thinks the GST exemptions will be passed on to consumers, and it’ll take at least three years for the government to grow the number of dentists to deliver on their promise. But the combination of free prescriptions, free- and half-price public transport for children and under 25s, respectively, and the targeted transfer increases will make a material difference to those households.
- Losers: Everyone who pays income tax, but we lose in a quiet, sneaky way. The government has decided not to shift the brackets on the income tax thresholds, so they can keep giving us incremental tax increases every year as inflation lifts our earnings up into the higher brackets.
National has also focused on the cost of living and they’re doing so via a massive $14.6 billion dollar tax package which claims it’ll deliver $250 a fortnight to the “average Kiwi household with kids”.