You are using an older browser version. Please use a supported version for the best MSN experience.

'At the margin': Extra Govt spending won't have much effect on inflation, ASB says

Newshub logo Newshub 25/05/2022 Rachel Sadler
Wage growth to outpace inflation later this year - economist
What to watch next
UP NEXT
UP NEXT

ASB doesn't believe the extra Budget spending to help Kiwis with the cost of living crisis will have much effect on inflation.

With inflation at 6.9 percent - a 30-year high - and the rising cost of living, the Government said that low and middle-income Kiwis will get $350 over three months to help. 

It will be paid out to an estimated 2.1 million Kiwis and the entire package will cost about $1 billion.

To try and help, ASB said inflationary impacts "were littered" throughout this year's Budget.

"They boosted both Crown expenditure and revenues, and were part of the delayed return to surplus now projected (for 2024/25). Spending allowances were higher, but the reality of 7 percent inflation means that much of this was simply running to stand still," ASB said.

"While the extra spending will add to inflationary pressures, we think the effect will be at the margin given everything else going on.

"We'd also note that the fiscal impulse - a summary measure of the net effect of fiscal settings on the economy - is about to flip into net contractionary territory and remain there, albeit less so than projected in December's HYEFU [Half Year Economic and Fiscal Update]."

ASB also said the cost of living support package will help soften the inflationary blow on household budgets, but added that this is a band-aid and not a cure, and the responsibility of cutting the causes of inflation rests with the Reserve Bank.

ASB's inflation predictions are counter to what the National and ACT parties claim.

National leader Christopher Luxon said interest rates will have to rise because of the Government's "wasteful" spending and how they're incapable of financial discipline.

Speaking ahead of the official cash rate (OCR) announcement on Wednesday afternoon that saw it reach 2 percent - an increase of 50 basis points - Luxon said an increase of this size was the right course of action, given high inflation expectations.

He told RNZ that he would prefer the Reserve Bank was "fixated" on getting inflation back to the 1 percent to 3 percent band, but Treasury was forecasting it wouldn't get back to 3 percent until 2025.

"So inflation's with us for some time," Luxon said.

He added that while New Zealand wasn't at the top of the worst inflation-affected countries in the world, the Government isn't doing enough to control the factors affecting domestic inflation.

© Provided by Newshub

ACT leader David Seymour continued to blame the Government's spending for contributing to record inflation.

"The Government hasn't done its job, so now [Reserve Bank Governor] Adrian Orr is doing his. The problem is Adrian's way will hurt," Seymour said on Wednesday.

"Kiwi families are facing record prices for everything they buy, while their mortgage rates are increasing as the Reserve Bank makes up for the Government's out of control spending."

Both parties are continuing to push for tax relief. National wants to adjust the income tax thresholds to inflation, while ACT wants to simplify the tax system by creating only just two tax thresholds. 

The Greens have said high levels of inflation affect people differently, often meaning low-income families struggle to pay rent and put food on the table. 

"RBNZ is stuck between a rock and a hard place now because of the action they took during the pandemic, so it’s important to review the economic response to COVID-19, both positive and negative, of the Government and the RBNZ," finance spokesperson Julie Anne Genter said.

"An inquiry would provide insights for the remaining stages of this pandemic and help the Government respond to current and future economic challenges.

"The Government's reliance on the Reserve Bank's lowering of interest rates to boost demand in the economy has had the unwanted side-effect of pushing up house prices across the country. The combination of monetary and fiscal policy led to the biggest transfers of wealth to the richest New Zealanders, who still do not pay their fair share of tax."

The Reserve Bank lifting the OCR to 2 percent means it's now at its highest level since 2016.

They said the hike was needed to keep price stability and support maximum sustainable employment.

"Consistent with the economic outlook and risks ahead, monetary conditions need to act as a constraint on demand until there is a better match with New Zealand's productive capacity," they said.

The Reserve Bank said economic activity around the world was still creating more inflation pressures. Russia's invasion of Ukraine and COVID-19 restrictions in China were driving ongoing supply chain disruptions, the central bank said.

"The pace of global economic growth is slowing," they said.

"The broad-based tightening in global monetary and financial conditions is acting to slow spending growth, accentuated by the high costs of basic food and energy staples."

Overall, the Reserve Bank said underlying strength remained in New Zealand's economy - but "headwinds are strong".

"Heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence. Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing.

"On balance, a broad range of indicators highlight that productive capacity constraints and ongoing inflation pressures remain prevalent. Employment remains above its maximum sustainable level, with labour shortages now the major constraint on production."

More from Newshub

image beaconimage beaconimage beacon