When will the Government realise that fiscal spending is inflationary?

In a hastily arranged press conference on a Sunday afternoon, our finance minister Grant Robertson announced it would extend cuts to fuel taxes, road user charges, and half-price public transport fares until the end of January next year. The reasoning is to assist households with rising cost pressures and offer some relief when filling up at the petrol pump. The cynical side of me questions the timing a day before the release of the second quarter CPI numbers, but that aside, the rationale for the cuts is somewhat baffling. I thought we have a central bank raising interest rates to dampen demand and get inflation back in check?

Second quarter inflation in 2022 came in at 1.70% bringing the headline number to 7.30% annualised. Clearly inflation is at an uncomfortable and unsustainable level. This is a global phenomenon not limited to New Zealand and as an example, we saw the Bank of Canada raise interest rates by a full percent last week. The Federal Reserve in the US is likely to raise their short-term interest rate by a further 0.75% at the end of the month, all targeted at bringing inflation back under control.

According to Grant Robertson, this latest extension is a ‘targeted intervention’ and ‘having done this, we’ve actually helped keep inflation under control.’ Spare a thought for our Reserve Bank governor Adrian Orr. The messaging we are hearing from the RBNZ is that they will continue to raise interest rates until inflation starts to moderate through dampening demand, yet we have a government who seem ill equipped to join the dots.

I am not for one moment questioning the difficulty households face in an environment of rising costs across the board, but to suggest that this latest round of fiscal spending is not inflationary is ludicrous. The whole premise of tightening monetary and financial conditions (raising interest rates and reducing government spending) is to reduce spending growth (take money out of household budgets) and reduce asset growth (slow the housing and equity markets). How is making it cheaper at the pump disinflationary?

A recent study from the Treasury found that government investment and consumption tend to have the largest effects on domestic demand and interest rates, that message is clearly not getting through to this current government. Whilst we can all debate the merit of targeted fiscal spending, to stand up and ‘sell it’ as keeping inflation under control feels a stretch.