It has become fashionable to complain about New Zealand’s cost-of-living crisis. And it is true: life has become grotesquely unaffordable for many Kiwis.
Unless you are on significantly more than the average income, unless you already own property and unless you have paid off your mortgage, you will feel squeezed.
Sadly, more inflation is on the horizon, which will mean even more hardship for New Zealand families trying to make ends meet.
But do not despair, help is on the way. That is politicians tempted to take advantage of the cost-of-living crisis.
Some politicians will promise to stop price hikes. Among their tools are rent controls, price freezes and even government-run supermarkets.
Other politicians, meanwhile, will promise financial support for people most affected by rising prices. That means increases in the minimum wage, higher benefits or fuel subsidies.
All these politicians will present themselves as saviours from our cost-of-living hell.
There is only one problem.
What if government is the cause of our problems, not the solution? What if the same politicians now trying to save us from high prices caused our current situation?
Not all cost-of-living issues can be blamed on government, of course. Some of the high prices that outrage us are a global phenomenon and therefore beyond our control.
The microchip shortage is pushing up car prices everywhere. Increased energy consumption and geopolitical uncertainty have pushed up fuel prices worldwide. Add shipping disruptions and you see another factor behind recent price increases.
There is not much we, here in New Zealand, can do about any such things. When world market prices for some products rise, that is a given for us.
But some matters are in our hands. And they concern both sides of the cost-of-living equation: households’ budgets – and consumer prices. Both sides of the equation have a lot to do with the actions of politicians and government.
Some prices are higher than they ought to be. The most obvious and widely known example is petrol. Once you add up everything, about half of what you pay at the pump is tax. It is even a little higher than that in Auckland thanks to the regional fuel tax. And not all the tax revenue goes into road funding but is siphoned off for other projects.
Tax, however, is not the main problem with our cost-of-living crisis in New Zealand. Unlike many other countries, we have a relatively clean and straightforward tax system. We do not have inheritance tax, no general capital gains tax (though some “brightline” rules), no payroll tax, and no social security tax (yet). Long may it remain that way.
Still, government can push up prices even without tax. The prime example is land prices. The government is increasing the price of land by restricting the release of land for development.
There is no shortage of global research on limiting the expansion of cities through greenbelt policies (London) or municipal urban limits (Auckland). It always happens this way: As land becomes rationed, land prices increase.
Several years ago, leading economist Arthur Grimes estimated that the price difference between land inside and outside of the Auckland rural-urban boundary was about a factor of 10. Only last year, Treasury economist Chris Parker showed that restricting development at city fringes pushes up downtown land prices.
We usually think of residential property when we talk about land prices. What we forget is that land is a component in many other activities. Each time you visit a restaurant, stay at a hotel or go to the cinema, you effectively rent a small piece of land for a short time. The same is true for retail. The annual rent for a square metre of prime retail space on Wellington’s Lambton Quay is about $2000 including GST.
As planning rules limit the availability of land, we all pay more for everything we do – all the time. And that is especially galling in a country with no shortage of land like New Zealand.
So let’s talk about house prices. For many if not most households, accommodation costs are the biggest outgoing every month. When the average house in Auckland and Wellington now costs well over $1 million, that is hardly surprising.
It need not be this way, and to see how much better we could have it, just jump on any US real estate website. Unless you buy in unique, prime locations (think Manhattan penthouses), US property is way more affordable than New Zealand houses.
There is another way government has made our lives unaffordable, albeit indirectly. One of the first things the newly elected Labour-NZ First coalition did after taking office was give the Reserve Bank of New Zealand a new mandate. Under this so-called “dual mandate”, the RBNZ has to aim for price stability and full employment.
As any economist will tell you, you can temporarily reduce unemployment with lower interest rates. But you cannot do that in the long run, and any such activism will come at the expense of higher prices. And voila, here we are.
Especially since the Covid pandemic, the RBNZ has systematically erred on the side of stimulus, even when alarm bells should have been ringing. But it did so while implementing the Government’s mandate, and thus it is the Government that is ultimately responsible.
Finally, though high prices are a pain, that pain would be more bearable if at least our incomes were higher. But they are not.
Once upon a time, New Zealand had the highest economic output per person in the world – much higher than in, say, the UK, Australia or the US.
Unfortunately, that was about a century ago. Today, our GDP per capita trails Australia by about 20 per cent and the US by 40 per cent.
Some consumer goods command roughly similar prices around the world – think mobile phones or laptops. But it makes a difference if you have to buy them out of an average monthly household net income of $6456 (Sydney), $6466 (London), $11,918 (San Francisco) – or just $4409 (Auckland).
New Zealand economists have debated endlessly why our productivity and our incomes are so low. But even though there is no complete agreement on the causes, there is widespread acceptance that restrictive land-use planning, high hurdles for foreign investment and our poorly performing education system have much to do with it.
So New Zealand is a country with high land prices feeding through the entire economy. It also has among the most expensive homes in the world. We have a Reserve Bank whose ill-informed mandate undermines price stability. We have a whole range of policies systematically torpedoing productivity and growth. And we have politicians now thinking aloud about introducing even more regulations, taxes and levies.
Is it any wonder there is a cost-of-living crisis? It is a crisis almost of the government’s making – not just this government’s, but of successive governments going back decades.
If politicians want to “help” us deal with our unaffordable lives, they should not saddle us with more interventions like price controls or antitrust action. There is a wide consensus among economists that these do not work.
Instead, politicians should clean up the messes they and their predecessors have created.
Start with Reserve Bank’s mandate; radically simplify land-use planning; open the borders wide to international investors; revolutionise our education system; cut back on government waste and then lower taxes.
The result would not just be a more affordable New Zealand but a much more dynamic country providing greater opportunities for everyone.
The only inflation we need is an inflation of imagination, courage and reforms.