The Kākā by Bernard Hickey

TLDR: The phrase ‘penny wise and pound foolish’ is one that applies across much of the Government’s approach to spending and investment over the last 30 years. Both National and Labour Governments have kept sinking lids on real spending and investment on the likes of housing, transport, health and education spending since the early 1990s in a reflexive and deep-seated drive to lower taxes and Government debt to at or below 30% of GDP.

It seemed like a good idea at the time, especially if you believe previous generations (pre-1984) had ‘over-invested’ in public infrastructure and services and you believe (as most did in the early 1990s) that Aotearoa was likely to have a flat and ageing population for decades to come. After all, who doesn’t love low taxes and low interest rates, or avoiding the fear of some sort of public debt crisis? But this foregone spending has mounted up in the form of massive society-wide opportunity costs in the long-run, that have been squeezing through into low productivity growth, maxed-out hospital capacity and jam-packed prisons, especially with both parties actually engineering the fastest population growth in the developed world in the last decade through migration.

Eventually, the true costs in ‘pounds’ of those pennies saved through the 1990s, 2000s and 2010s is turning up through things breaking or not working because of a collective case of deferred maintenance and avoided investment. Our primary health care spending decisions are the latest case in point, including one publicised this week. It shows that for every $1 in prescription co-payments collected by the Government, there is an effective cost to the Government an $18 in extra hospital costs.

But the Treasury’s and Labour Goverment’s ingrained ‘penny wise and pound foolish’ approach to the opportunity costs remains locked in place, little changed from the previous National Government.

Paying subscribers can see more detail and analysis below the paywall fold and hear more in the podcast above. I’m asking subscribers below if they want this one opened up later today for public reading, listening and sharing. They support the public interest journalism I do on housing affordability, climate change and poverty reduction and get to say whether and when it should be made public. We’d love you to join us too.

$18 in savings foregone for every $1 in co-payments ‘earned’

A study of what happens when sick people don’t have to pay the current $5 co-payment for their prescriptions has found they are more likely to get their medicines and avoid having to go to hospital. For every 100 people who had to pay the $5 fee for a year, the study found they generated an extra 118 nights of hospital stays at up to $1,500 per night, over and above a comparable 100 people who didn’t have to pay.

That means that for those 100 people with chronic conditions such as diabetes, mental health issues, chronic obstructive pulmonary disease, the ‘lost’ $10,000 a year in co-payments (sick people have to pay for the first 20 prescriptions per year) actually cost an extra $177,000 in higher hospital costs. That means $1 earned is costing almost an extra $18 in hospital costs.

It seems an obvious conclusion that begs the question: why hasn’t the Government removed the $5 fee already? Surely Treasury has done a proper cost-benefit analysis of the cost of up to $1,500 per night in extra hospital days vs the foregone cost of the co-payments? Surely this is the sort of ‘Wellbeing’ analysis that Treasury would have done since its first Wellbeing Budget in 2019 and its adoption of the ‘Living Standards Framework’ earlier in the decade?

It turns out they haven’t, despite international evidence suggesting the potentially large scale of the opportunity costs of removing the fee and despite then-Health Minister David Clark asking about it in 2018. Actually, the Government chose not to do it in the 2020 Budget, in order to ‘save’ the $147 million a year in lost revenue and therefore foregone debt reduction. It turns out this penny wise and pound foolish decision not to remove it could be costing over $2.65 billion a year in extra hospital admission costs at a time when our hospitals and staff are stretched to breaking point.

Treasury has form on this. Back in 2012, the fee was increased from $3 to $5 per prescription by the Key-English National Government in an attempt to get the Budget back into Budget balance after heavy Christchurch earthquake spending. Treasury even recommended the fee be increased to $10 at the time to increase revenues, and therefore reduce foregone debt. It did that despite evidence from a Canadian study it would generate extra hospital stays when sick people couldn’t get their medicines.

Essentially, Treasury argued (and the Governments of the day in 2012 and 2020 have accepted) the benefits of Government debt reduction, in the form of slightly lower interest rates and higher asset values, were worth more than the unexamined but very real long-run costs of tens of thousands of sick people spending hundreds of thousands of extra nights in hospital.

So what’s the latest evidence?

So how do we know this now? It turns out a randomised and controlled study by University of Otago public health researchers that was published in a BioMed Central (BMC) paper last month found that the 469 people in their 2019/20 study who had to pay the $5 charge spent many more nights in hospital than the 591 who didn’t.

Of every 100 people who received free prescriptions in the study, 33​ were admitted to hospital and stayed for 208​ days. Of every 100 people who still had to pay the $5, 41​ were admitted to hospital and stayed for 326​ days. So the difference is an extra eight people in every 100 people spending a net extra 118 days in hospital per year. In the study, the Government would have lost up to $10,000 in forgone prescription fees, but had to pay an extra $177,000 for the extra hospital nights. That’s $18 saved for every $1 earned decision in any analysis of the costs and benefits of removing the fee.

Here’s more from the Hannah Martin article published in Stuff last night on the study:

Lead author Professor Pauline Norris, from Va’a o Tautai​ – Centre for Pacific Health, said the charge prevented some people getting their medication, leading to worse outcomes.

“They go without their medicines, and as a result their health problems get worse, so they need hospital care. This is bad for them, their whānau, and the health system.”

Māori and Pasifika much more affected by $5 fee

The latest NZ Health Survey for 2021/22 found that 3.3% of people reported not getting their medicines because of the $5 fee, with Māori and Pasifika adults being 3.3 times and 1.1 times respectively more likely not to collect a prescription due to the cost.

Co-author Dr Shirley Keown, from Turanga Health, said “prescription charges force people to choose between getting their medicines, feeding their whānau, paying the power bill or buying petrol for the car to get to work”.

Norris was “surprised at how much difference the free medicines made – it was really dramatic”.

“If a doctor thinks someone needs a medicine, and they want to take it, why do we let the lack of $5 stop them?”, Norris said.

The researchers recommended in their paper that Aotearoa follow the precedent of Scotland, Wales and Northern Ireland, which abolished prescription charges in 2011, 2007 and 2010, respectively. 

Here’s the final recommendation in the paper:

Eliminating a small co-payment appears to have had a substantial effect on patients’ risk of being hospitalised. Given the small amount of revenue gathered from the charges, and the comparative large costs of hospitalisations, the results suggest that these charges are likely to increase the overall cost of healthcare, as well as exacerbate ethnic inequalities.

The study made clear it was designed to match the effects of such a policy intervention.

The key strength of the study is the comparison of a single simple intervention to usual care, mimicking a potential policy change and its incremental benefits. Additionally, although we did not recruit the sample size we aimed for, we were very successful in recruiting people facing socio-economic disadvantage and a significant burden of ill health. The inclusion criteria were designed to identify the people most likely to be hospitalised because of cost-related non-adherence. We think they are representative of the group of people who face significant social disadvantage and have poor health, but they were not intended to be representative of the New Zealand population as a whole.

So how much would be saved and lost in any change?

The last available Cabinet papers revealed in an OIA request last year show the Government estimated revenues of $147 million in the current 2022/23 fiscal year from the $5 fee. Given the $18 to 1$ benefit to cost ratio, removing the fee would generate savings of $2.65 billion.

So why hasn’t it been proposed and done already?

Papers released under the OIA show then-Health Minister David Clark asked in 2018 for advice on removing the fee. Officials pushed back then, and again in 2019, pointing out some pharmacy chains (Chemist Warehouse and Countdown Pharmacies) were choosing not to charge the fee, and were instead effectively using the fee (which still has to be paid to the Government) as a loss leader.

The heroes of this story are…Chemist Warehouse and Countdown

Essentially, officials were saying the health system could get some of the benefit of the removal of the charges without having to give up the revenues. It was saying let shareholders of the two chains be generous with their ‘loss leader’ profit sacrifice and avoid taxpayers losing the revenues.

The implication is that, in their desire to grab more market share, Chemist Warehouse and Countdown have done more to reduce the stress on our health system than Treasury or politicians of both parties.

This effect can be seen in the changing results for non-collection of prescriptions between the Health Surveys of 2016/17 and 2021/22. The percentage of respondents saying they didn’t pick up prescriptions because of the cost fell from 6.6% in 2016/17 to 3.3% in 2020/21. The Australian-based Chemist Warehouse launched into the New Zealand market in 2017 with its flagship discount being the removal of the $5 prescription charge. It still pays it to the Government, but does not charge customers. Countdown now has a similar policy for those pharmacies it has within its supermarkets. Chemist Warehouse now has 37 stores in Aotearoa and Countdown has 34.

The push-back led to the issue being kicked into a wider review of primary health care, which was in turn folded into the bigger health system reforms pursued by Clark’s successor Andrew Little, which turned into the dissolution of the DHBs and the creation of Te Whatu Ora and Te Aka Whai Ora (The Māori Health Authority).

Clark had another go in 2019 to push it through into an item in the 2020 Budget. Document six in the OIA documents shows a presentation in October 2019 that noted the Government was in favour of removing the fee. There was no cost-benefit analysis done, with the main focus on the need to compensate DHBs for the likely ‘loss’ of $133 million of fee revenue. Discussion of ‘Wellbeing’ or the ‘living standards framework’ was nowhere to be seen in the documents released.

Clark was reported in 2020 as saying the Government would not remove the fee. PharmacyToday-$$$

How Treasury viewed this issue

Detailed advice and Cabinet papers from 2011 and 2012 show how Treasury approached the suggestion of increasing the fee to save money in the wake of the quakes and National’s then-push for ‘zero’ Budgets. The fee was increased from $3 to $5 from the beginning of 2013, but Treasury actually recommended it be increased to $10 to ‘save’ up to $200m per annum.

Here’s what officials said at the time:

In the current fiscal environment the government needs to think carefully about which services it funds, and for whom. Increasing cost sharing is one way to shift a share of health costs from the public health system to those who use and can afford to pay for services. Cost sharing also sends a price signal to patients and can help improve the efficiency and effectiveness of the health system.

The government is operating under tight fiscal constraints and increasing cost pressures. In order to return to budget surplus by 2014/15 in accordance with the fiscal strategy, Ministers will need to make choices on spending priorities in Budget 2012.

In the very different fiscal environment the Government now faces it is appropriate to reconsider whether the benefits of universal subsidies outweigh the benefits of targeting scarce public funds to the areas and individuals/households with greatest need.

Treasury also knew about a 2001 Canadian study of the effects of co-payments on hospitalisation rates, but argued it was not directly comparable and have only small effects, even though the study had not focused on those with low incomes.

The detail above may seem overkill, but it gives you an idea of how these decisions are made and the incentives at play.

Governments of both colours have prioritised low debt, low interest rates and high asset values in the short term at the expense of people’s health and public health costs in the long run.

And everyone wonders why our productivity growth has been so stagnant.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: This week in the podcast of our weekly hoon webinar for paying subscribers, Peter Bale and myself talked with Auckland Central MP Chloe Swarbrick and Auckland City Councillor for the Albert-Eden-Puketāpapa ward, Julie Fairey, about Auckland’s floods, climate change and what might (and should) happen next.

This week’s five big things

The climate changed - Auckland’s heaviest ever downpour after Aotearoa’s hottest ever year unleashed floods that killed four people, made hundreds (more) homeless and will be our most expensive natural disaster ever, outside of the Christchurch earthquakes. Insurers face claims of over $500 million and are already putting up premiums and pulling insurance from some of the one in seven properties on flood plains, under (and over) cliffs and within expected reach of rising seas.

The politicians didn’t - The Labour Government announced an extra $719 million in spending to extend fuel tax cuts for another three months to the end of June, increasing the bill for encouraging more emissions from petrol and diesel vehicles to $2.1 billion and making it even more unlikely they will be unwound before the election on October 14.

Mortgage rates fell - ANZ cut its longer-term mortgage rates to match cuts by others as global markets are now dragging down longer-term wholesale rates in anticipation of cuts in official rates. That’s because inflation is rapidly coming off the boil in the big Northern Hemisphere economies, which just experienced mild winters that kept gas prices down and where wage growth is now slowing, avoiding wage-price spirals.

Goldilocks economies - The world’s largest economy reported much-stronger-than-expected jobs growth last night, but also wage growth fell, creating the tantalising potential for the United States to have a soft landing where the US Federal Reserve doesn’t have to raise interest rates too much. A recession that was seen as inevitable as recently as in January, could be avoided. The Eurozone also avoided a recession over its winter, partly due to a warmer winter and continued jobs growth. The one time climate change was a good thing.

From the dog house to the honeymoon suite - Two opinion poll results published this week showed support for Labour bounced strongly in new PM Chris Hipkins’ first week in charge. Labour’s support rose just above National’s in both the 1News/Kantar and Newshub/Reid Research polls. Interestingly, Hipkins net approval and net trust ratings were significantly above that of National leader Christopher Luxon. It’s game on again for the election on October 14, with the prospects growing that Te Pāti Māori, TOP and/or NZ First become the makers of King Chris or King Christopher.

Chart Pack of the week

Off-the-charts amount of rain in a day

Fuel tax cuts extended despite prices at pre-war levels

Labour bounces back in the polls

US wage inflation rolling over too

IMF points out NZ has the most punitive GST in the world

Substack of the week

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Yesterday’s decision to extend again the Ukraine War fuel tax cut of 25c/litre was portrayed by the Labour Government as it focusing on ‘bread and butter’ issues to help those most stressed by ‘cost of living’ issues associated with high inflation, which sounds true on the face of it.

The problem is the $2 billion of cash benefits the policy has now ballooned to are actually distributed mostly to the rich, as Infometrics Economist Brad Olsen pointed out last night in a research note and demonstrated with a chart included below.

PM Chris Hipkins refused again yesterday to consider removing GST on food and was also non-committal on questions about increasing incomes for the poorest by lifting benefits and extending and improving Working For Families to allow more families with children (including beneficiaries) to keep more cash, especially when their working incomes rise to levels where marginal tax rates sometimes approach 100%.

Elsewhere in the news overnight and this morning in Aotearoa’s political economy, geo-politics and the global economy:

* The IMF highlighted Aotearoa’s status as having the most punitive GST rate in the world, covering more products than any other and collecting a bigger share of GST than any other (see more in Charts of the Day below);

* Transport and Auckland Minister Michael Wood appeared to waver on his backing for Auckland’s ‘Light’ Rail line from the CBD to Mangere, saying only in an interview the project was part of Hipkins’ review of ‘unnecessary spending right now’ and he was “in general, committed to high quality public transport”;

* there was fresh news overnight of easing inflation pressures in the world’s largest economies, with data showing the Eurozone’s annual inflation rate fell to 8.5% in January from 9.2% in December, which was also lower than economists’ forecasts for around 9.0%;

* The US Federal Reserve just announced another slowing of its monetary policy tightening with a 25 basis point hike in its Federal Funds Rate (Official Cash Rate) to a range of 4.5% to 4.75% (ahead of NZ now on 4.25%) as inflation pressures in the world’s largest economy are easing back; and,

* in another sign of easing pressure on interest rates and a precursor to a potential rebound in house prices after a potential change of Government, ANZ cut its mortgage rates overnight to reflect recent falls in wholesale mortgage rates linked to easing inflation pressures here and overseas. Almost all economists now expect the Reserve Bank to ease its rate hike back to 50 basis points (4.75%) on February 22 from 75 basis points on November 23 last year, with a peak of 5.0-5.25% by the middle of 2023.

Paying subscribers can see more detail and analysis on the fuel tax cuts, the IMF’s GST analysis and Michael Wood’s Light Rail comments below the paywall fold and in the podcast above.

Labour gives cash to the rich, rather than the poor & climate

If anyone is wondering why Governments of both flavours love inventing new forms of middle class welfare (interest free student loans, fees-free tertiary education, KiwiSaver grants, first home buyer grants and tax threshold increases), it’s always, always worth knowing about how they have to appeal to a relatively small group of voters in the middle of the electoral spectrum. This group of ‘median voters’ includes the 10-15% of the electorate who are mostly older homeowners living in stand-alone homes with two cars in the driveways of the outer suburbs of our largest cities and throughout our provincial towns.

Median voters like:

* their residential land prices rising, which is how they get rich and save for their retirements, rather than via their jobs and small businesses;

* their mortgage rates falling, which give a double whammy benefit because that often drives up land prices too; and,

* plenty of cheap petrol and diesel to drive themselves and their families to schools, shops, playgrounds and beaches, preferably in a double cab ute with a jetski in the back.

This cohort:

* thinks benefit increases and easier sanctions on beneficiaries are an undeserved reward for those who aren’t ‘hard-working kiwis’ like them and it’s not fair their tax money goes to people who don’t work and haven’t saved hard enough to buy their own homes;

* reflexively distrusts suggestions of tangata whenua regaining control or even partial ownership of Government or other assets, let alone having a say over access to beaches, parks and fishing spots;

* thinks the Government and the unseen bureaucrats in Wellington are wasteful, overpaid and smug parasites who feed off the real creators of wealth in the suburbs and provincial towns, especially outside of the Auckland and Wellington CBDs, and inside the South Island; and,

* just want the Government to stop telling them how fast to drive, where to drive, what to drive, where to live, how to live, whether and where to be locked down, and what type of barbecue they should have, because all they want to do is get on with their lives.

Median voters often loathe:

* cyclists using up perfectly good lanes that cars, utes and trucks need;

* ‘tenants from hell’ who have to be screened out, cleaned up after and insured for;

* policy advisers, parking ticket inspectors and ‘losers’ who have to use public transport instead of their own cars, in which plenty of time can be spent listening to Mike Hosking.

Appealing to Ford Ranger Man

In other countries, these target-rich cohorts of swinging voters are given labels such as ‘Mondeo Man’, ‘White Van Man,’ ‘Soccer Moms’ and ‘Little Aussie Battlers.’ Here, the easiest shorthand is ‘Ford Ranger Man’.

You get the picture. This is a broad-brush picture of the group that both main parties appeal to or are afraid of in equal measure.

* It’s why the Labour Government has repeatedly refused to carry out all the recommendations of its own Welfare Experts Advisory Group (WEAG) to much-more-significantly increase benefits, remove sanctions and widen accessibility to Working For Families, as well as reforming WFF to make it much more widely available to beneficiary families and updating the Accommodation Supplement to reflect rents now, rather than from five years ago, when they were last adjusted after an 11-year freeze.

* It’s the reason why Labour, fearing a loss to Don Brash’s National Party in the 2005 election, pulled interest-free student loans out of the hat just weeks before the election and introduced Foreshore and Seabed legislation to dampen fears beaches would become off limits;

* It’s the reason why National doubled grants for first home buyers before the 2014 election to dampen concerns about the effects of the Reserve Bank’s (then) new Loan to Value Ratio restrictions, which reduced the amounts first home buyers could borrow;

* It’s the reason why National has never repealed Working For Families, interest-free student loans and has protested only weakly against fuel tax cuts and last year’s one-off ‘cost of living’ payments.

* It’s the reason why both parties have shied away from (and are again) massively increasing public investment and subsidies for public transport, largely because that spending comes from the taxes paid by ‘Ford Ranger Man’ on fuel and initially designed to fund road maintenance, rather than busways and rail tunnels;

* It’s the reason why National’s ‘Ute Tax’ attack on the clean car fuel rebate was so effective, along with Groundswell’s protests last year against the ‘ute tax’ and co-governance; and,

* It’s the reason why both parties have shied away from taxing capital gains on residential land and instead focused tax reform on gathering more from consumption taxes (which hurt the poor proportionally more than the rich) and PAYE taxes, which are also paid mostly by those at the bottom-to-middle ends of the income spectrum, especially after income from capital gains on land and house sales are taken into account.

Pulling up the ladder and kicking down

So what we repeatedly see, especially when under pressure, is National and Labour Governments that default to giving tax cuts and other benefits to middle income earners, and/or keeping them after the other side does them, and which ‘kick down’ at those on the lowest incomes, either directly through action, or by inaction on benefit levels, sanctions and tax credit structures once in power.

That is the context in which to view yesterday’s announcements about another $718 million in spending on fuel tax cuts, increasing the total lost revenue since March to over $2 billion.

Here’s Infometrics Economist Brad Olsen giving the Government both barrels.

“It’s extremely dumb economic policy from the new PM. Extending the fuel tax subsidy gives three times as much help to the top income decile, who don’t need it, compared to the bottom income decile, who need the help the most.” Infometrics CEO Brad Olsen via Twitter.

Here’s the chart to prove it from Brad.

Fuel tax cut distribution favours highest earners

Estimated monthly fuel cost savings per household, by income decile

A very wobbly rail commitment

New PM Chris Hipkins has already previewed that some of the Government’s projects and programmes would be dropped or delay to focus on the ‘here and now’ of ‘bread and butter’ cost of living issues. It appears the Auckland CBD to Airport rail line, which was on the verge of a green light, is in the firing line, as Glenn McConnell reported late yesterday for Stuff.

“We are undertaking a stocktake about how we move things forward. We will be able to confirm the direction in a couple of weeks.” Transport and Auckland Minister Michael Wood

He said he did want to focus on fixing Auckland congestion and said public transport, even if it wasn’t light rail, would be a priority.

“The scale of Auckland in terms of population and economic activity means that if we do well in Auckland, the whole country will be better off. For example, we currently lose about $2 billion worth of economic activity every year because of the congestion in Auckland.”

Asked if he was still committed to Auckland Light Rail, Wood said the Government was “in general, committed to high quality public transport”.

Reading between the (rail) lines, this looks like another delay is coming to focus on debt reduction, taking pressure off inflation and dragging mortgage rates down.

Ironically, they’re already falling. ANZ cut its 18 month to five year mortgage rates overnight by 29-55 basis points, with its main ‘special’ being its 18-month rate at 6.59%, down from 6.84%. ANZ’s move follows cuts to longer term rates by ASB and Kiwibank last week. Here’s the Stuff article reporting on the cuts. It is currently the most popular story on Stuff.

It is music to the well-tuned ears of Ford Ranger Man, through the Android Auto or Apple Carplay.

Charts of the day

Aotearoa’s GST burden - These IMF charts from its review released overnight of Australia’s economy and tax systems shows how NZ has the most comprehensive GST in the world, which collectives the highest share of GST in the world. Australia’s is much lower, in large part because it does not collect GST on food. The IMF would like Australia to be more comprehensive.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Aotearoa’s Government effectively decided without debate in late 2021 when it created the $4.5 billion Climate Emergency Response Fund that it would be fiscally neutral, which means it does not increase the Government’s debt and does not ‘pay forward’ investment by today’s taxpayers to help future taxpayers deal with or reduce the pain of climate change.

The fund essentially recycles revenues from the Emissions Trading Scheme (typically from higher petrol and diesel costs) into operational and capital spending on climate measures. The other flagship climate policy introduced by the Government, the Clean Car Rebate, does the same. Revenues from levies on high emissions vehicles are meant to be recycled into rebates or discounts on low emissions or no emissions vehicles so there’s no deficit that taxpayers at large would have to pay for.

But these fiscally neutral policies actually extend an intergenerational wealth crime of at least the last two decades, whereby today’s taxpayers and the politicians wanting their votes skimp on investment and policies to reduce climate emissions, knowing that the costs will land on the unborn and those too young to vote now. A fairer way to respond to climate change now would be use the most conventional tool for spreading costs (and benefits) more fairly over multiple generations: to consume today’s assets or borrow to invest in other assets or spending. The slightly higher interest costs for taxpayers effectively avoid lumping all the costs on today’s taxpayers and smear them out over the long run.

The Government’s decisions so far to only have fiscally neutral climate policies and to prioritise debt reduction have shown where its real priorities, and those of the median voters lie: low debt and low mortgage rates to keep asset values high.

Is this the rainy day we’re saving for? Or is it this century?

The phrase ‘we need to save for a rainy day’ is intuitively easy to understand for anyone listening to a Labour or National politician or Treasury official arguing for Government spending and investment restraint because the ‘rainy day fund’ will be needed for some vaguely realistic, but far-enough-off-in-the-future risk to justify not spending now.

The implication is that rainy days are unusual and that the nation is better off saving for an unspecified but large risk, than spending or investing now on either consuming now or building other more ‘normal’ infrastructure. That’s how the Government has operated for the last 30 years: spending rightly and heavily in emergencies such as the GFC, Christchurch earthquakes and covid pandemics, but defaulting back to ‘prepare for future rainy days’ mode when the crisis has passed by prioritising deficit reduction, strangling investment spending and reducing the Government’s net debt to GDP.

That’s why this chart below is the second chart in Treasury’s last fiscal and economic update in December. It is our political economy’s north star. In the minds of Treasury officials, finance ministers and therefore Cabinets, any decision involving spending, taxation, borrowing or investment is always eventually focused on getting that net debt line bending down out in to the future, and preferably well below the ‘ceiling’ specified by Treasury. For most of the last 20 years the ceiling was gross debt of 20% of GDP. Then-Finance Minister Steven Joyce tried to lower that to 10-15% of GDP in 2017. It was tweaked to net debt of 30% of GDP last year, which is also

The Government’s guiding force (for both National and Labour) for 30 years has been focusing on getting net debt down again as soon as a crisis has passed. It’s why then Finance Minister Bill English crunched down infrastructure spending from 2012 to 2017 because he (and Treasury) believed the nation’s finances needed to have more ‘headroom’ to deal with the next shock once the quakes were over. It’s why now-Finance Minister Grant Robertson has argued he needs to take a ‘balanced approach’ to increasing spending on social services and infrastructure, releative to debt-to-GDP reduction. Now the covid crisis is over, the focus is on debt reduction ahead of the next ‘rainy day’.

But what if the rainy day is today and actually just a series of days off into the indefinite future. Does ‘saving for a rainy day’ make sense when the rainy day is now, always and forever?

Short term pain always trumps long term gain and pain

Humans are not very good at assessing the benefits and costs of decisions that have effects and costs over a very long time period. We tend to hate losing things now much, much more than the same gain some time off in the future. Studies show the pain of losing something now is twice as large in perceived terms as the actual same amount of gain in the future. It’s called ‘loss aversion’ and it’s a key problem in the political economy.

We saw that writ large today when we had the apparently perverse combination of a Government choosing to increase subsidies for burning petrol and diesel to generate more climate emissions on the very same day our biggest city experienced its third extreme weather event in four days, which is clearly caused by climate change.

The cognitive dissonance fair clanged out across the political economy.

The short term matters more than the long term for Hipkins

Lynn and I went to the news conference this afternoon where Chris Hipkins joined Transport and Auckland Minister Michael Wood and Finance and former Infrastructure Minister Grant Robertson to announce the extension of the fuel tax cuts.

They made the announcement in central Auckland after visiting a relief centre in Mangere catering for people flooded out of their homes by the most expensive climate change disaster in our history. Hipkins was repeatedly challenged at a news conference to justify the extension of subsidies to create more climate emissions by burning petrol and diesel when the effects of climate change had just proved so disastrous.

“The Government has an extensive climate change programme underway. We’re absolutely focused on reducing emissions. The public transport (fare) reductions, for example, that we’ve put in place today, are a positive step in terms of getting more people into public transport.

“And we’ve got extensive work going on around the electrification of the vehicle fleet. We’ve got a lot of work happening to reduce our emissions overall as a country in the electricity generation space,” he said.

“But we also have to acknowledge that right here and right now, that increase in fuel costs is putting a significant amount of pressure on families who have no choice but to continue to fill up the car.” Chris Hipkins.

Hipkins repeatedly went back to his initial comments as PM that he wanted to focus the Government on ‘bread and butter’ issues.

Challenged directly if he was prioritising ‘bread and butter’ issues over climate change action, he said:

“No, absolutely not. The work on climate change continues. We still have an extensive Emissions Reduction Program. In reality, the cost of a tank of gas going up by 25 cents a litre, if that was to happen straightaway, wouldn't reduce the amount of fuel being consumed by households.

“They still have to find that money from somewhere at a time when they often can't find that extra funding. So this is easing some of the financial pressure, but our work to come to reduce emissions will continue.” Hipkins.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: The cleanup and the post-mortem have begun, even though the rain just keeps falling in Auckland after Aotearoa’s most expensive ever climate event.

The most rain ever to fall in a day:

* swamped our biggest city, killing four people, making dozens of homes uninhabitable, forcing hundreds to people into emergency shelters and causing (at least) hundreds of millions of dollars damage;

* exposing Auckland Mayor Wayne Brown’s failures as a communicator and the unpreparedness of Auckland’s infrastructure and emergency response systems to such intense and more frequent events; and,

* landing a crisis in Chris Hipkins’ lap after just 10 days as PM and before he has even named his Cabinet.

Brown said on Saturday it was too early to say human-induced climate change was responsible.

But the event should challenge our political economy’s bias in favour of the current car-and-tarmac dominated transport and suburban complex.

Remember, Friday-night’s deluge happened after a year in which:

* The Huntly power station and coal boilers at dairy factories, hospitals, factories and schools across the motu burned 1.25 million tonnes of coal to generate electricity and heat, up from the 1.22 million tonnes burned in 2017, the year in which Jacinda Ardern campaigned for and won power on the grounds she saw climate change as her generation’s nuclear free moment;

* The Ford Ranger was the top-selling new vehicle, with seven other double-cab utes and SUVs filling eight of the top-10 slots for new vehicle sales, and only one electric car and one small passenger car being in the rest of the top 10, which is unchanged from the Ranger being the top-selling vehicle in 2016, and seven other double-cab utes and SUVs dominating the top 10;

* The Labour Government softened plans to price climate emissions from farms and rejected Climate Commission advice it should tighten Emissions Trading Scheme rules in a way that would increase fuel costs;

* The Government spent over $1 billion to subsidise petrol and diesel costs;

* Just 7% of the Government’s 16,000 vehicle fleet were electric-powered in mid-2022 , five years after the new Government pledged to have an emission-free fleet by 2025; and,

* new Auckland and Christchurch Mayors Wayne Brown and Phil Mauger campaigned successfully to slow or cancel the building of cycle paths and want their transport officials to stop talking about moving away from cars;

* Treasury and Finance Minister Grant Robertson decided climate spending would be ‘fiscally neutral’, which means the Government won’t use its balance sheet to borrow and invest in long-term climate investments;

* The Government’s Climate Emergency Response Fund had gathered $3.8 billion in funds from the ETS, but spent just $510 million by the end of the year, meaning climate tax revenues are effectively being used to drive Government debt lower and take pressure off inflation in the short run, which Treasury and Robertson have prioritised over climate and other spending; and,

* National’s transport spokesman and likely-Transport-Minister-by-November Simeon Brown has repeatedly spoken out against mode shift and significant new public transport projects, describing them as part of a ‘war on cars.’

The end result of the soft-pedalling and the back-pedalling on mode shift by politicians, officials and voters was the statement from Auckland Transport last week that people should drive to Mt Smart Stadium for Friday night’s concert by Elton John because of a shortage of buses and the cancellation of train services for maintenance. Thousands were stranded, including in a few inundated buses, when the concert was cancelled at the last minute.

The climate is now changing faster than our political economy’s ability to adapt our views and policies.

The Chart Pack

A sunnier view - ANZ reported its January survey of business confidence found expectations about the wider economy and businesses’ own activity improved from a record low for wider business confidence in December.

On the turn - But the survey’s measures of business’ expectations for prices and wages have turned and are in line with the Reserve Bank (Te Pūtea Matua)’s expectations for inflation to fall back to 3% by early next year.

Chart of the day

Off the charts - This Marc Daalder chart of 60 years of Auckland’s daily rainfall data tells the story.

The Data points

A month’s rain in an hour - Auckland Airport’s 249mm in 24 hours beat the previous record of 161.8mm on February 16, 1985 by 54%. It has been described as a 1 in 250 year event.

US$75 billion - America’s second largest oil giant, Chevron, announced plans for capital returns to shareholders of US$75 billion through share buy-backs in coming years, after it reported a record high US$35.5 billion net profit for the 2022 calendar year. It invested US$12.3 billion in exploration in 2022, up from US$8.3 billion the previous year, to increase its reserves by 1.1 billion barrels of oil equivalents, or 97% of its net production in 2022.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Chris Hipkins signalled in his first week as PM he was open to loosening migration settings and would ‘rein in’ unnecessary Government spending to focus on ‘bread and butter’ cost-of-living issues once he picks his full Cabinet next week.

Also in our political economy, the global economy and geo-politics this week:

* December quarter inflation was softer than the Reserve Bank (Te Pūtea Matua) expected so some economists and most traders dialled down their expectations for the bank’s next rate hike on February 22 to just 50 basis points from 75 basis points;

* Signs of a soft landing with slower inflation emerged in the European and US economies, leading traders to lower wholesale interest rates in the hope the US Federal Reserve and the European Central Bank ease back on their inflation-fighting rate hikes;

* Germany agreed to release its own and other European nations’ Leopard II tanks for Ukrainians to fight Russian troops with, as long as America sent some of its own Abrams tanks;

* The scientists running the Doomsday clock moved its hands 10 seconds down to be 90 seconds from the ‘midnight’ of a global nuclear, climate and/or pandemic catastrophe, which was the closest to the end time since it was created in 1947; and,

* MetService reported this morning Auckland had its wettest day ever yesterday, with Auckland Airport flooding and being closed until midday today after 249mm fell in a single day, which was 54% more than fell in the previous wettest day of 161.8mm on Feb 16, 1985. More rain fell on the Airport in an hour than would normally fall in a month. January will be Auckland’s wettest month ever after Aotearoa recorded its hottest year ever. Mayor Wayne Brown eventually declared an emergency. We hope all our subscribers are safe and well.

In the podcast above of our weekly ‘hoon’ webinar for paying subscribers last night at 5pm, co-hosts Bernard Hickey and Peter Bale talk to special guests Foreign Affairs Professor Robert Patman from the University of Otago, ANZ economist Finn Robinson and University of Auckland Associate Professor Susan St John about:

* Chris Hipkins’ first week as PM;

* Grant Robertson’s decision to go list-only;

* Germany’s decision to release its Leopard II tanks for Ukraine to use;

* Softer-than-forecast domestic inflation data and what it means for the Official Cash Rate decision due on Feb 22;

* the likely slowdown in the US Federal Reserve’s rate hike this coming Thursday;

* the Government’s long-stalled Working For Families review; and,

* how the various welfare payment settings punish those with young families for earning extra money much more than pensioners are punished for earning more.

The Chart Pack of the Week

Lower - Global shipping container costs fell to pre-pandemic levels. Visual Capitalist

Slower - Quarterly NZ non-tradable inflation fell to 1.5% in the December quarter from 2% in the September quarter. Stats NZ

Softer - US GDP growth slowed to an annual rate of 2.9% in the December quarter from 3.2% in the September quarter, which was better than expected. US Bureau of Economic Analysis data.

Better - Business pricing intentions as measured in ANZ’s monthly business confidence survey bounced in January, but are off their highs.

Data Points of the Week

US$25.461 trillion - US GDP in nominal terms in 2022, up 21% from 2020 and up 8.2% from 2021. Real US GDP rose just 1.0% in 2022 from 2021. US BEA

29.3% - The rise in New Zealand’s domestic air travel prices in the December quarter from the same quarter a year ago. International air travel prices rose 11.6% in the quarter from a year ago. Stats NZ.

Some wild things

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: New PM Chris Hipkins looks set to loosen migration settings to buy the Government a surge of cheap economic growth that keeps interest rates and inflation low and tries to restart house price growth, along with winning Labour re-election.

Median voters love this kind of growth, as do businesses and Treasury. National and ACT really love it and we face a type of ‘race to the bottom’ competition in the next nine months to see who can offer the loosest migration settings, the lowest inflation and the lowest interest rates — all to fire up house prices again.

But is it good in the long-run for everyone born here who cannot hope to get help with a home deposit from family, or who can’t marry into a home-owning family? Or does it just enable the re-firing up of the ‘churn’ economy where the main game is keeping interest rates and infrastructure investment low to take advantage of leveraged tax-free gains on land prices?

For 20 years, both main parties have used this tactic of accidentally-on-purpose pulling the cheap migration lever to buy fast growth without the necessary infrastructure investment. In the end, it simply increases the ‘churn’ rate where young New Zealanders have to leave for Australia to be able to afford their own homes, and are replaced by temporary workers who see life here as preferable to life in China, India, the Philippines or South Africa.

At what point does the ‘churn’ rate become unacceptable to the median voters who decide election results? We’re not there yet, and won’t be until older home owners in the suburbs and provinces get sick of having to help their kids with deposits and/or have to watch their grandkids grow up in Australia via Whatsapp.

Australia’s imminent opening up of a fast pathway to ‘first-class’ Australian residency for New Zealand residents (including the recent arrivals) could be that moment of truth. It would be a moment when the ‘escape valve’ for the pressures in our political economy of residents emigrating starts blowing so loud that everyone hears it whistling. Right now, it can’t be heard over the immediate noise of calls from median voters for lower inflation, lower mortgage rates and higher house prices.

Paying subscribers can see more detail and analysis on this below the paywall fold and hear more in my daily podcast above. Also FYI to paying subscribers, I’ll be on deck for the weekly Ask Me Anything session at midday today, and Peter Bale and I will co-host the weekly ‘Hoon’ webinar at 5pm today for an hour. The link to get in is with my sign-off at the end.

Hipkins eyes more migration to fire up ‘churn’ economy

New PM Chris Hipkins was open in his first meeting yesterday to calls from business leaders for an urgent opening of the low-wage migration tap, while he was also cautious about committing to another significant hike in the minimum wage.

Hipkins will decide within weeks how his new Cabinet will fire up economic growth without high inflation and try to win a third term on October 14. He looks set to opt for the cheapest and fastest way to win back the confidence of small-to-medium business owners, which is to enable them to grow by adding cheap labour that resumes downward pressure on wages.

It is the simplest way in the short run to reassure median voters the Government is focused on what they and Treasury officials want:

* a faster return to Budget surplus through extra GST and income tax receipts from population and employment growth;

* the flow-on short-term benefits of lower Government debt to take pressure off interest rates and mortgage rates in particular; and,

* the resumption of a strangling of infrastructure spending to ensure the return of low mortgage rates and population growth combines with residential land shortages to generate another surge in untaxed and leveraged capital gains on land values.

We’ll find out over the next couple of weeks if the new PM, who said yesterday he agreed with businesses that the ‘rising tide of economic growth lifts all boats,’ opts for the usual bi-partisan approach of fueling nominal GDP and land price growth through high population growth that is:

* not debated or agreed to by the public;

* not planned for or invested in by councils and infrastructure operators; and,

* does not have the permission or endorsement by future voters, who will have to bear the housing, infrastructure, climate and lost-productivity-growth costs of this endemically short-term and median-voter-focused approach.

The key moments and decisions to watch over the coming weeks are:

* Hipkins’ naming of his Cabinet early next week (probably Tuesday), and who he appoints as Immigration and Workplace Relations Minister (currently the 15th ranked Michael Wood);

* what announcements or changes are made to immigration settings; and,

* what projects and spending are ‘reined in’ to focus on the ‘bread and butter’ issues for median voters, which are getting mortgage rates and inflation back down while arresting the decline house prices. That ‘reining-in’ of non-essential spending could include delays in housing and public transport investment.

The churn economy

Choosing the low-wage, high nominal GDP growth, high population growth, low interest rate and low investment option is consistent with the approach of Governments of both the centre-left and centre-right in the last 20 years. It’s what median voters want, but the pressure on the disposable incomes and wellbeing measures of those in the renting class of families is showing through the ‘escape valves’ of surging health, housing subsidy and justice costs for the Government, along with an escalation in emigration by those locked out of home ownership. It’s sustainable as long as the ‘churn’ rate of cheap migrants replacing exiting residents can be held high and those residents left here are comfortable commuting to and from Australia for family events and crises.

A loosening of migration settings and a tightening of investment spending is the Government’s likely tactic for the next six months, largely because it fears median voters will prefer the even louder calls for a bigger use of the churn lever by the Opposition. But it’s only a tactic, albeit unconsciously adopted and agreed to by most voters and bureaucracies alike.

It’s definitely not a strategy that is sustainable in the long-run, even for those median voters who own their own homes and benefit through the spectacular growth in tax-free capital gains on land values. They may be sitting on assets valued in the millions, but they face decades to come of having to withdraw or risk that equity by helping their kids with deposits for homes, or having to watch their grandkids grow up by Whatsapp/Facebook/Facetime/Zoom in Australia.

A moment of truth looms

In my view, a key challenge to this churn strategy will come on April 24 this year when Australia’s Labor PM Anthony Albanese is on track to promise full and fast citizenship rights to the 600,000-plus New Zealand residents already in Australia, and another million or so New Zealanders with valuable skills wanting to take advantage of cheaper housing costs relative to their disposable incomes and the chance of building a life for their families with their own homes, without the fear of being a second-class citizen.

At that moment, the escape valve will be able to open right up on Aotearoa’s churn economy. It will be a moment of truth for those employers desperate to keep and win staff, and for those median voters and their politician servants who had hoped the churn could go on.

How could it be different?

One thing I’m constantly surprised at is how little we hear from employers, chambers of commerce and business lobbyists about the need to massively increase housing supply and removing the tax advantages of housing investment to ensure housing costs are attractive enough to retain and attract young staff.

I spoke about that this week in an interview with WellingtonNZ CEO John Allen for my weekly ‘When The Facts Change’ podcast via The Spinoff.

Business leaders are constantly calling for more cheap migrants, more tourists, more conferences and more opportunities to grow volume with their existing capital and technology bases, rather than calling on the Government to increase its necessarily-tax-funded investment in underlying public infrastructure that would enable much more climate-friendly housing and transport (medium density housing and more buses, busways, cycle-paths and walking corridors.)

In my view, a much more interesting set of calls from business leaders would be for:

* long term public investments in poverty reduction that increase the productivity of workers now and into the future, and that lower the growth of future health and justice costs for all taxpayers;

* removing the existing tax incentives for investments in leveraged gains in residential land values, rather than investing in pension funds, shares and new businesses (which is perfectly convention policy everywhere else in the developed world); and,

* for a public debate and bipartisan plan for the infrastructure growth needed to cope with high and agreed population growth over the next 70 years, which is an age when Aotearoa will be a climate change refuge (whether we like it or not) that at least 100m mostly-rich residents of India, China and southeast Asia want to live in.

To do that, many in business would have to acknowledge that the current ‘churn’ strategy can’t keep working, and that they will have to change their business models from having jobs and businesses that aren’t focused on productivity growth or high profitability, but are actually focused on regular, bankable cash incomes to support leveraged residential land ownership. It is a housing market with bits tacked on that only keeps going because we keep pumping it full of leverage and people.

So what actually happened yesterday?

I attended the first public meeting new PM Chris Hipkins had in Auckland, which was with a tightly-packed group of small and large business leaders in the Auckland Business Chamber (formerly known as the Chamber of Commerce).

It was carefully choreographed and designed to send a signal that Hipkins went first to business leaders and was open to their suggestions.

Hipkins and Auckland Business Chamber CEO Simon Bridges reported after the meeting that it had focused on calls for looser migration settings for lower-wage workers.

“He got it, and got it straight between the eyes. There's a real sense that this isn't just about skilled work. It's not just about rocket scientists or surgeons or anything like that. It's also workers at the bottom of the rung.

“If we're not competitive against in Australia or Canada or something, we're not really in the game. He got that message, and he was listening.” Simon Bridges in the standup with reporters after the meeting.

‘The rising tide lifts all boats.’ Really?

Hipkins made clear he wanted to work closely with businesses, and said something I haven’t heard from a centre-left politician for a long time — that the rising tide of economic growth lifts all boats. That’s simply not true, but most in business still believe that. Hipkins agreeing to that was a surprise to me.

“I think the relationship between business and government is a really important one. It is integral to the economy.

We have shared interests here and making sure that we create a good well paid jobs for New Zealanders because that's how Kiwi families are going to be getting ahead. We all want to see the economy continue to grow.

“The rising tide will lift all boats. And that's that's actually the spirit in the business community as well. So I think we've got a real interest in working together.” Chris Hipkins speaking to reporters after the meeting.

He confirmed the Government was considering further loosening migration settings. There have been at least three rounds of loosening since mid-2022 under new Immigration and Workplace Relations Minister Michael Wood.

“We have always kept immigration on the table as an issue that we'll continue to reconsider as the pressure that we face as a country changes.

“We've had significant population growth in recent years, and that has created a set of pressures. We've had to catch up in terms of extra housing in terms of extra infrastructure and so on. And so that has been one of the factors that we weighed when we've made decisions around immigration.

“We also acknowledged that there's a significant skilled labor shortage. There's a significant labor shortage that we're dealing with across the country.” Hipkins.

Earlier last year the Government tried to restrict population growth by restricting migration growth in the hope of squaring the population growth-infrastructure deficit circle. That lasted about three months before the pressure from employers forced the various loosenings, including

* the reopening of the skilled migrant and parental residency categories;

* an historic increase in the Registered Seasonal Employer scheme quota; and,

* increases in backpacker and student work rights.

Will the minimum wage increases be slowed?

Another big decision in front of Cabinet in the next couple of weeks will be what the minimum wage will be increased to from April 1. Since 2017, the current Government has lifted the minimum wage by 39% or an average of 6.5% per year to $21.20/hour. Employers and the Opposition have called for slower increases, arguing that would allow more people to be employed and avoid the wage increases being passed on as price increases in a new ‘wage-price spiral’. Recent research globally has shown such minimum wage increases have barely slowed jobs growth and have not been as big a factor in inflation as profit margin expansion.

Hipkins was cagey about whether the next increase in the minimum wage would be as fast as the ones seen since Labour’s election in 2017. Unions have called for an increase of 11.5% to the current living wage of $23.65/hour.

“We've got to acknowledge that our lowest paid workers, minimum wage workers, are really feeling the acute pressure from the rising cost of living.

“With all of these things, there's a balance to make sure that we're supporting people whose budgets are squeezed, to make sure that their incomes are rising so that they can keep up with the rising cost of living.” Hipkins.

The ‘balance’ framing has been repeatedly used by Grant Robertson to justify restricting Government spending and debt to keep interest rates low, instead of borrowing and spending extra on benefits and infrastructure. ‘Striking a balance’ that favoured employers and profits would mean a lower minimum wage increase.

Nicola Willis unhappy about big minimum wage hikes

National Finance Spokeswoman Nicola Willis jumped into the debate yesterday by saying that the higher minimum wage increases since 2016 were “the great shame.” National’s minimum wage increases between 2008 and 2017 totalled 35.6% over nine years and averaged 3.9% per year. That’s just over half the growth rate under Labour in the last two terms.

"We are very conscious that lower-income New Zealanders are being absolutely smashed by inflation.

"The great shame is that Labour increased the minimum wage so much in previous years, but what you've seen has happened is that they have not been able to increase it as much in these inflationary years because they know it will be passed on.

"Now, every year National was in government we increased the minimum wage - we think that is the right thing to do - but how much you do that by is a very careful balance.

"Because what we don't want is workers on the one hand being paid more, but on the other hand having to pay so much more in costs at the supermarket, on rent and other things that their wages just get eaten up."Nicola Willis on RNZ yesterday.

‘Careful balance’ is the code for favouring employers over workers.

Do paying subscribers want me to open this one up publicly? Please vote in this poll and/or comment below.

The Chart Pack

In the global economy, geo-politics and our political economy in the last 24 hours:

Soft landing? US economic growth slowed a bit in the December quarter to an annualised rate of 2.9% from 3.2% in the September quarter, but this was better than the consensus expectation for growth of only 2.6%. US Bureau of Economic Analysis data

Job hoarding? - In another sign the world’s largest economy might be set for a soft landing, US jobless claims fell to a nine-month low of 186,000 in the week to January 21 from 192,000, which was also better than the economists’ consensus forecast for jobless claims of 205,000. US Department of Labour data

What recession? - The Philippines reported its GDP grew at an annual rate of 7.2% in the December quarter and annual GDP rose 7.6% in 2022, which was its fastest annual growth since 1976.

The chips are down - South Korea’s economy contracted 0.4% in the December quarter, but was GDP was still up 1.4% from the same quarter a year ago. The result matched expectations and was partly driven by slow growth in China, which buys a lot of South Korea’s tech exports, including chips and screens. Bank of Korea data

The Data Points

A growing waiting list - Te Whatu Ora/Health NZ reported there were 30,000 people waiting longer than the four-month target for their planned surgery at the end of October, up from 27,500 in May. RNZ

The chicken comes first. - The Poultry Industry Association warned yesterday Aotearoa is still 400,000 laying hens short and would not have enough chickens grown into laying hens until May at the earliest. RNZ

A restructurer restructures - Global business software group, SAP, announced plans overnight for a ‘targeted restructure’ that will will sack nearly 3,000 workers, or 2.5% of its workforce.

The Milestones

A matriarch passes - A tangi for legendary Maori activist Titewhai Harawira was held yesterday at the Hoani Waititi Marae in West Auckland. Many spoke, including new PM Chris Hipkins, who passed on a tribute from Jacinda Ardern. 1News

"I first met Titewhai at Te Tii Marae as a young opposition member of Parliament... but our relationship only really took place at my first Waitangi as Prime Minister. I knew Titewhai had my hand and I knew that it would be all right." Jacinda Ardern’s tribute to Titewhai Harawira, as read by Chris Hipkins.

A grandson goes - Toyota announced last night its CEO of the last 13 years, Akio Toyoda, will step down as CEO and become Chairman. Toyoda, 66, is the grandson of the company’s founder and will hand over to Koji Sato, who has been with Toyota for 30 years. CNN

Ka kite ano

Bernard

PS. Here’s the link to today’s ‘hoon’ webinar at 5pm

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

This is a free preview of a paid episode. To hear more, visit thekaka.substack.com

TLDR: Quarterly inflation fell to its lowest level in 18 months in the December quarter and is set to fall further through this year as fuel costs and rents stabilise, and as fruit and vege prices fall with better weather. Some economists lowered their forecasts for the peak in the Official Cash Rate later this year as a result.

But will that lower inflation come soon enough for the Labour Government to dampen the ‘cost of living’ concerns now dominating the political debate before the election on October 14? I spoke to National Finance Spokesperson Nicola Willis in the podcast above about whether National’s inflation-fighting tactics would make a difference, or maybe even make inflation worse.

Elsewhere in the news overnight and this morning:

* Leopards freed - Germany agreed overnight to send 14 of its own Leopard II tanks to Ukraine and let others export their Leopards to Ukraine, but only on the condition the United States sent 30 Abrams tanks, which Russia described as an “extremely dangerous decision” which “raises the conflict to a new level of hostilities” WSJ;

* 90 seconds left - The Science and Security Board of the Bulletin of the Atomic Scientists moved the hands of its Doomsday Clock forward yesterday by 10 seconds to 90 seconds to midnight, which was the closest it had ever been to a global catastrophe and, largely, it said, “because of the mounting dangers of the war in Ukraine”;

* Net negative - A Stuff/Horizon Research poll published this morning found 13% of voters would be less likely to vote for Labour because of departure of Jacinda Ardern as PM, while 9% said they would be more likely to vote Labour. The finding of a net-negative 4% moving away from Labour came from the poll taken from January 19-21, which was after Ardern resigned, but before Chris Hipkins became the sole nominee to replace her. The poll found 58% said the change of PM would make no difference. Stuff did not focus on the 4% net-negative result.

Paying subscribers can see more detail and my analysis of the inflation results and my interview with Nicola Willis below the paywall fold and in the longer podcast above. All subscribers can hear the full interview above.

Inside the inflation data & National’s inflation-fighting plans

TLDR: Jacinda Ardern shocked almost everyone by returning from a summer break this week and resigning as Prime Minister because she said had “nothing left in the tank.”

Perhaps even more surprising, Deputy PM and Finance Minister Grant Robertson said he did not want the top job, having tried and failed twice to become Labour Leader in 2011 and 2014.

Within 48 hours, the Labour Caucus settled on Chris Hipkins as the sole candidate to be Ardern’s replacement as Prime Minister. The caucus is expected to confirm him as the new Labour Leader and next Prime Minister shortly after 1pm. He is then expected to give his first news conference in the Beehive Theatrette at 3pm and confirm expectations his deputy will be current Social Development Minister Carmel Sepuloni. I’ll be there to ask questions and welcome suggestions in the comments below.

The podcast above for all subscribers is a recording of the weekly live ‘hoon’ webinar for paying subscribers we had on Friday evening at 5pm. This week’s edition is the first for 2023. I co-hosted the webinar from a car at the Queen Elizabeth Park on the Kapiti Coast, while fellow co-host Peter Bale was north of Auckland overlooking Kawau Island. University of Otago International Relations Professor Robert Patman was in Dunedin and former Labour MP and current Community Law Centres of Aotearoa CEO Sue Moroney was in Auckland. The recorded version reproduced here is shorter than the original live version because we had some technical problems and I’ve cut out the boring bits. Many thanks to 100 or so paying subscribers on the webinar for your patience.

We spoke almost exclusively about the resignation of Jacinda Ardern and its meaning for Aotearoa, the Labour Party and future policy.

Briefly elsewhere in the news in our political economy, the global economy and geo-politics this week:

* The US Government hit its US$31.4 trillion debt ceiling and was forced to start cash preservation measures that will extend its runway to avoid a financially catastrophic default until June, with the hope the Republicans who control the House of Representatives will allow a debt ceiling increase before then;

* The Bank of Japan surprised markets by sticking with its loose monetary policy of bond buying to hold down its long-term interest rates below 0.5%, but most expect it to relent some time after a new Governor is appointed in April;

* China reported GDP growth in 2022 of less than half the 5.5% it had been targeting because of a slump in its apartment development market and repeated lockdowns until its December opening up; and,

* China also reported its population fell in 2022, which was its first fall in almost 60 years and an indicator of the beginning of a longer-term decline that may have already seen China surpassed as the world’s most populous nation.

Ka kit ano

Bernard

PS: Peter Bale now has his own substack and I’d recommend you all sign up. It’s over here Media News You Need - Curated by Peter Bale

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Apparently out of the finally blue skies of a summer break, Jacinda Ardern announced this afternoon she has decided to resign as Prime Minister, saying she just didn’t have enough energy left to keep going for a third term.

I wrote and said publicly last year there was a non-negligible but real chance she would retire just before Christmas or early this year before the resumption of Parliament and in time for a new Labour leader to prepare for the election. I saw a retirement as possible, in part because of the intense pressures of the job over her five years in charge, and in part because Ardern has, bit by bit, ruled out many new policy areas for Labour.

She also knew she had become personally and viscerally unpopular with a section of the electorate, some of whom are swinging voters able to bring in a new Government. But it’s fair to say this is a surprise and a complete shock to most. It completely throws open the prospects for this year’s election, which is now set to be on October 14. I said it was possible, but never believed it was probable. It’s still a shock.

Ardern will be replaced by a new Labour leader and Prime Minister if two-thirds of the Labour caucus agree on a new leader in a vote on Sunday, but (in theory) without her deputy Grant Robertson as a candidate. He has said he will not stand again, but I think there’s a chance the caucus will beg him to do it, given he remains the most popular and accomplished politician in the caucus.

If Robertson is resolute about not taking the job, the vaguely viable candidates to replace her include Cabinet ministers Chris Hipkins, Michael Wood, Megan Woods and Kiri Allan. In my view, only Robertson would be able to revive Labour enough to reverse National’s lead in the polls and win the election. Hipkins is most likely to win the caucus vote, in my view, given his experience and resolve under pressure.

The ultimate tragedy of Jacinda Ardern, the politician

I’ve included some of the audio from Ardern’s news conference in the podcast above, along with my analysis of what happened today, why it happened, and how it might change the outlook for the Government, and any policies. I have also included my tribute to Ardern, and tried to explain what I see as her ultimate tragedy. She promised so much in 2017, won the enthusiasm of so many, and ultimately failed to deliver.

She wasn’t transformational, but did some extraordinarily good things in two of the biggest crisis moments in Aotearoa’s modern history. Her commitment to fiscal orthodoxy and limiting the tax take to 30% of GDP, along with ruling out capital gains or wealth taxes, meant she could not achieve what she promised on housing, transport, climate change and child poverty. She ruled out so many pathways that there were few places for Labour to go with its reforming instincts. I think that is ultimately why she is leaving. I had a column written and unpublished on why should should retire now to open up pathways to reform. Some of it is repurposed here.

In the end, she deserves our utmost respect and thanks. She was instinctively extraordinary with her responses and leadership after the Christchurch attacks and the arrival of Covid.

Ultimately though, her innate conservatism, including on the issue of cannabis reform, means she will never be seen as a transformational Prime Minister. However, she was an extraordinary one who worked brutally hard for five years, sacrificed much personally and was both gracious and empathetic. In front of the camera, and behind. She certainly does not deserve the enmity of those who protested against her last year outside Parliament.

Out of not-so-clear-blue Napier sky

Ardern made the announcement shortly before the start of the Labour Caucus’ summer retreat strategy session in Napier, where it has been raining lightly. Here are the key segments from her resignation speech to a media conference in Napier.

“I am entering now my sixth year in office. And for each of those years, I have given my absolute all. I believe that leading a country is the most privileged job anyone could ever have, but also one of the more challenging. You cannot, and should not do it unless you have a full tank, plus, a bit in reserve for those unexpected challenges. 

“This summer, I had hoped to find a way to prepare for not just another year, but another term - because that is what this year requires. I have not been able to do that. 

And so today, I am announcing that I will not be seeking re-election and that my term as Prime Minister will conclude no later than the 7th of February. This has been the most fulfilling five and a half years of my life. But it has also had its challenges.” PM Jacinda Ardern

Ardern said she was not leaving because she thought she would lose the election and she was confident a new leader could lead Labour to victory in October.

“I’m not leaving because I believe we can’t win the election, but because I believe Labour can and will win it. We need a fresh set of shoulders for the challenges of both this year and the next three. 

“As to my time in the job, I hope I leave New Zealanders with a belief that you can be kind, but strong, empathetic but decisive, optimistic but focused. And that you can be your own kind of leader - one who knows when it’s time to go.” Jacinda Ardern.

Ardern highlighted the personal toll of the job over the last five years.

“I know there will be much discussion in the aftermath of this decision as to what the so called “real” reason was. I can tell you, that what I am sharing today is it.

“The only interesting angle you will find is that after going on six years of some big challenges, that I am human. Politicians are human. We give all that we can, for as long as we can, and then it’s time. 

“And for me, it’s time. 

“I know what this job takes, and I know that I no longer have enough in the tank to do it justice. It is that simple.” Ardern

She said she had no plans beyond stepping down as Mt Albert MP in April.

“All I know is that whatever I do, I will try and find ways to keep working for New Zealand and that I am looking forward to spending time with my family again - arguably, they are the ones that have sacrificed the most out of all of us. 

“And so to Neve, mum is looking forward to being there when you start school this year. And to Clarke, let’s finally get married.”

The mechanics and the details

Her office said in a statement Ardern would remain as the MP for Mt Albert through until April, which would mean there is no requirement for a by-election before the election. They can be avoided six months before a General Election.

The Labour Caucus has seven days to find a leader who holds more than two-thirds support within caucus to become the new Prime Minister. A caucus vote for a new leader will happen on Sunday, 22 January. 

If no one receives two-thirds support within caucus, the leadership contest will go to the wider Labour membership. Ardern recommended to the Party that the process, if required, should happen no later than 7 February.

The Government’s intention is that Parliament will rise on Thursday, August 31 and Parliament will be dissolved on Friday, September 8. Writ day will follow on Sunday, September 10, with nominations closing at noon on Friday September 15. Advance voting will start on Monday October 2 ahead of the election on October 14, with the last day for the returning of the writ being Thursday November 9.

Robertson appears to rule himself out

Finance Minister and Deputy Prime Minister Grant Robertson said in a statement he would not be “putting myself forward to be a candidate for the leadership of the Labour Party.”

“In 2014 when I failed to secure the leadership of the Party for the second time I indicated that I would not put myself forward again.   My position has not changed. 

“I have been a close up witness to the extraordinary work that Jacinda has done as leader and Prime Minister. The level of intensity and commitment required of Prime Minister is an order of magnitude greater than any other role.

“It is a job that you must unequivocally want to do in order to do it the justice it deserves.  I have every confidence that there are colleagues within the Caucus who are both capable of doing the role, and have the desire to take it on.  They will have my full support.” Grant Robertson in a statement.

Robertson said he was committed to standing again at the election and serving in whatever role the new leader wanted him to undertake. He said he would “not be making any further comment on the leadership until the process has concluded.”

He paid tribute to Ardern, who he has been closely aligned with for their entire careers. He stood to be Labour leader in 2011 and 2014, winning the support of the caucus on both occasions, but losing to first David Cunliffe and then David Shearer in the subsequent votes by Labour Party members at large. Robertson stood with Ardern as his proposed deputy in 2014.

“It has been the honour of my working life to have supported Jacinda as Minister of Finance and as Deputy Prime Minister.   Her intellect, judgement and empathy mark her out as one of New Zealand’s finest Leaders.  I believe that history will judge her tenure as Prime Minister as a period where New Zealand not only weathered many storms, but also made huge progress in becoming a stronger, fairer and more inclusive nation.   As a colleague, a friend and a New Zealander I am incredibly grateful for her service and commitment and wish her every joy and success in the future.” Grant Robertson

Luxon pays tribute to Ardern

Opposition Leader Christopher Luxon held a news conference this afternoon, also in Napier where the National caucus is also holding their summer retreat. He paid tribute to Ardern, but said it would not change National’s approach to the election. He said he texted her to thank her and wish her well.

“When I reflect, I think that the way she led New Zealand through the Christchurch terror attacks and the way we all felt proud of ourselves as a country and of her as our leader, and the way she has always been a good ambassador for us on the global stage, are things that will be really important in her legacy.

“It is a pretty difficult and demanding job, she has given it her all and we should thank her for her public service.

“For us, nothing changes from what we talked about this morning. The reality is New Zealanders want a government that is able to get things done and they want a government that is going to deal with the cost of living crisis, lift incomes for all, restore law and order and deliver better public health and education.” Christopher Luxon at a news conference.

So what happens now? And will it make a difference?

Everything is up in the air with no clear successor. A popular replacement with a new set of policies might have upset the trajectory of National and ACT, which at this stage appeared to be on track for victory, but there is no obvious candidate or set of policies beyond Ardern’s that are in prospect.

My current view is this cements the likelihood of a National-ACT victory on October 14, with no fundamental change in tax, Government spending or social policies, other than the reversal of Labour’s interest deductibility and bright-line measures, along with the truncation of Three Waters, the removal of the clean car rebate scheme and no follow-through on a levy on farm emissions.

From a purely political and financial view, it’s more likely to lower interest rates, increase residential land prices, increase net migration, increase nominal GDP, lower the Budget deficit, lower net debt-to-GDP, further restrict productivity growth, slow real wage growth and increase the emigration of young New Zealanders who come from renting families.

But many stranger things have happened. A week is a long time in politics. A few quiet weeks over summer turned out to be much more consequential for our political economy than we expected.

Or maybe not consequential at all.

In the long run.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe