The Kākā by Bernard Hickey

TLDR: Aotearoa’s Australian-owned banks look set to widen their profit margins as interest rates rise, adding to a new type of inflation spiral that is more evident this time around than in the 1970s: a profit-price spiral, rather than a wage-price spiral.

ANZ jumped first late yesterday to put up its mortgage rates by more than its term deposit rates in response to Tuesday’s hotter-than-expected inflation data for the September quarter. It raised its mortgage rates up by around 45 basis points, but only lifting its term deposit rates by around 30 basis points. That widens ANZ’s net interest margin, which is its major driver of its net profit.

A profit-price spiral, rather than a wage-price spiral

So why is inflation proving so persistent and high after the supply shocks of Covid and Russia’s invasion in Ukraine? One factor that is getting a lot of attention overseas, but less so here, is the portion of inflation due to companies that have increased their market power in recent years increasing their profit margins.

The most obvious rise has been in the United States, which is the world’s largest economy and therefore a major driver of inflation. It has seen a persistent rise in the profit share of the economy over the last 30 years, with a particular surge in the last two years.

Workers are effectively being punished for the sins of profit-gouging business owners.

Here’s the data and chart from the US Federal Reserve Bank of St Louis:

This growing concentration of the share of GDP going to company owners has followed more than three decades of lightly-regulated market consolidation and the growing power of network monopolies, along with the financialisation of large parts of the economy - housing in particular.

The same is true here, where profit margins have risen sharply in recent years as large parts of the economy (supermarkets, banking, domestic air travel, electricity, real estate agencies, fuel retailing, insurance and building materials) saw margins increase when the pressure went on.

Here’s the data for Aotearoa, courtesy of First Union researcher Edward Miller in this chart via Twitter.

See more on that below in Charts of the Day, which shows how bank profits as a share of GDP are rising again, having surged over the last 30 years.

This is partly due to banks interest margins tending to rise when short term interest rates are rising, as this June 2020 paper “Does Monetary Policy Influence the Profitability of Banks in New Zealand?” from the University of Waikato found:

“The study investigates the relationship between monetary policy and bank profitability in New Zealand using the generalized method of moments (GMM) estimator. Our sample comprises 19 banks from New Zealand over the period 2006–2018. Our results suggest that an increase in short-term rate leads to an increase in the profitability of banks, while an increase in long-term interest rates reduces bank profitability.” June 2020 paper “Does Monetary Policy Influence the Profitability of Banks in New Zealand?” from the University of Waikato

Labour Finance Minister seems less worried

So where is the Reserve Bank and Treasury research into the effects of rising profit margins on inflation? There has been none that I’ve seen from the latest bout of inflation. And why would higher mortgage rates from the Reserve Bank necessarily control that inflation?

Finance Minister Grant Robertson was asked on RNZ’s Morning Report yesterday if bank profits were partly driving the rise in mortgage rates. He said profits had been high, but there weren’t signs he could see they were getting worse.

"We always ask our retail banks to make sure that they understand the environment they're operating in, that their customers are operating in. They have to have a social licence to operate and I think any New Zealander would be concerned if they were drawing excessive profits beyond what they need to reasonable margin.

"Bank profits have been high in New Zealand for a long time and I think the important thing here is that there isn't any evidence that there's a particular set of behaviour right now that's trying to overly capitalize on this.

"But they do have significant profits and we would expect them to bear that in mind and bear in mind the situation of the consumers." Grant Robertson on RNZ’s Morning Report

Punishing workers for the sins of price setters. Again.

This idea of a wage-price spiral has stuck around since the 1970s, when there was much higher unionisation rates and wage increases happened in a widespread and quick way through wage arbitration centrally. Unionisation rates are now much lower and the Employment Contracts Act has made widespread and fast wage increases much harder.

It turns out, even in the 1970s the idea of a wage-price spiral was overplayed, as this IMF research from earlier this month showed (bolding mine):

Inflation in some economies is rising at the fastest pace in four decades, while tight labor markets have boosted pay gains. That has raised concerns that these conditions could become self-reinforcing and lead to a wage-price spiral—a prolonged loop in which inflation leads to higher wage growth, fueling even higher inflation.

An examination of recent wage dynamics and the prospect of such a wage-price spiral are the subjects of an analytical chapter of our latest  World Economic Outlook, which finds that, on average, the risks of a spiral are limited—so far. Three factors are working together to contain the risks: the underlying shocks to inflation are coming from outside the labor market, falling real wages are helping to reduce price pressures, and central banks are aggressively tightening monetary policy.

To better understand these dynamics, we identified 22 situations in advanced economies over the past 50 years with conditions similar to 2021 when price inflation was rising, wage growth was positive, but real wages and the unemployment rate were flat or falling. These episodes didn’t lead to wage-price spirals on average. Instead, inflation came down in subsequent quarters and nominal wages gradually rose, helping real wages recover. IMF research

Here’s an IMF video version of this research above for those who want more.

My view: The Reserve Bank is putting up interest rates with the deliberate aim of increasing unemployment to take pressure off wage inflation, which the bank and others have argued needs to be controlled to reduce the risk of a 1970s-style wage-price spiral.

This inflation was sparked by supply shocks that restrained capacity and allowed companies with enhanced market power to increase their margins when the system was under pressure. We have yet to see any Reserve Bank or Treasury or Government acknowledgement of this cause of inflation, or debate about whether conventional monetary policy would change this.

Workers are effectively being punished for the sins of profit-gouging business owners.

Paying subscribers were able to see more detail and analysis below the paywall fold and in the podcast above earlier this week.

Elsewhere in the news to me:

* A key US interest rate jumped to a 15-year high after a central banker warned of tougher monetary policy if inflation didn’t recede;

* Joe Biden will release more oil from the US strategic reserve to try to get ‘gas’ prices falling below US$4/gallon ahead of mid-term Congressional elections on Nov 8;

* A possible leadership rival to Liz Truss resigned overnight and took a swipe at the British PM, who is expected to go within weeks;

* The FT-$$$ reported this morning four former RNZAF pilots had worked at a South African flight training school to train Chinese military pilots; and,

* The AFR-$$$ reported this morning private equity firm BGH Capital had registered company names ahead an imminent takeover bid of around NZ$1.5b for Pushpay.

In geo-politics, the global economy, business and markets

Highest since 2007 - The US 10 year Treasury yield, which is the base for longer-term global interest rates, rose 13 basis points to a 15-year high of 4.12% overnight after Minneapolis Federal Reserve President Neel Kashkari said the Fed Funds rate could be lifted over 4.75% if inflation didn’t cooperate.

"I've said publicly that I could easily see us getting into the mid-4%s early next year. But if we don't see progress in underlying inflation or core inflation, I don't see why I would advocate stopping at 4.5%, or 4.75% or something like that. We need to see actual progress in core inflation and services inflation and we are not seeing it yet." Neel Kashkari at a panel at the Women Corporate Directors, Minnesota Chapter, in Minneapolis. Reuters

Mid terms near - President Joe Biden pledged overnight to release another 15m barrels of oil from the US Strategic Oil Reserve in December to try to get petrol prices down below US$4/gallon ahead of mid-term Congressional elections due in less than three weeks (Tuesday, November 8). US officials also said they would look to buy oil to refill the reserve once prices got down to US$67-72 a barrel, effectively setting a type of floor and ceiling for US oil prices, which are currently around US$82/barrel. Energywire

Double-digit inflation - Britain’s annual inflation rate rose back to 10.1% in September from 9.9% in August, the UK Office of National Statistics reportedovernight, which was more than the 10.0% expected by economists and close to the 10.9% reported by Germany.

‘More of a war footing’ - Vladimir Putin declared martial law in the four Ukrainian provinces Russia has annexed and said in a televised address the “entire system of state administration” must be geared up to back Russia’s war in Ukraine. His comments came as the Russian-appointed administration in the biggest city it has captured in southern Ukraine, Kherson, ordered the evacuation of up to 60,000 ahead of an expected assault by Ukrainian forces. Reuters

New UK turmoil - British Home Secretary Suella Braverman, seen as a potential leadership challenger, resigned after 43 days in the job, saying she was taking responsibility for mistakenly sending an draft official document from a personal email account, but also indirectly criticising PM Liz Truss for not taking responsibility for her mistakes.

"The business of government relies upon people accepting responsibility for their mistakes. Pretending we haven't made mistakes, carrying on as if can't see that we have made them, and hoping that things will magically come right is not serious politics.

"Not only have we broken key pledges that were promised to our voters, but I have had serious concerns about this Government's commitment to honouring manifesto commitments, such as reducing overall migration numbers and stopping illegal migration, particularly the dangerous small boats crossings." Suella Braverman’sresignation letter.

In Aotearoa’s political economy

Not-so-climate friendly - Auckland Mayor Wayne Brown sent a letter to Auckland Transport last night suggesting it stops removing car parks for cycling lanes.

“You appear to have been focused on changing how Aucklanders live, using transport policy and services as a tool. Instead, AT must seek to deeply understand how Aucklanders actually live now, how they want to live in the future, and deliver transport services that support those aspirations. Aucklanders do not always have the choice of using an e-bike, a bus or even a train but rely on the roading and carparking networks to make their life functional.” Wayne Brown in a letter to Auckland Transport.

Low target strategy - National Leader Christopher Luxon said National would not release a costed Budget plan until a month before the election, Claire Trevett reported last night on NZ Herald

Luxon told the NZ Herald that while elements of its tax plan would be unveiled earlier in election year, National would not release its final fully-costed plan until after the pre-election fiscal update – Treasury's release of the state of the books about a month before an election.

He said National would unwind the list of Labour taxes that it has promised to repeal in its first term in government – which includes the top tax threshold of 39 cents for those on salaries of more than $180,000 - "but of course we want to open up the books and make sure we can phase it and see what we are dealing with."

The plan includes indexing tax thresholds to inflation and scrapping various taxes and levies Labour has introduced, but the full details of the extent and timing of it are a work in progress.

He rejected Labour's claim he would have to cut crucial services to fund it, saying Labour's current spending levels were higher than at any other time – "there's a lot of waste in it. We've never seen this level of cash being sprayed around like it is." Claire Trevett’s report last night on NZ Herald

Project ‘Pegasus’ - Australian private equity group BGH Capital moved closer to launching a NZ$1.5b takeover bid for Pushpay by registering company names, the Australian Financial Review’s Street Talk column reported. AFR-$$$

In the news in Aotearoa yesterday

Social Investment version 2.0 - National Finance Spokesperson Nicola Willis said in a speech at Victoria University’s School of Government this morning that Bill English’s social investment approach would be the “organising framework for the next National Government’s approach to the funding and delivery of social services.” Willis announced National would create a new Social Investment Fund to invest in programmes “that promise to change the lives of New Zealanders with the greatest needs.” It would start small and scale up over time.

“I can imagine, for example, a National Government might deploy the Social Investment Fund to tackle the task of delivering secure, sustainable housing for people currently living for extended periods in emergency housing.” Nicola Willis in her speech.

Coming up today

PM Jacinda Ardern is due to meet Wayne Brown in Auckland, although she won’t be holding a joint news conference, as his office had hoped.

What did I miss? What should I look at today?Scoops of the day

Quotes of the day

Dead PM walking

“How can she be held to account when she’s not in charge? Why would anyone else trust the Tories with the economy ever again?” Labour leader Keir Starmer attacking PM Liz Truss in Parliament overnight.

But not going down quietly

“I’m a fighter, not a quitter.” Liz Truss in Question Time in response.

Number of the day

‘Go now please’

53% - An Ipsos survey of 1,000 British adults found 53% wanted Truss to resign and 75% thought the Conservative Government did not have a good long-term economic plan.

Charts of the day

A lucrative business for Australia’s big four banks in Aotearoa

Thread of the day

A detailed and nuanced thread on social investment.

Podcast of the day

Longer read of the day

Longer watch of the day

Official report of the day

The Craic

Some fun things

By the way, everyone should vote for The Kākā in Bird of the Year.

Here’s where you vote. :)

Ka kite ano

Bernard

PS: My apologies for not putting an email out yesterday. I was travelling.

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: A damning report into the death of a woman after she left an over-crowded Middlemore ED has illustrated again how stressed our infrastructure is after 30 years of under-investment.

So why has the Government just decided to remove any remaining caps on migration and loosen its settings to suck in hundreds of thousands of new migrants, while also continuing to underfund the infrastructure needed for even moderate population growth?

Migration before infrastructure again

Overcrowded and under-invested - An independent report out late yesterday into the death of a patient who could not get into Middlemore Hospital’s Emergency Department because of overcrowding found systemic problems caused by too many people and a lack of resources. 1News

“The evidence provided to me strongly reflects an overcrowded ED, a hospital well over acceptable capacity and subsequent system dysfunction. This is an unsafe environment for both patients and staff and is not sustainable." An unidentified fellow from the Australasian College for Emergency Medicine in the report.

For more on the background to the removal of the migration planning range and the under-investment, here’s my deeper-dive from the weekend, which is now open to all for sharing.

Paying subscribers were able to see and hear more detail and analysis earlier in the week

In geo-politics, the global economy, business and markets

Truss trussed up - New UK Chancellor of the Exchequer Jeremy Hunt last night gutted most of the rest of PM Liz Truss’ Reagan-era programme of unfunded tax cuts to drive economic growth through wealth trickling down from the wealthiest. It didn’t work in the 1980s and even financial markets judged it wouldn’t again. Hunt dropped £32b of Truss’ £45b of unfunded tax cuts and announced the truncation of £140b worth of gas and electricity subsidies to try to reduce debt. Reuters

Satiated for now - Hunt was trying to fend off the attacks of bond vigilantes who thought unfunded tax cuts for the wealthy were a bad idea. The initial response was positive. The 30 year gilt yield dropped 42 basis points to 4.32% and the pound rose 1% to £1.13 per dollar, despite the Bank of England reiterating overnight it would not restart its short-term money printing announced soon after Truss’ September 23 mini-budget sparked market mayhem. Reuters

Goneburger within days - Truss is expected to be removed as PM by rebels in her party or forced to resign within days. Business leaders were scathing overnight. Labour’s lead in the polls there blew out to 36 percentage points, which is the widest margin since 1997 when Labour won power after 18 years of Conservative Government.

“She is a busted flush. As prime minister, you have to have the confidence of business, investors, the electorate and colleagues in the party. She has none of these.” Asda Chair Stuart Rose, who is a Conservative, talking to the FT-$$$

‘Not a good look’ - China delayed the release of third quarter GDP figures at the last minute last night. They were expected to show annual growth of 3.4%, well below the growth plan for this year of 5.5%. Economists said that may explain why they’re not going out in the middle of the once-in-every-five years Communist Party Congress. The National Bureau of Statistics (NBS) said the change was "due to adjustment to work arrangements," but gave no further details. Reuters

In Aotearoa’s political economy

‘Turn off the money tap’ - New Auckland Mayor Wayne Brown issued a statement last night ordering Watercare to stop work on Three Waters, describing it as a “doomed project.” However, unlike the PM, the Mayor can’t just order arms of Council to do what he wants. He needs the agree of a majority of the Council, which he hasn’t secured on this issue. The PM has said she is open to changing Three Waters, which is still going through Parliament, but hasn’t been specific.

“The proposal has not been passed by Parliament and after last weekend’s local government elections throughout the country has no chance of proceeding this side of next year’s general election.

“It is not in the best interests of Watercare, its shareholder or its customers for it to spend any more money on the doomed proposal – and that is also true of Auckland Council.

“What money Watercare or Auckland Council might have spent on Three Waters should be returned to Auckland households in the form of lower water charges and rates than would otherwise be charged.” Wayne Brown in a statement.

Two more years? - The Government wants to extend its Covid-19 restriction powers for another two years from their current expiry date of May 2023, Newshub reported last night from leaked DPMC documents.

Scoop of the day

A longer watch worth your time

I recently heard a presentation from Saul Griffith on why electrification is actually an inflation fighting measure. He’s worth watching.

Fun 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: This week on the weekly ‘hoon’ webinar for paying subscribers on Friday at 5pm for an hour, myself and co-host Peter Bale, along with economist Rodney Jones and University of Canterbury-based and Ukrainian-born political communications scientist Natalia Chaban discussed the news of the week in geo-politics, the global economy and Aotearoa’s political economy, including:

* the anti-Labour backlash in local elections last weekend that saw older pro-car and anti-densification candidates win most of the mayoralties (except Wellington) … see my analysis earlier in the week here;

* the Government’s proposal for a world-first methane and nitrous oxide levy on farmers to slash climate emissions, which beef and sheep farmers said would gut their sector because the scheme would not allow offsets from mass tree planting on farms and the levy would be set by the Government, rather than farmers (see my analysis here from Wednesday);

* the Government’s announcement of the reopening of the Skilled Migrant and Parent residency visa programmes, along with the removal of the decades-long residency planning range (see my analysis here out today);

* the Bank of England’s desperate attempts to avert a financial crisis in Britain after a disastrous mini Budget by new PM Liz Truss and new Chancellor of the Exchequer Kwasi Kwarteng proposed £45b of unfunded tax cuts for the rich (we talked about this with Rodney Jones last night before this morning’s news that Liz Truss had sacked Kwarteng and done a U-turn on a planned corporate tax cut);

* hotter-than-expected inflation figures in the United States that is driving up expectations for US interest rates, driving up the US dollar to record highs and threatening financial market mayhem (we talked about this with Rodney Jones);

* this weekend’s Communist Party Congress is set to confirm President Xi Jinping for a third term and unveil a new lineup of China’s leaders (we talked about this with long-time analyst of China’s politics and economy Rodney Jones); and,

* Vladimir Putin lashed back at Ukraine with dozens of missile strikes on civilian targets in cities across the country after his signature bridge to Crimea was blown up (we talked with Natalia Chaban about how the strikes only hardened Ukraine and West’s resolve to push Russia out of Ukraine completely).

My longer deep-dive listening for the weekend

This weekly podcast from New York-based British political and economic historian Adam Tooze on Europe’s energy crisis is an eye-opener in explaining just how important Germany’s reliance on Russian gas was and how broken it is now.

This is a weekly podcast from Irish economist David McWilliams is one I try to listen to. He is a hoot and this week’s piece on how central bankers want more unemployment is a cracker. It explores the ultimate class war behind inflation targeting.

This week’s episode of The Spinoff’s ‘Gone By Lunchtime’ is an excellent and comprehensive debriefing of last week’s local council election results.

Useful longer reads elsewhere

There’s so much news around this week, but this shouldn’t be ignored. The US is really, really cracking down on US high tech exports or sharing with China.

Paul Krugman makes some great points about this week’s hot US inflation number. It’s mostly about rents, and the CPI numbers that looked hot are lagging indicators of rents that are now falling.

This is another big story among many this week I haven’t had a chance to tackle properly.

This is a sweeping and fascinating piece from Ben Hunt.

Scoops of the week elsewhere

Charts of the week

Cartoons of the week

The Craic

I’m a big fan of Gillian Tett from the FT.

Profundities and feel-goods

Ka kite ano

Bernard

Have a great weekend.

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 Government’s response on Tuesday to He Waka Eke Noa’s farmer-led approach to reducing methane emissions was the usual fudge to buy time for yet more magical thinking about cutting emissions without it hurting too much economically and politically. We may kid ourselves, but we’re not kidding the planet.

Our political economy is still working its way through the bargaining stage of the five stages of grief about the need to actually reduce dairy herd sizes substantially if Aotearoa-NZ is going to have any real chance of meaningfully achieving our emissions reduction targets, or even better, the reductions needed to stop the planet warming by more than 1.5 degrees.

To be fair to farmers, they’re not the only ones still fudging and hoping. Our rural sector has actually moved faster and with more specificity than most townies. Politicians and home-owners in our cities are yet to even get past the anger and denial stages, as we saw in the weekend council election results.

Our glacial pace of grieving for our unsustainable way of earning export income and our unsustainable way of living suburban lives is proving too slow for the planet.

It turns out the physics of global warming are now moving faster than our political economy seems able to move, let alone catch up. We needed to apply defibrillators to the hearts of our export economy and our suburbs. Instead, we’re just testing electric fences with blades of grass. It tickles, but not much more.

The tragedy is we know what to do when biology moves faster than politics. During Covid, just once, we accelerated and circumvented the usual incrementalism of our political economy to shut down our economy in a matter of days for the sake of the health of people, rather than quarterly profit reports.

It worked in 2020, but didn’t in 2021, when the biology sped up and beat the ability of our politicians and citizens to react and adjust in real time.

Climate Change is the ultimate test of our political economy’s ability to adapt and adjust faster than the physical world.

So far, we’re not moving fast enough and the latest “pragmatic approach” proposed by PM Jacinda Ardern on Tuesday kicked the tough herd-cutting calls out into another electoral term with a probably less sympathetic Government. It won’t fool the planet and it shouldn’t fool the rest of us.

Paying subscribers were able to see more detail and analysis below the paywall earlier today and in the podcast above, which includes my questions and answers from PM Jacinda Ardern at the news conference Lynn Grieveson and I attended at a dairy farm near Featherston yesterday. I have now opened this article and podcast up for public viewing, listening and sharing. Only paying subscribers can comment.

First the anger, then the denial, and now the bargaining…

If only we could speed up the process of grieving straight to acceptance and moving on.

Denial - As recently as May this year, former Federated Farmers President (2008-11) Don Nicolson wrote that warnings about methane warming the planet were ‘climate alarmism’ and ‘methane chicanery’ because methane was actually a cooling agent. Citing research launding the benefits of methane by William van Wijngaarden and William Happer, Nicolson wrote:

“When the laws of physics are applied to methane in the atmosphere and its molecular ability to absorb infrared radiation, it’s clear that it is physically impossible for methane to cause anything but an immeasurably small warming (or cooling for that matter).  It’s that simple!” Former Federated Farmers President (2008-11) Don Nicolson

Anger - In 2003, Aotearoa-NZ’s rural community reacted with pure anger when the-then Labour Government led by Helen Clark proposed an $8m levy on farmers averaging $300 per farm per year to pay for research into ways to reduce emissions.

Then-National MP Shane Ardern (a distant cousin of PM Jacinda Ardern) drove a tractor called ‘Myrtle’ up the steps of Parliament in a rally to Fight Against Ridiculous Taxes (FART). That Groundswell-style eruption killed the ‘FART’ tax and eventually led then to an Emissions Trading Scheme (ETS), albeit one that excluded agriculture’s emissions and still excludes them (until January 2025).

Clark’s ETS was enacted in September 2008 just before Labour lost the election to John Key’s National-led coalition. Labour also then lauded it as the world’s first such scheme. The trouble was it was limited to less than half of the country's climate emissions and had loopholes that truckloads of emissions were allowed to fall through, including agriculture (almost half of Aotearoa-NZ’s emissions) and large chunks of industrial emissions, including steel plants, smelters and any other industries competing with the rest of the world. It languished under Key and was ruthlessly gamed by emitters buying junk credits on international markets. By 2013, the price of carbon credits in our 'world-first' ETS fell under $2/tonne.

It has taken the current Labour Government (supported by the Greens) another eight years to tweak the scheme to make it more credible. It only started to have any real effect last year, 13 years after it was launched. Prices are now around $83/tonne and finally some of the biggest emitters are losing their exemptions. This March 2022 guide to the ETS by Motu Policy Fellow (and current Climate Change Commissioner) Catherine Leining is a useful primer and backgrounder.

Yet even now, agricultural emissions are still excluded. It was not until 2019 that the Climate Change Response (Zero Carbon) Amendment Act specified that agricultural would have to be included in the ETS in some form by January 2025. That was the signal for full-scale bargaining to start as farmers scrambled not to be included in any raw way.

Bargaining - The He Waka Eke Noa process was a three-year exercise in the farming industry bargaining and pleading with the Government to allow it to regulate itself and set its own price in a ‘split gas’ scheme that would allow farmers to offset emissions with a whole bunch of tree planting in gullies and hill country. It issued its recommendations on May 31, including:

* a split-gas levy charged at farm level after farmers themselves calculated their long-lived (carbon dioxide and nitrous-oxide) and short-lived emissions (methane);

* an on-farm levy for nitrogen fertilisers;

* the recognition of widespread on-farm sequestration (often pine tree planting) to offset levy costs;

* incentives for emissions reduction paid for from the proceeds from the levy; and,

* a system oversight board made up of industry and Government representatives to set the levy, rather than cabinet.

In response, the Climate Commission recommended the adoption of a He Waka Eke Noa-style farm-level pricing system outside the ETS, but without the ability to claim sequestration credits. The Commission argued it wouldn’t be fair on other sectors who couldn’t use such offsets and, most importantly, would not improve emissions much in the long run.

The proposed bargain - So almost 20 years after Myrtle’s ascent part way up the steps of Parliament, something remarkably similar is now proposed, albeit at a much larger scale and with so much more software.

The Government is proposing:

* a He Waka Eke Noa-style split-gas farm-level pricing system with the levy’s funds paid for research and incentives to reduce emissions on-farm, starting with an interims scheme in 2025;

* only allowing sequestration for riparian (riverside) planting and native trees, rather than wholesale gullies or hill country;

* charging a levy for nitrogen at either farm level or at the manufacturer-importer level; and,

* the levy being set by Cabinet, rather than than an independent industry-led group.

If this scheme can’t be built and launched by 2025 with different levies for 23,000 different farms, the Government has proposed a backstop of an interim processor-level levy, which would be calculated and charged at the level of 80 dairy companies and meatworks.

Climate Change Minister James Shaw actually argued in Cabinet for a system of hard methane volume limits, within which credits could be traded and a methane price reached. He lost that fight in Cabinet to be the main recommendation, but it’s still going out for consultation.

The bargain’s biggest losers - The modelling in the Cabinet paper suggested a price of 11 cents per kg of methane would be enough to reach the Zero Carbon Act’s targets of reducing emissions by 10% from 2017 levels by 2030, and between 24-47% below 2017 levels by 2050. Remember though that these targets were set before the latest IPCC reports and the Paris agreement made clear much bigger cuts would be needed to keep warming below 1.5 degrees.

The 11c price is equivalent to $3.93/tonne of CO2 equivalent, well below the current market price of around $85/tonne. The proposed price for mitigation incentive payments was the equivalent of $50/tonne. That’s quite a spread… The modelling also assumes the use of several mitigation technologies by 2030 including low-methane genetics for sheep and cattle and nitrous oxide inhibitors.

‘The problem with those assumptions, as outlined here by the NZ Agricultural Greenhouse Centre, is that the main nitrous oxide inhibitor is dicyandiamide (DCD), which we stopped using in 2013 because it was tainting the milk and China didn’t like it. The ability to breed low-methane sheep won’t be available until next year, and even then, will be a slow rollout of cumulative improvements, as detailed here in this article.

Shaw was clearly worried this low price and no limit on overall emissions would made the same mistake made in the first version of the ETS legislated in 2008. Here’s the section in the Cabinet paper on that (bolding mine):

“The proposed farm-level pricing system is for a low marginal price and no overall cap on emissions. Prior to our Government’s reforms last term, the history of the NZ ETS shows that a low marginal price and no cap on emissions were ineffective in reducing emissions.” Cabinet Paper (Page 21, 131.1)

Our poor track record

That experience with the ETS is instructive, given it has done nothing yet to reduce emissions, in part because agriculture was not included. This first chart via the Parliamentary Commissioner for the Environment shows Aotearoa-NZ’s mix of green house gases, while the chart below that shows our CO2, methane, nitrous oxide and overall emissions per year.

This World Bank data chart shows how vulnerable Aotearoa-NZ is to a backlash from the rest of the world over our agricultural methane emissions, which have stayed high while others, such as the UK, have fallen beneath ours.

Methane’s short and hot life

The problem of course is that the ‘short-lived’ gases (methane lasts decades) is hard to compare directly with the long-lived ones (CO2 lasts thousands of years and nitrous oxide lasts over a century), especially as methane has a bigger warming effect in its first decade. As the excellent Wellington-based scientist Melanie Newfield wrote in August at her substack The Turnstone (bolding mine):

Methane makes up 44% of our contribution to global warming, about the same as our carbon dioxide emissions. However, that figure is based on a Global Warming Potential calculated over a period of 100 years, which is perhaps misleading when we are trying to get our emissions to “net zero[1]” by 2050. Remember, if we calculate our methane emissions over a 20 year time scale, as some scientists suggest we should, methane is not 25 times worse for the atmosphere than carbon dioxide – it’s 80 times worse. After all, 2050 is not much more than 20 years away. Melanie Newfield via The Turnstone

The other issue is that while our methane emissions per year haven’t fallen, they have accumulated over the last 20-30 years before they start to ‘die off’ in the next 20-30 years. That’s in part because our massive increase in cow numbers since 1990 more than offset the equally massive decrease in sheep numbers. This NIWA chart measuring methane levels at its Baring head sampling station on the south coast of Wellington is alarming.

So what’s the forecast economic impact?

The 52-page Regulatory Impact Statement issued with the 57-page Cabinet Paper, the 97-page consultation document and a 101-page Ministry of Primary Industries and Ministry for the Environment scenarios impact document show the modelling with the preferred farm-level split-gas levy-with-incentives system at the prices above would lead to net revenue drops (after the emissions incentives) of 4-5% overall for agriculture, including:

* a 21-37% reduction in production for sheep and beef and a 18% reduction in land use;

* a 5% reduction for dairy farmer production and a 3% reduction in land use; and,

* offset by an increase of up to 10% in revenues for arable farmers.

Here’s the ‘money shot’ table of various scenarios for prices and levy/price-setting systems (page 9 of scenarios impact document) with my highlighting of the main farm-level split-gas levy scenario (yellow) and the Shaw-proposed hard limit with credits trading scenario (blue).

The worst scenario’s biggest losers - It’s no surprise Cabinet wasn’t keen on Shaw’s hard limits approach, given it would lead to a 29% drop in dairy output, while the processor level levy would have seen dairy output down 9%, lamb output down 24% and beef output down 62%.

So what happens now?

The Government had hoped that the He Waka Eke Noa process might soften the backlash when the inevitable reduction in production, revenue and land use was made clear, but that appeared not to happen, begging the question of why have the three-year delay. Farmers were angry with the decision to not allow farmers to set the levy and to remove the opportunity to offset with widespread tree planting.

Here was Federated Farmers Andrew Hoggard’s immediate reaction:

"The government’s rehashed plan to reduce on-farm greenhouse gas emissions throws out the two and a half years of work the industry did to come up with a solution, supposedly all that time in a ‘partnership’ with government to achieve a workable solution which would not reduce food production

“We didn’t sign up for this. It’s gut-wrenching to think we now have this proposal from government which rips the heart out of the work we did. Out of the families who farm this land.

"Our plan was to keep farmers farming. Now they’ll be selling up so fast you won’t even hear the dogs barking on the back of the ute as they drive off.” Federated Farmers President Andrew Hoggard in a statement.

The Government will take submissions until November 18 and Cabinet is due to make final decisions in February 2023, before a select committee process and legislation ahead of the election.

But will it be repealed anyway?

National has been cautious in not saying immediately it would side with the farmers and repeal it, as it has promised to repeal Three Waters, interest deductibility, brightline, ringfencing and the 39c tax rate.

This underlines the perception that both National and Labour have that any change needs to be incremental to avoid it being overturned whenever there’s a change of Government. Both have embraced what Bill English termed “incremental radicalism,” in this Duncan Greive piece from 2017.

The trouble is the planet is not waiting for the incremental change to eventually become the radical shift lower in emissions. Unlike in the first year of Covid, our political economy is not moving radically enough to stop the climate’s incremental changes cascading into a series of dangerous tipping points.

Our political metabolic rate is too slow to digest what is needed to combat the accelerating pace of climate change.

Ka kite

Bernard

PS: As you can see, this is a very focused and detailed email on a complex subject, which is why I took a day and a half to write it. I appreciate your patience and hope the more reflective and broad approach is useful. Paying subscribers can comment below if want it opened up to the public and/or vote here. If it gets over 100 votes I’ll open it immediately.

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: Older home-owners in Aotearoa-NZ’s single-storey suburbs lashed back against the Beehive’s drive for housing densification and transport mode shift in council election results over the weekend.

The elevation of new (old) mayors and councillors everywhere except Wellington itself looks set to cement in a massive and multi-decade wealth transfer at the heart of our existential housing affordability, climate change inaction and poverty reduction crises.

The great boomer backlash of 2022 is likely to further stymie moves to densify housing in the inner suburbs and frustrate any further significant emissions-reducing mode shift from cars to buses, trains, walking and cycling for at least another decade.

The great boomer backlash of 2022

So it turns out older homeowners in the suburbs quite like things just the way they are. They don’t want any big new housing developments near them. They don’t want their motorways turned into cycleways and walkways. And they certainly don’t want the centralisers in the Beehive taking their assets off them and ordering them to change without giving them much help. And they hate traffic cones.

Council election results over the weekend in Auckland, Christchurch and Dunedin produced sharp turns away from more progressive mayors and councillors to mostly older, pakeha men who had campaigned to block more housing densification, big public transport and mode-shift projects, and a broader shift to co-governance with tangata whenua.

In line with previous council elections, homeowners aged over 50 and living in standalone homes in the leafy suburbs voted at three to four times the rate of young renters in the inner city areas. After three years of Parliamentary legislation ordering councils to allow more homes near town centres and plans to disrupt suburban streets with new rail lines and cycleways, the beneficiaries of the status quo said ‘No more.’

New Auckland Mayor, the 76-year-old Wayne Brown, summarised the mood of most of those who voted in a statement calling for the rest of the Auckland Transport (AT) board to resign (AT Chair Adrienne Young Cooper resigned on Saturday night) and pledging to cut “rising costs and council waste”

“Let me be very clear: Wellington's job is to listen to what Aucklanders say are our priorities, and to fund them - not impose ideological schemes like the $30 billion airport tram, untrammelled housing intensification and Three Waters on a city that doesn't want them.” Wayne Brown.

Brown then went on to sing songs with his supporters in Saturday night celebrations, including this one (F… off Goff), and then cancelled scheduled media appearances on Sunday to spend time with family and go surfing.

Brown will now have a mostly centre-right Council to work with, given at least 12 of the 20 on Council are seen as also opposed to densification and want to cut back on council spending. He said yesterday he would put out a statement on the Council’s finances today after a briefing this morning from officials.

The new Christchurch Mayor, 56-year-old Phil Mauger, told The Press this morning he did not want to see the congestion charging and road tolls in a recent Council transport plan aimed at reducing emissions, and wanted to ditch a levy on new private car parks. He also opposed a $22.6m cycleway on Harewood Rd that removes two lanes for cars and 300 car parks.

“I would like to think we can soften it up a bit. We do have to get people in town.”

He said the plan would make it too hard for motorists and he wanted to make it so “everybody was happy”. Phil Mauger via The Press

New Dunedin Mayor, 67-year-old Jules Radich, campaigned against council spending and to reduce debt. He beat one-term Green Mayor Aaron Hawkins, who presided over heavy capital spending in the city in favour of mode shift. Radich opposed an inner-city plan to create a cycleway as part of a one-way system for cars.

Of the other major cities, only Wellington saw its council retain its centre-left majority and elect a centre-left Mayor. Former Green Party leaders’ office chief of staff, Tory Whanau won decisively over Labour MP Paul Eagle and previous centre-right Mayor Andy Foster. Hamilton’s more progressive Mayor Paula Southgate scraped back in against a conservative candidate.

Ousted Dunedin mayor Hawkins summarised the reaction across the country as a reaction against the Government’s reforms around Three Waters, densification and mode shift yesterday via RNZ:

“It always seemed obvious that the breadth of the reform agenda was going to make it difficult for progressive candidates up and down the country. I don’t like to be proven right but it seems that are what we are seeing.” Aaron Hawkins

So how and why did this backlash happen?

The scale of the backlash this year was inevitable in the light of the democratic deficit now underpinning council elections and what I call the broken financial relationship at the heart of Aotearoa-NZ’s political economy since 1989.

Firstly, the weight and size of the imbalance of power and agency between older, home owners in the leafy suburbs and young renters has to be understood. The continued low overall turnout of 40% that was focused on yesterday disguises the immensity of the gap between voting rates between the young and the old, between owners and renters, and between pakeha and the rest.

Last year’s General Social Survey (civic and cultural participation) found 71.3% of owner-occupiers said they voted in the last local elections and 47% of non-owner occupiers said they voted. Council voting rates for those aged over 55 ranged from 71% to 86%, while voting rates for those aged under 44 ranged from 43% to 61%.

Voting rates in the weekend’s elections in Ōtara fell to 19.6% from 22.7% in 2019 and fell to 21.4% in Papatoetoe from 25.5%. Voting rates in the leafier suburbs such as Devonport and Parnell were over 40%.

The Democratic Deficit of young, poor renters

Previous analysis of local turnout rates in Auckland from the 2016 election found a close connection between deprivation scores, home ownership rates and voting rates. Those in the richest neighbourhoods with the highest percentage of home owners voted the most, while those in the poorest with the lowest home ownership rates voted at the lowest rates.

Turnout rates in council elections are even lower than in general elections, as are enrollment rates. Overall enrolments nationwide have slumped for young cohorts over the last 20 years. Local Government participation has been falling in recent years, even relative to general election turnout.

Home ownership is also a key indicator of voting in local elections, with those councils with high ownership rates having the highest voting rates. The biggest ‘blob’ of low home ownership and low turnout in the chart below is Auckland.

The broken relationship at the heart of our political economy

The democratic deficit above would not be so much of a problem if councils and governments had invested in the infrastructure necessary to ensure plenty of good quality and affordable housing supply, along with strong, well funded and well-used networks for public transport, cycling and transport.

I think that the democratic deficit is actually intertwined with the infrastructure deficit, which the Infrastructure Commission has estimated at worth more than $100b over the last 30 years, with another $100b needed over the next 30 years.

This is all about decisions made in the late 1980s that effectively reversed a multi-decade political settlement from the 1930s to the 1970s that saw the central Government run a high-tax and high-investment strategy aimed at investing in housing, electricity, water and transport infrastructure to ensure the children born in the late 1940s, 1950s and early 1960s were well catered for. It was a generational decision of those who fought in the wars and their parents to sacrifice consumption for investment. That meant the Government used those relatively high tax revenues to invest in dams, railroads, motorways, new suburbs and power networks.

The centrally-directed Ministry of Works and Electricity Departments planned and often built the railways, motorways, lines networks and substations to enable fast population growth with affordable housing. The central Government provided subsidies and guarantees for house-building, along with building tens of thousands of state homes and subsidising the building of thousands of social home by councils. Government helped to build the infrastructure and councils were not taxed or given extra regulatory functions ensuring water and environmental quality. They had a financial partnership designed to ensure population growth and the welfare of the young families of the heroes who came back from the wars were prioritised.

So how did everything change in 1989?

In 1989, a collection of Douglas-Richardson-era legislative reforms were either passed or started that fundamentally changed that key relationship between central and local Government, extending an imbalance in place for most of our Pakeha-era history. It has been unequal ever since the disestablishment of the more Federal-style Provincial Governments in 1875 by Julius Vogel, who wanted more centralised development driven mostly by debt-funded investment in railways. There had been six separate provincial Governments between 1853 and 1876, including Auckland, Taranaki, Wellington, Nelson, Canterbury and Otago. This meant provincial governments never attained the power to tax incomes or spending in the way central government did, which is in stark contrast to more federal-style and localised governments overseas, where income and sales taxes are fully or partially collected by or granted to council, provincial and state governments.

The Crown’s dominance of all government spending in Aotearoa-NZ is the highest in the OECD, while the amounts granted councils are among the lowest in the world.

Those changes introduced in 1989 deepened and extended that imbalance by both adding to council responsibilities and reducing the availability of taxes. They included:

* the amalgamation through the Local Government Commission of 850 local bodies into 86 local authorities under Local Government Minister Michael Bassett;

* the passing of the Public Finance Act, which re-regulated and centralised control of Government spending, taxation and borrowing in a way that led to low public investment and relatively low income tax rates;

* the launch of the Resource Management Act (eventually passed in 1991) that put responsibility for resource and building consenting onto the shoulders of councils, district councils and regional councils;

* the increase in the GST rate to 12.5% from 10%, which was applied to council rates, while councils were not allowed to charge rates on Crown land;

* the launch of the Reserve Bank Act to create an independent body to drive inflation and interest rates lower, thus massively increasing values of supply-constrained revenue-generating assets such as rental properties; and,

* the failure of then-Labour Finance Minister David Caygill to enact a proposed Capital Gains Tax, which would have filled the hole between the ‘broad-based and low rate’ income and consumption taxes brought in by Roger Douglas.

The end result was an increasing fiscal dominance by the Crown at the expense of local government, and a weakening of councils’ ability to invest in infrastructure, as this 2014 chart shows. Perhaps not surprisingly, voters could see where the real power and consequence lay: at the central government level, rather than with councils. That growing imbalance in fiscal power has coincided with the relative decline of council voting rates and the infrastructure investment drought relative to population growth.

This shows Aotearoa-NZ’s decline in tax-GDP ratio since the mid-1980s and the even greater decline in rates relative to GDP.

How did this lead to inter-generational wealth transfer?

The toxic combination over the last 30 years by Labour and National Governments of:

* not taxing capital gains on residential property while removing subsidies for business investment via pensions;

* not investing enough in infrastructure while also engineering two migration-led population growth booms (1% to 2% in 2000-2005 and 0.5% to 2.2% 2011-2019); and,

* limiting the size of core Government spending and debt to around 30% of GDP while limiting council spending and debt to around 3% and 6% of GDP:

led to;

* over $1t of leveraged and untaxed increases in residential land values for those owning property from 2000 onwards because of a lack of housing land supply in tandem with falling interest rates and the tax advantages;

* growing disillusionment with councils ability to deliver the transport, housing, water and roading infrastructure needed to cater for strong population growth;

* a growing distrust between central and local government as the Beehive mocks dysfunctional councils and councils bemoan being told to do ever more with ever less financial support.

So what now?

This electoral backlash is the result of Labour’s attempts (and partially one National attempt) to deal with some of the housing supply, transport and water problems by trying to force councils to agree to invest in and permit housing growth, and by trying to take water assets (and liabilities and political risks) off councils via Three Waters.

‘You must do it without enough consultation or funding’

The trouble is Labour (and National via the bipartisan Townhouse Nation law) tried to ram through its densification and mode shift agendas without either getting the permission of councils or providing the necessary funding and revenue sharing.

The reaction was inevitable from home-owning boomers who don’t want their tax-free gains from housing supply shortages or their motorways taken away from them by a bunch of woke, young renters who prefer cycling and buses to a decent double cab ute and a nice house in the suburbs with a backyard, a barbecue and a boat in the drive. They also hated the idea (if not the reality) of co-governance with iwi.

This rejection of the densification and mode shift agendas is a harbinger of worse things to come for Labour at next year’s elections, although to a lesser extent because the democratic deficit is not as wide. Look out for co-governance to be thrown under the bus. It’s also a problem for National with its support of Townhouse Nation. That too may be shuffled under a large oncoming vehicle.

Ka kite ano

Bernard

PS: The biggest elephant in the room though is the lack of voter permission for fast population growth. Doing it credibly would require higher taxes to fund more investment and an implicit deal not to tolerate NIMBYs let alone encourage them.

Elsewhere in the news here and overseas this morning:

In Aotearoa-NZ’s political economy

Another loosening - Immigration Minister Michael Wood yesterday announced another loosening of migration settings to bring in temporary workers for the hospitality and tourism industries, including:

* removing the qualification requirement for chefs to be hired through an Accredited Employer Work Visa (AEWV); and,

* extending the transition towards the full median wage for an additional year from 2023 to 2024.

In geo-politics, the global economy, business and markets

Warm jobs - The US Bureau of Labor Statistics reported on Friday night the world’s largest economy created 263,000 jobs in September, which was fewer than the 315,000 added in August, but above the consensus forecast for a 250,000 rise. The unemployment rate fell to 3.5% from 3.7%, which was also better than the 3.7% expected. However, seasonally adjusted wage growth of 0.3% in the month of September was flat and matched economists’ forecasts.

Cool stocks - The lower-than-expected unemployment figure unnerved US stock and bond markets somewhat, with the S&P 500 closing down 2.8% on Saturday morning and the US 10 year bond yield closing up eight basis points at 3.88%.

Blown bridge - Tensions in Europe escalated again over the weekend after a truck blew up the key Kerch bridge linking Crimea and Russia. Russia accused Ukraine of sabotage and threatened retaliation, which some fear might include use of a tactical nuclear weapon.

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 news in geo-politics, the global economy and Aotearoa-NZ’s political economy:

* Te Pūtea Matua (The Reserve Bank) hiked its interest rates again to control inflation (Thursday’s email);

* the Government revealed a robust set of accounts that will allow room for competing tax cut offers in next year’s election (Thursday’s email);

* local elections came to a close with a revolt against the Government brewing (Interviews with Efeso Collins and Simon Wilson);

* TOP proposed a residential land tax to pay for income tax cuts for low to middle income earners (Interview with Raf Manji)

* An increasingly-desperate Vladimir Putin faces growing opposition at home and more defeats on the battlefield in Ukraine; and,

* the IMF and UNCTAD warned about a slowing of global economic growth, especially in developing economies, because of the rapid and concerted tightenings of monetary policy led by the US Federal Reserve (Friday’s email).

We recorded the podcast above from the weekly ‘hoon’ webinar we do for paying subscribers every Friday evening at 5pm for an hour. This week co-host Peter Bale and myself talked about the local elections, flawed plans to merge TVNZ and RNZ and the potential for tax cuts next year.

We talked in the second half of the show with regular guest, University of Otago Foreign Relations Professor Robert Patman about the situation in Ukraine, the risk Putin might use tactical nuclear weapons and Saudi Arabia’s defiance of the United States by promising (along with Russia) to cut oil output.

Five things this week

These are the five key bits of news and analysis this week that may not have crossed your radar and I thought was important, given in my focus on the issues of improving housing affordability, reducing climate emissions and reducing child poverty. I welcome the support of paying subscribers to allow me to do this work, and to share it publicly after paying subscribers see it first.

Te Pūtea Matua may hike 75 bps to 4.25% on Nov 23

Deep in the notes from the Monetary Policy Committee’s commentary with the statement on this week’s fifth consecutive 50 basis point hike in the Official Cash Rate to 3.5%, Te Pūtea Matua said the committee considered putting up the OCR by 75 basis points, which would really have thrown the cat into the mortgage rate pigeons. It argued this was partly because mortgage rates had yet to rise in line with wholesale rates (swaps rates) and it wondered if the tightening therefore needed a hurry up.

In the end, the committee decided against 75 basis points, in part because it thought the banks would get around to putting up mortgage rates more.

“The Committee expects that higher wholesale interest rates will be reflected in higher retail interest rates, particularly deposit rates, as banks compete for funding.” MPC

Here’s the chart for the two year swap rate, which has risen by 350 basis points from 1.25% before Covid to 4.75% now. In theory, that should have meant average two-year mortgage rates should have risen from 3.5% pre-Covid to 7% now, all other things being equal, including profit margins.

Instead, what we’ve seen is the average two-year mortgage rate has risen from 3.5% pre-covid to 5.5%, although it has risen 300 basis points from its post-covid low of around 2.5%.

Some of those average figures disguise the discounted rates that banks offer so the 7% estimate of where they ‘should’ be may not include the loss-leader discounts the banks include.

So what? - My suspicion is the Reserve Bank wants to see the banks give up some of those discounts and put the mortgage rates up to around 6% from 5.5% now. We’ll find out more on November 23 when the last full Monetary Policy Statement of the year (and the last monetary policy decision) comes out. If the banks have not put their ‘specials’ up closer to 6% by then, that may encourage the Reserve Bank to do a final 75 basis point hike for the year to 4.25%, given the next decision after that is not until February 22.

The bottom line - Brace for a 75 basis point hike on November 23 if inflation is still running hot and the banks have not nudged their retail mortgage rates up much. We’ll find out more about inflation on October 18 (the Tuesday after next) when the September Quarter CPI comes out.

The young are deserting Labour and going to ACT & TOP

The Roy Morgan opinion poll is the only long-running and truly regular monthly public poll but is not promoted or attached to a media outlet or interest group so doesn’t get much publicity. Some others also think it’s an inferior poll to the 1News-Kantar, Newshub-Reid Research, Talbot Mills (for corporate clients and Labour) and Curia-Taxpayers Union polls. The television-sponsored polls are irregular and depend on the whims and budgets of newsrooms. The monthly Talbot Mills poll is not regularly leaked and the Curia poll has not been available publicly and monthly for long. The Roy Morgan poll’s methodology is standard, but its commentary release is written from Australia and often jars, which undermines its credibility. Its numbers though are as good or bad as the others, in my view.

This week Roy Morgan released its September poll of 942 electors taken by landline and mobile phone. It found Labour down 5.5 percentage points to a record-low 29.5% since Labour came to power in 2017. National rose 0.5 points to 36% and ACT rose 2% to 12.5%. The Greens rose 2.5 points to 12.5%. Te Pāti Māori fell 1.5% to 3.5%, while TOP rose 1.5% to 2.5%. On those numbers, National/ACT would be able to govern alone

But the most interesting trend for me was the continued desertion of Labour and National for ACT, Te Pāti Māori and TOP by young men and women. Support for Labour among young women (18-49) fell to 26.5% from 30.5% a month ago and fell for National to 30.5% from 31% a month ago. Support for Labour among young men fell from 30.5% to 27% and fell for National to 25.5% from 35%. Young men increased their support for the Greens to 16% from 9.5%, to 5% from 3.5% for Te Pāti Māori and others (including TOP) to 8% from 4%.

The other thing to watch is whether support for the Government, and therefore Labour, bounces in line with consumer confidence as the summer arrives and passes without more Covid drama, as the economy opens up more and as inflation fades. Consumer and business confidence have bounced in the last couple of months and their may be a lagged effect to boost Labour over the summer.

So what? - TOP/Te Pāti Māori are now regularly polling at 5-6% overall and over 10% for the young. Disillusion with National and Labour’s addiction to untaxed capital gains is beginning to grate among the young, who have much lower home ownership rates.

The bottom line - If TOP leader Raf Manji can win the Christchurch electorate seat of Ilam (where he polled second in 2017 when up against then-National-MP Gerry Brownlee) and drag in one or two more TOP MPs, alongside another three or four Te Pāti Māori MPs, then there is the prospect that TOP and Te Pāti Māori could extract some form of wealth, land or capital gains tax out of Labour or National for either to form a Government.

The bottom bottom line - TOP and Te Pāti Māori need electorate polls done in early 2023 to show they are viable prospects to coat-tail in votes under 5% to win more support from the young who don’t want to ‘waste’ their votes.

The early global inflation indicators are falling fast

We all tend to watch our own inflation figures in the rear-vision mirror, which means here we still think inflation is 7.3%. That was actually four to seven months ago and since then the leading indicators for inflation globally for later this year and early next year are blowing cold as the European and Chinese economies are slowing rapidly because of the Ukraine war, Covid lockdowns and China’s apartment development collapse respectively. The US economy is also slowing.

That means shipping costs and input costs for businesses are falling in Europe and the United States. Chinese inflation hasn’t been nearly as high as elsewhere throughout the last year either. Here’s the charts for Brent Crude (down 25% since June) and the Freightos Global Container price index (down 50% since June)

It will take a while for these to feed through, but the chances are rising that inflation will ‘cure itself’ without central banks having to put up their official cash rates much beyond 4.25% in the next three or four months.

Some scenarios for our political economy in the year ahead

So what? - I’m still in Team Transitory and see mortgage rates falling again late next year as the global economy cools and these big energy and shipping costs surges wash out. If National/ACT remain on track to govern alone from September next year onwards, expect the housing market to take off again in late 2023 in expectation of the repealing of Labour’s tax tweaks for landlords and the effects of lower mortgage rates.

The bottom line - Our housing market’s fundamental over-valuation relative to incomes and rents, will remain in place, and potentially worsen again because the fundamental problems of the non-taxation of residential land value appreciation and the under-investment in infrastructure for new housing and public transport would remain unsolved, especially after that potential election result.

Aotearoa-NZ’s political economy would still be little more than a housing market with bits tacked on that embeds a two-tier society split between the landed gentry families of older, Pakeha home owners and the families of younger (and older) Maori and Pasifika renters.

The bottom bottom line - First home buyers shouldn’t wait for more price falls in the ‘bleeding edge’ markets of Auckland and Wellington, and should get in as soon and as much as they can to ensure they get their share of the leveraged and untaxed gains in land values to come.

The even thicker bottom line - Young renters and old owners who want to change that status quo and grow their own families in Aotearoa-NZ would need to campaign and vote for Te Pāti Māori and TOP in the next election to have a hope of extracting land and/or capital gains taxes out of either National/ACT or Labour. Votes for the Greens are effectively wasted because the Greens would never transfer their deciding votes to anyone other than Labour, which means Labour can ignore any Green demands.

So what will determine which scenario happens?

So what now? - The key things to watch over the next year in these calculations are:

* what happens to polling support for Te Pāti Māori and TOP;

* whether Raf Manji and Te Pāti Māori co-leaders Rawiri Waititi (Waiariki) and Debbie Ngarewa-Packer (Te Tai Hauāuru) are on track to win their electorate seats;

* whether National/ACT remain in the polling position of being able to form Government alone;

* whether Jacinda Ardern resigns as PM in late December or late January to hand over to Grant Robertson (a small chance in my view), which could boost Labour in the polls;

* whether inflation globally and here comes off the boil as expected, and if not, whether the world’s central banks carry on cranking up interest rates (which would keep driving house prices down), or are forced to bail out markets to avoid another financial crisis (which would force house prices up);

* whether, as I expect, Labour eases migration settings to restart population growth in response to demands from businesses and promises of the same from National/ACT, which would support house prices and possibly help Labour in the polls; and,

* whether Australian PM Anthony Albanese confirms a faster pathway to residency in late April next year, which could unleash a flood of those young renters migrating to Australia.

The best-case scenario to achieve better housing affordability, lower climate emissions and lower child poverty? These things would need to happen in combination:

* TOP and Te Pāti Māori would have to win electorate seats and more than 5% in the election, and are able to extract some form of land or capital gains taxation pledges out of either Labour or National;

* Inflation stays uncomfortably high or worsens, which would drive interest rates up and force house prices down; and,

* Labour chooses not to unleash more migration, or does ease settings and the migrants don’t turn up, which I think would be unlikely.

The worst case scenario, which is my current base case, is that:

* National/ACT win Government without the need for TOP/Te Pāti Māori, cut taxes for home owners and repeal the interest deductibility, ring-fencing and brightline tests that are helping to repress house prices at the moment;

* Inflation is clearly dropping by early next year and mortgage rates are dropping through late 2023;

* Migration and population growth is surging by late 2023/early 2024 because both Labour and/or National/ACT have released the restrictions and the temporary work migrants (work visa, students, backpackers) show up because they haven’t worked out how to get into TradeMe property or realestate.co.nz to see the rents and house prices; and,

* This population growth overwhelms the exodus of young renters seeing a future for higher wages, lower rents, more secure and healthy housing and bigger pensions in Australia because the fear of being a second-class non-citizen living there is removed.

Your thoughts? Flaws in the logic or facts you can point out? I welcome comments from paying subscribers below.

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: I spoke this week in the podcast above to NZ Herald senior writer Simon Wilson about the election campaign for the Auckland Council that ends this weekend. In particular, we looked at the potential makeup of the new council and the attributes of Mayoralty contenders Efeso Collins and Wayne Brown.

This election is crucial for Auckland’s future, given the huge decisions needed in the next couple of years around mode shift from cars to walking and cycling, and whether Auckland’s housing densification plans are sufficient.

We talked through the particular sets of skills and attributes of Collins and Brown to be Mayor. The long story short: Brown, 76, has a combative and reactionary approach that is less likely to build the necessary agreements on those issues above with fellow councillors and the Government than Collins, 48, who is a two-term councillor.

For more reading on this issue, here’s all of Simon’s articles via NZ Herald-$$$ on the election campaign, including this piece on Wayne Brown and this piece on Efeso Collins.

I spoke with Efeso Collins in this podcast recorded on Monday. Wayne Brown declined a request for an interview with me earlier in the campaign.

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 Opportunities Party (TOP) has proposed a big tax switch to discourage investment in land and increase after-tax incomes for those on low-to-middle incomes.

Leader Raf Manji, a former Christchurch City Councillor, detailed the plan in a ‘hoon’ interview I recorded in the podcast above this afternoon. The full package was announced yesterday afternoon.

The fiscally-neutral package includes:

* an annual 0.75% tax on the value of residential land to raise $6.75b to $7.5b per year and replace the current brightline tax on capital gains for landlords;

* to fund $6.35b of tax cuts for middle income earners by having a tax-free threshold for all income earned below $15,000, along with three tax rates of 20%, 35% and 39% for those earning from $15,001 to $80,000, from $80,001 to $180,000, and above $180,000; and,

* $900m of support for families and those with disabilities by extending the in work tax credit in Working For Families to children of beneficiaries at a cost of $500m, and by increasing disability allowances by $400m per year.

“The evidence of the last two decades shows us that the formulaic policy responses from governments of the left and right – whether it be benefit reforms or tax cuts – have not worked.”

“Without a fundamental rebalancing of the way revenue is gathered and income distributed in this country, the problems of unaffordable housing and poverty will not be solved.” Raf Manji

TOP also proposed benefit system changes, including:

* the cancellation of $2b of debt owed by beneficiaries to the Ministry of Social Development (MSD); and,

* the removal of sanctions penalising people for their relationship status and discouraging part-time work.

Manji said TOP also wanted to encourage new housing supply and to discourage leveraged purchases of rental properties by;

* creating a $3b Community Housing Development Fund to support 6,000 to 10,000 new homes;

* rebating GST on building materials for new builds and infrastructure to councils to encourage consenting; and,

* making landlords have a 100% deposit to buy another rental property.

Plans for Ilam

Manji stood for the Christchurch electorate of Ilam in 2017 and won 23% of the vote behind then-National electorate MP Gerry Brownlee. First-term Labour MP Sarah Pellett won it from Brownlee in 2020 and Brownlee has since decided to stand as a list-only candidate in next year’s election.

Manji told me in the interview above he was hopeful of winning the electorate, which could help TOP bring an extra three to seven MPs into Parliament on his coat-tails. He said he would be happy to have ‘cups of tea’ with either of the main parties.

He said TOP would not want to join any of the two main parties in a formal coalition, but would prefer to sit on the cross-benches after agreeing a limited supply-and-confidence agreement with either Labour or National.

Ka kite ano

Bernard

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TLDR: Auckland Mayoral candidate Efeso Collins is about to get the endorsement of PM Jacinda Ardern with less than a week to go in the campaign. But Collins says he won’t step into line behind the Beehive on infrastructure funding for climate change action.

Collins told me in a ‘hoon’ interview recorded in the podcast above that he wanted to see a Mayoral taskforce on climate change challenge the Government to provide more funding for emissions reduction action and medium density housing.

He agreed that would mean reprioritising the Government’s preference for low debt and a high credit rating over much bigger investments in public transport and low emissions housing.

“I think we've really gotta take it to the Crown and say, if this is what we want to achieve as a nation, then we've got to look at all of our settings. That includes economic settings or financial settings that we've set ourselves and asking ourselves whether they're too restrictive.” Efeso Collins

The two-term councillor, who is up against self-styled ‘Mr Fixit’ Wayne Brown as his main opponent from right of politics, is campaigning for fares-free public transport and ‘mode shift’ away from cars to cycling and walking in a city growing up rather than out.

Elsewhere in the interview, Collins said he favoured:

* the Government rebating the $300m gathered in GST every year on top of rates to the Auckland Council;

* an agreement with the Government about plans for population growth through migration that can be matched with infrastructure spending;

* replacing the current Regional Fuel Levy with congestion charges in a phased way; and,

* Auckland Council putting two voting councillors onto the board of Auckland Transport.

The full audio of the interview is above.

Ka kite ano

Bernard

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TLDR: This week the financial and geo-political outlooks darkened in Britain and northern Europe after Britain’s plans for unfunded tax cuts were trashed by financial markets and sabotage of gas pipelines in the Baltic Sea aggravated tensions between NATO and Russia.

Closer to home, National’s leaders Christopher Luxon and Nicola Willis were forced to deny their tax cuts were similar to Britain’s disastrous plans and postal voting in council elections got off to a slow start, prompting suggestions they should be run in future by the Electoral Commission in similar ways to the General Election.

In the podcast above of Friday evening’s ‘hoon’ webinar for paying subscribers, co-host Peter Bale and myself talked about the news of the week in geo-politics and Aotearoa-NZ’s political economy with the University of Otago’s Robert Patman, including:

* The Bank of England’s intervention to promise to print at least £65b to stop Britain’s £1.5t pension sector from collapsing under the weight of billions of pounds of margin calls from the use of a new derivative tool called Liability Driven Instruments (LDIs);

* the LDIs were triggered by the fastest ever rise in British bond yields because new PM Liz Truss and new Chancellor of the Exchequer Kwasi Kwarteng promised £45b of unfunded tax cuts, most of which will go to the richest taxpayers;

* the turmoil on global financial markets saw the NZ dollar fall to a 14 year low of 56 USc, complicating the inflation-fighting job of the Reserve Bank, which is expected to hike the Official Cash Rate again next Wednesday at 2pm by 50 basis points to 3.5%;

* the mysterious explosions under the Baltic Sea that destroyed the Nordstream 1 and 2 gas pipelines from Russia to Europe, which Danish authorities have said was caused by sabotage with 500kg of TNT;

* without formally accusing Russia of the sabotage, NATO pledged to defend Europe’s infrastructure with concerted military action;

* Russia’s deputy head of security said he thought Russia would be able to get away with nuking Ukraine because NATO was afraid of retaliation;

* surveys of the confidence of consumers, employees and businesses in Aotearoa-NZ found improvements in the September quarter as mask restrictions were lifted and tourists and working holiday makers began returning; and,

* a political opinion poll showed National-ACT in a position to govern alone (just) if the election was held now, with another survey showing the net approval ratings of Christopher Luxon and Jacinda Ardern were neck and neck.

Here’s Peter Bale’s weekly email on world affairs as a primer.

An update from the podcast: Robert Patman talked on Friday night about the potential fall of the key city of Lyman in the Donetsk province of Ukraine. Since then, Russia’s troops have indeed pulled out of the strategic city.

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