The Kākā by Bernard Hickey

TLDR: Growing calls for a return to ‘business as usual’ with tighter Government spending and a return to budget surpluses are premature and risk embedding a massive Covid injustice. Those who did well out of Covid should help those who did badly before they move on. In my view, they should do that by returning the taxpayer cash and capital gains they received as Covid windfall refunds to the Government.

Asset owners did fantastically well during Covid because of Government policies, including $20b of cash handouts to businesses and $55b of money printing by the Reserve Bank that helped push up asset values of households and businesses by $824b.

In my view, the Prime Minister and Finance Minister should call on boards and owners of companies to return to taxpayers as much of the $20b in Covid cash handouts that they can and no longer need. Businesses have $96b in cash in their bank accounts, up $23b from December 2019.

It’s also worth asking whether owners of residential land that captured $378b in unearned (and almost totally untaxed) capital gains because of Government actions should pay a one-off Covid refund of $20b from a one-off land tax. They could afford it – households made an overall $621b in windfall gains from higher asset values during Covid, including shares and equity in businesses. They also have an extra $35b in cash in bank accounts, holding $227b as at the end of March.

The proceeds of these windfall taxes could then be applied to ‘Building Back Better’ for renters and the young who have been hit hardest during the Covid ‘Rekovery’, including by implementing the recommendations of the Welfare Experts Advisory Group to fully increase cash incomes for those on benefits, and to forgive all beneficiary and student debt incurred over the last two years. It could also be used to repay debt and/or invest in infrastructure for affordable housing and public transport.

Tax the Covid windfalls to build back better

There was a flurry of pointless clickbaitery on Friday that seemed to capture the zeitgeist of how many on both sides of the political divide feel about this next phase of the post-Covid lockdown period. One side believes the Covid ‘cash handouts’ should stop, but doesn’t believe the ones they received counted or should be returned. The other side is increasingly calling for the beneficiaries of unearned Covid-era gains to hand back at least some of their windfall gains to taxpayers at large, to help those hurt most during Covid.

Here’s the latest skirmish. The NZ Herald and NewstalkZB removed an article on Friday by Newstalk ZB deputy political editor Jason Walls that challenged what he described as $20,000 of NZ Film Commission funding for a short documentary made during the first Covid lockdowns about public scientist Dr Siouxie Wiles. The bolding is mine.

“I'm just so sick of everything getting taxpayer money for these projects. Why can't people just pay out of their own pocket? I just keep seeing these things crop up time and time again, when we have hospitals overwhelmed. Twenty thousand dollars is not tons of money in the grand scheme of things, (but) that sort of stuff keeps adding up.” Newstalk ZB deputy political editor Jason Walls on air last week, as RNZ’s Colin Peacock reported yesterday. 

An article summarising Walls’ views was published online afterwards, although removed on Friday after Wiles publicised her unhappiness with it.

“Would you pay $20,000 for a documentary about ‘science superhero’ Dr. Siouxsie Wiles? Because you already did,”  the Herald’s story began. 

The implication was that $20,000 of taxpayers’ money was ‘wasted’ on publicity for a scientist. As it turned out, the $20,000 referred to was for another unfinished project and the project had actually cost the documentary maker $8,000, with a further $7,685 in funds raised via a kickstarter campaign from the public.

Aside from the factual issues with the piece, it struck a nerve with Wiles’ supporters. It also struck a particular nerve of mine, regarding NZME’s use of publicly provided funds during and since Covid, and the apparent hypocrisy of some of its commentators about private use of public funds.

I tweeted this on Friday night in response to Wiles’ tweet.

NZME got $12.9m of public cash & will pay $15m in cash to investors

The owner of NZ Herald and NewstalkZB, NZME, received $8.6m of wage subsidies, which it has refused to repay (detail here via RNZ). That is on top of $4.3m of public funds from the Public Interest Journalism Fund and other public funds to pay for journalists working for NZME and specific projects over the last two years. The $12.9m in public funding helped stablise NZME during Covid, but the company has now returned to growing its operating profits and has reduced debt substantially.

In fact, NZME is now in the process of returning $15m in cash to shareholders through share buy-backs and special dividends. It is not the only one. Fletcher Building received $68m in wage subsidy cash during 2020 and has refused to repay it, despite an increasingly robust profit and balance sheet. It paid $140m of cash dividends to shareholders in April this year after reporting solid profit growth and a strong outlook because of a boom in house building and building materials sales. NZME and Fletcher Building are just two among many large and small New Zealand companies that have refused to repay the cash, despite reporting profit growth and higher cash reserves.

Overall, the Government gave $20b in cash to companies during 2020 and 2021 as wage subsidies, but less than $1b has been returned, which companies were supposed to do if they found they did not need it. Meanwhile, company profits have surged over the last two years, despite a sharp rise in costs and wages because of inflation. Those higher profits are due at least partly to the cash windfalls from Covid, and partly to profit margin expansion during the surge in inflation.

Stats NZ’s most recent annual enterprise survey for the year to June 30, 2021 found company profits rose by almost $25b to $103b from the previous (also) Covid-affected 2019/20 year, and were up from the last non-Covid year’s profit of $97b. That came after Government grants of $17.2b in 2020/21 and $9.4b in 2019/20, which followed $7.1b in 2018/19. That is also before the second round of wage subsidies in the second half of calendar 2021 in response to the delta lockdowns from August onwards.

Profits up $25b after $20b of cash payments from Government

More than 60% of the increase in profit in 2020/21 came from just three sectors: banking and insurance (up $10.6b), rental and real estate (up $3.7b), and construction (up $1.7b).

The Auditor General has criticised the Government’s failure to properly chase up those who incorrectly kept the wage subsidy money. Prime Minister Jacinda Ardern and Finance Minister Grant Robertson have repeatedly refused to call directly on companies to return the cash. MSD, the original distributor of the funds, has made a few prosecutions, but is spending more chasing and prosecuting beneficiaries to repay their $1b in debt to MSD.

Then there’s the unearned gains on assets

The other major interventions of the Government during Covid were through the Reserve Bank, which removed LVR restrictions, printed $55b to buy Government bonds to lower mortgage rates, and lent $12.7b cheaply for banks to lend on to home buyers. Those moves were all approved by Robertson. The central bank’s deliberate aim was to make asset owners feel wealthier so they would spend, lend, invest and employ to soften the economic shock of Covid.

It worked, but it also delivered asset owning households $621b in increases in net worth to a total of $2.4t between the end of December 2019 and the end of the March quarter of 2022, according to Stats NZ’s National Accounts data.

These accounts also show financial enterprises, which include banks and insurers, reported $6.6b in gross disposable income (equivalent to pre-tax profit) in the two years to the end of March 2022, up from $5.5b in the previous two years. Banks did not take the wage subsidies, but did benefit from cheap Reserve Bank loans and the removal of LVR restriction in 2020. This same data shows non-financial businesses made gross disposable income of $114.1b in that two-year period, up from $74.4b in the previous two years. This data also shows the equity held by non-financial businesses rose by $203b to $1.275t in the two years to the end of March.

So Covid policies helped increase the net worth and equity of households and businesses by $824b in 2020 and 2021 ($621b for households and $203b for businesses), including $378b from the rise in residential land and house values to $1.31t, caused largely by lower interest rates.

How to refund the Covid windfalls

There are various ways the Covid support could be refunded to taxpayers at large by business and home owners, including simply repaying the bulk of the $20b in cash support for businesses. It would require direct requests for repayment from the Government, which we have yet to see. CTU Economist Craig Renney has also suggested a windfall tax on bank profits, which are currently running at an annual rate of $6.8b per year, and reflect the big surge in mortgage lending done through the last two years of Covid and cheap funding from the taxpayer-owned Reserve Bank.

The refunds of unearned Covid gains could also be done through a one-off 0.2% tax on the value of all residential-zoned land, which would raise around $20b.

That combined $40b of windfall refunds to the Government could be used to both increase incomes for the lowest paid and reduce Government debt, or alternatively, to invest in infrastructure to allow much greater supply of affordable housing.

I think a debate about the wealthiest returning their near-$1t in windfall gains from Covid policies is more useful than debating whether $20,000 of public funding for a documentary on a public scientist can be justified, especially when the debater’s employer recieved $12.9m of taxpayer cash and is paying it all back in cash dividends to its fund-manager owners.

Elsewhere in the news overseas and here this morning:

Recession fear - An early S&P survey for July showed US and European factory confidence sunk into recessionary territory, forcing share prices 1-2% lower on Friday night and dragging bond yields significantly lower as fears about inflation receded somewhat. The US 10 year bond yield fell 14 basis points to 2.77% and the German 10 year ‘bund’ yield fell 17 basis points to 0.97%. Longer term global interest rates that set our mortgage rates are peaking because recessions will reduce inflation.

Shaw’s future in doubt - James Shaw was ejected as Green Party co-leader on Saturday night in vote that opened up his position to a wider contest and revealed deep divisions in the party. There were 32 delegates out of 107 who voted to reject Shaw’s annual re-appointment as co-leader, passing the 25% threshold needed to open up the position. Shaw has said he has yet to make a decision about whether to stand again, although Prime Minister Jacinda Ardern said he supported retaining Shaw personally as Climate Change Minister. Some Green activists are unhappy with a lack of progress on climate change action and poverty reduction. Shaw must decide within a week and a fresh vote will be held in five weeks.

Chart of the day

Time ambulances spend waiting to discharge at A&Es

Quote of the day

Why Green members voted to oust James Shaw

“Our Government, led by James as Minister, has been shown not to be reducing emissions, not to have ambitious mandatory targets, but to actually be weak. You have to remember you're in the Green Party - you're not here to placate Labour and necessarily stay in power for the sake of it." Former Green MP Catherine Delahunty via Newshub

Some 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, Aotearoa-NZ’s annual inflation rate rose more than expected to 7.3%, which restarted the debate about who was to blame and what should be done about it, as I wrote in Tuesday’s Chorus. Meanwhile, Europe finally tightened its monetary policy, but faces the potential for another debt crisis, as I wrote in Friday’s Chorus.

In the climate crisis, I wrote in Monday’s Chorus about performative declarations of climate emergencies by politicians and why they can’t now be trusted. In Wednesday’s Chorus, I wrote about growing fear of another house-building bust and why that’s both a long term problem and a symptom of our political economy’s structural failings.

In Friday evening’s live hoon webinar for paid subscribers, which is in recorded form above for all subscribers, I took a lap around these issues and more in geopolitics and the global economy with co-host Peter Bale.

We talked about:

* who Liz Truss is and why she might become Britain’s next Prime Minister;

* how the ground war in Ukraine is now playing out;

* whether inflation is really peaking;

* whether the Reserve Bank here can be blamed for high inflation;

* how the Auckland Mayoralty campaign is playing out.

Here’s Peter’s Weekly World Bulletin email newsletter for more background.

This is my weekly summary and sampler of the big news of the week we’ve covered on The Kākā for both free and paid subscribers. The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. Join our community by subscribing in full.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and anyone on a benefit. We also have a new special $65 a year deal for over 65s who are renting and reliant on NZ Superannuation.

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: European economies and its financial markets face a fresh round of turmoil after the European Central Bank was forced to tighten monetary policy for the first time in 11 years and by twice as much as expected to fight euro zone inflation now running at 8.6%.

The biggest euro zone rate hike in 20 years came just as Italy’s debt crisis returned with a vengeance because of the resignation overnight of Italian Prime Minister ‘Super Mario’ Draghi, the man who rescued the euro during Europe’s last debt crisis a decade ago.

So what? Brace for more global financial and geo-political turmoil that may deepen recessions already expected in the Northern Hemisphere and ensure inflation continues coming off its mid-2022 peaks.

That may allow central banks to return to money printing eventually to again rescue banks and asset owners from the pain of lower asset prices. It all depends on whether inflation comes off the boil. I think it will, but that’s not a consensus view, to say the least.

Paid subscribers can see and hear more detail and my analysis below the paywall fold and in the podcast above about what the latest European financial drama means for the global economy, and for borrowers, savers, workers and managers closer to home, especially if the inflation goes away as I, but few others, expect.

Elsewhere in the news this morning here and overseas:

A Covid cough - US President Joe Biden tested positive for Covid overnight, but has mild symptoms and is already being treated with Paxlovid. The White House said the 79-year-old was fully vaccinated and twice boosted. It reported he had a runny nose, fatigue and an occasional dry cough. Reuters

Still squeezed - Russia’s Gazprom turned the gas supplies back on to Europe through its Nordstream 1 pipeline overnight after a 10-day scheduled maintenance outage. That eased some fears it would stay completely closed going into the Northern Winter in a way that would force gas rationing and hammer European GDP 2-3% lower next year. But the flows remain constrained at 40% of normal levels and the European Union’s call on Wednesday for 15% cuts in consumption still stands. CNN

Amazon pounces - Amazon announced overnight it would buy US primary healthcare provider One Medical for US$3.9b in a move to expand further into telehealth and monthly subscriptions for individuals wanting access to doctors, nurses and health advice. Amazon has already transformed retailing and cloud computing. Health is another massive part of the global economy yet to see the full deflationary power of shifting services into the cloud. CNN

Cooling economy - US jobless claims rose in the week to July 16 to 251,000 from 244,000 the previous week and was above economists expectations for claims of around 240,000, indicating a red-hot jobs market in the world’s largest economy is coming off the boil and also softening inflationary pressure. Also, the Philadelphia Federal Reserve’s monthly survey of mid-Atlantic manufacturing activity contracted in July for the second consecutive month at a rate that was worse than economist expectations. MarketWatch

New outbreak - China's southern industrial city of Shenzhen, which has 18m people, vowed last night to "mobilise all resources" to squash a Covid outbreak that curretly has 12 cases. The measures include wide-spread testing and temperature checks, along with lockdowns of Covid-hit buildings. China’s economy has been wracked by lockdowns in the last six months as President Xi Jinping clings to his elimination strategy ahead of a key Chinese Communist Party conference expected in November to confirm his ‘leader-for-life’ status. Reuters

Briefly elsewhere:

Ovato, the largest magazine printer in Australia and New Zealand, announced yesterday it had been put into voluntary administration.

Goldman Sachs announced it had appointed former Australian Treasurer, Josh Frydenberg, as a ‘Senior Regional Adviser for the Asia Pacific’.

The latest Covid wave filling Aotearoa-NZ’s hospitals appeared to have peaked, Keith Lynch and Hannah Martin reported at Stuff this morning.

Chart of the day

Trade deficit record after Marsden Point refinery closes

Stats NZ reported yesterday New Zealand’s annual merchandise trade deficit hit a record-high $10.5b in the year to the end of June 2022, up from a deficit of $277m the previous year. Goods exports rose $7.2b to $67.6b, but imports rose $17.4b to $78.1b, driven partly by a surge in the cost of petroleum imports due to the closure of the Marsden Point refinery and higher underlying oil costs.

“Since the recent closure of the Marsden Point refinery, more refined petrol and diesel are being imported. The value-adding, which occurs offshore prior to arriving in New Zealand, contributes to the increases in the total import value.” Stats NZ international trade statistics manager Alasdair Allen.

Here’s a deeper explanation via a Stats NZ diagram of a deficit of $701m for the month of June.

Quotes of the day

‘Whatever it takes’ version 2.0

“The ECB is capable of going big. We would rather not use (the new programme), but if we have to use it, we will not hesitate.” European Central Bank President Christine Lagarde speaking overnight after the ECB hiked its deposit rate by 50 basis points to 0.0%, which was twice market expectations and previous ECB suggestions for a 25 basis point hike.

The deposit rate had been negative for eight years. The ECB also launched its ‘defragmentation’ bond-buying programme overnight, which is designed to buy Government bonds from EU countries in stress to lower their interest rates.

Lagarde also said overnight the programme had ‘no limitation,’ echoing the now famous (or infamous) comment from then-ECB President Mario Draghi in July 2012 that he would do ‘whatever it takes’ to rescue the euro during a previous debt crisis.

Back then, Greek, Italian, Spanish and Portugese bond prices collapsed (which mean yields or interest rates spiked) well above the yields of northern European Government bond yields, putting the euro under intense stress. Reuters

A perfect storm in Europe’s financial markets

“The combination of a brewing giant stagflationary shock from weaponised Russian natural gas and a political crisis in Italy is about as close to a perfect storm as can be imagined for the ECB.” Krishna Guha, head of policy and central bank strategy at US investment bank Evercore, just ahead of the ECB decision, via FT-$$$

Number of the day

229 basis points - The spread or difference between the German 10 year Government ‘bund’ yield and the Italian 10 year Government bond yield is seen as an indicator of the stress in Europe’s financial and banking system. It rose a further 15 basis points overnight and is up more than 100 basis points in the last year.

The higher the spread goes, the bigger the fear that Italy might default on its debts. That’s a problem because the European Central Bank has been buying all of Italy’s new bonds in the last decade or so and Italian banks are also big holders of Italian Government bonds.

An Italian default would wreck the balance sheets of Italy’s banks and, in theory, force the ECB to rescue them, much to the chagrin of voters and bankers in Germany. That would put the euro and the European economy under intense stress. A rise in the spread to over 250 basis points is seen as a ‘red line’ that could cause the ECB to intervene again.

Some fun things

Ka kite ano

Bernard

PS: We’ll have our regular weekly Ask Me Anything for an hour today at midday and our weekly ‘hoon’ live webinar on the week’s news with Peter Bale for an hour at 5pm today. The link for paid subscribers to join at 5pm is here.

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: Construction cost inflation hit a record high annual rate of 7.7% in the June quarter and is likely to remain intense for the rest of the year, Core Logic reports this morning in its quarterly Cordell Construction Cost Index. It sees the potential for a further rise into double digits because of labour shortages later this year.

Paid subscribers can see more detail and hear more of my analysis in the podcast above.

‘It will get worse before it gets better’

Core Logic published its Cordell Construction Cost Index (CCCI) for the June quarter this morning and warned already-record-high inflation was likely to escalate through the rest of this year because of labour and building material shortages and a long pipeline of unfinished building consents.

The CCCI measures the cost to build a 200 sqm three-bedroom, two-bathroom single storey brick and tile house. The Index rose 2.6% over the quarter, lifting annual growth to 7.7%, which was the largest increase since the CCCI commenced in late 2012.

CoreLogic Chief Property Economist Kelvin Davidson said the industry was under intense cost pressure and an early reprieve was unlikely.

“This is the swiftest rise in the NZ CCCI we’ve seen in a decade, and I don’t expect these price pressures to ease for at least another couple of quarters, given ongoing materials shortages and labour pressures.

“Looking ahead, it wouldn’t be a surprise if cost pressures get worse in the next quarter or two, potentially pushing up towards double-digit indexed growth, before they start to slow later as builders’ workloads potentially ease off in 2023. But we’d also be a bit more confident than in the past that the wider construction industry won’t go from boom to bust.

“After all, the loan-to-value ratio rules and tax system now favour new-build property, both for owner-occupiers and investors. A higher ‘normal’ level of demand for new property than we’ve seen in the past should give developers confidence about future market conditions.” CoreLogic Chief Property Economist Kelvin Davidson

So what? - If you haven’t already listened to my Dawn Chorus yesterday, I’ve gone in depth into the industry’s problems with productivity that are worsening the inflation, which is the major domestic source of inflation in the economy overall.

Elsewhere in the news here and overseas this morning:

UK inflation pain - The Office of National Statistics reported overnight that British consumer prices rose 9.4% in June from a year ago, lifting the annual inflation rate from 9.1% in May. Food and fuel costs drove most of the 0.8% rise in prices in June from May. The Bank of England expects British inflation to rise over 11% later this year and is expected to hike its official cash rate by 50 basis points to 1.75% on August 4.

European gas plea - The European Commission formally asked European Union countries to plan to cut gas consumption 15% this coming winter because of fears Russia would cut off gas supplies completely. Meanwhile, the IMF published an analysis showing how Russian gas cuts would hammer European GDP, including potential 2-3% cuts in German output next year.

Another crypto crash - The Zipmex crypto-currency exchange and lender announced overnight it had suspended withdrawals because of market volatility and the ‘financial difficulties of our key business partners.’ The exchange operates from Thailand and also offers services in Singapore, Indonesia and Australia. Coindesk

Farmers on edge - Biosecurity and Agriculture Minister Damien O’Connor announced last night a stepping up of measures to stop Foot and Mouth Disease from getting into Aotearoa-NZ from Bali, including using disinfecting foot mats for passengers arriving from Indonesia. We no longer have direct flights from Bali or Indonesia since Covid. An audit of the supply chain for PKE from Indonesian palm plantations would also be carried out.

Chart of the day

US already in recession?

The Federal Reserve Bank of Atlanta produces a weekly ‘flash’ estimate of ‘GDPNow’ that estimates GDP growth given a bunch of real time leading indicators. Its latest weekly estimate is that the US economy is already in recession with June quarter GDP down 1.6%.

Number of the day

If only

US$416,000 - The US National Association of Realtors published June sales data overnight showing the median price of existing homes sold in June was a record-high US$416,000, up 13.4% from a year ago. That’s NZ$668,000 at the current exchange rate of 62.2 USc. REINZ reported last week the median existing home price in June was NZ$816,000 or US$507,000, which equates to 13.7 times the World Bank’s measure of Aotearoa’s net national income per capita of US$33,692. The US median price is 7.8 times US net national income per capita.

So what? - Our houses are almost twice as expensive relative to income than those in the United States.

Quote of the day

The PM on Three Waters

“There is common ground, one area where we absolutely all agree except potentially bar the opposition, is that the status quo is untenable. The vast majority of local government accepts that, and it then becomes a debate of what you do about it.” PM Jacinda Ardern speaking after delivering a speech to Local Government New Zealand’s annual conference yesterday in Palmerston North, via RNZ.

So what? - The PM has again focused on the aspiration, rather than the balance sheet structure and a social license to go with it that is needed to achieve the improved water quality. Three Waters is in effect a political fudge to try to solve the real need for local and central Government to use their balance sheets to invest much more heavily in water and other infrastructure, but without specifically asking voters to raise taxes in the form of water charges and public debt in the form of water authority bonds. I’ll go into more depth on this in a deep dive later today.

Some 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: Reports are emerging of an 80-90% slump in inquiries for new house builds because of rising interest rates and concerns about falling house prices. Fear is growing of a repeat of the boom-bust cycle that has killed past attempts to improve the construction industry’s structure, technology and training to improve productivity.

Paid subscribers can see more detail and analysis below the paywall fold and in the podcast above.

Tragically, here comes the bust after the boom

For years it has dominated the cadence of our economy and stopped our splintered, sub-scale and high-cost house-building sector from investing in the new technology, scale-building consolidation and training needed to improve productivity, and, ultimately, improve housing affordability.

The boom-bust cycle in housing is acknowledged as the main reason why so many builders and tradespeople prefer not to make permanent hires, prefer not to bring on apprentices and prefer not to invest in scale, technology and systems that would allow them to build many more homes faster and cheaper. After all, why invest in expensive capital and training when there’s a high risk you’ll be stuck high and dry with equipment mothballed and highly-trained staff leaving to work in Australia as soon as the bust comes.

That’s what happened in 2009/10 after the systemic collapses of retail-funded property finance companies and the Global Financial Crisis. Building consents collapsed to lower levels per capita than during World War Two and the Great Depression and an entire generation of just-trained apprentices and subbies jumped on planes to work in construction and the mines in a booming Australian economy through 2010 to 2012 (thanks to China’s massive buying of iron ore and coal to fuel its own infrastructure surge unleashed to combat the GFC)

That knowledge and capacity just went. The hope in the 2010-20 decade just completed was that a rebound in the housing sector could be sustained, in part by the Government providing a strong baseline of building demand through Kainga Ora and Kiwibuild, and as bigger firms able to build more complex higher-density projects built up their balance sheets and were able to ‘build through’ the ups and the downs safe in the knowledge they could handle the buffeting.

The bust is coming

We’ve already seen a collapse in residential building intentions in the NZIER QSBO and ANZ business confidence surveys earlier this year as the easy and cheap credit dried up from November onwards, which in turned dragged down house prices from the peaks and reduced some of the incentives to buy off the plan and flick them on for capital gains, tax-free or otherwise.

However, this morning Carmen Hall reports for the NZ Herald-$$$ from interviews with builders large and small that inquiries for new builds have crashed 70-80% in recent months.

"We know from nationwide sales data across a lot of our members, that there's been a decline in interest and a decline in demand of between 70 and 80 per cent over the past six months. Those numbers are eye-watering. This is going to wreak havoc." Master Builders Association national vice-president Johnny Calley via NZ Herald-$$$

Classic Group director Peter Cooney was quoted as saying sales were back down to levels last seen in 2008 because of tighter credit and uncertainty about interest rates. He has been through four boom-bust cycles.

"Workloads are still strong from last year's sales but going forward in six months it will be a whole different ball game. There is going to be some real hurt coming in the construction industry.

"This one has been a lot more sudden than we expected. I would anticipate that it will last until such time as interest rates begin to decline again which will be when inflation is under control." Classic Group director Peter Cooney

Interest rate rises and still-very-high house prices were also blamed by others.

"The biggest uncertainty will be how long the cycle takes to turn around. The biggest challenge will be how to bring new housing back to an affordable level." Venture Developments director Mark Fraser-Jones

New Zealand Certified Builders CEO Malcolm Fleming was quoted as saying his members had 12-24 months of work lined up.

Housing Minister Megan Wood was quoted as saying the Government was aware of the issue.

"We have been engaging with the sector on this issue through forums such as the Construction Sector Accord, which has played a vital role in maintaining a viable construction sector over the past year." Megan Woods.

A dream dying at birth

Meanwhile, there have been reports via BusinessDesk-$$$ in recent weeks from leaked internal documents showing Kāinga Ora has frozen new hiring and building plans because of concerns about cost blowouts now and the long term debt outlook with the new higher interest rates.

The long-held dream of lifting the base of house-building demand to a dependable and relatively high drumbeat to encourage the creation of larger-scale builders of more complex medium density homes may well have just died at birth.

‘Engaging with the sector’ is a long way from saying the Government guarantees to buy 15,000 affordable medium density homes per year. At present, those numbers are in the low-single-digit thousands, and remain subject to the whims of individual ministers and Governments.

Again, the 30/30 maxim is holding the Government back from providing that assured multi-election-cycle demand that the scale builders will want to see before they commit to the scale, technology and skills development needed to make those investments pay through the cycles.

And, of course, the failure to improve productivity much has helped drive the latest burst higher in construction costs (chart below of housing cost inflation in Monday’s CPI data) because of a surge in demand without the capacity to respond.

Twas ever thus.

Chart of the day

US homeowners just got very pessimistic

Elsewhere in the news here and overseas this morning:

* ‘0% here we we come’ - The European Central Bank will consider a full 50 basis point hike in its main deposit rate from minus 0.5% to 0% (!) on Thursday night NZ Time in an effort to catch up with finflation running at nearly 9%. A full half point hike would be bigger than the 25 basis points financial market expectations. Reports citing unnamed central banking sources in the FT-$$$, Reuters and Bloomberg overnight previewed the shift to a more aggressive stance, which boosted the euro. The Bank of England’s Governor Andrew Bailey also gave a speech overnight signalling a 50 basis point hike, the biggest since 1994, to 1.75% early next month.

* London’s burning - Britain experienced its hottest day ever overnight, with daytime temperatures hitting 40.3 degrees celcius in places (up from the previous record high of 38.7C in 2019) and night time temperatures now at 25C (up from previous a previous high of 23.9C in 1990). Fires broke out in parks and commons near homes in and around London, railways buckled and Luton Airport’s runway melted. Wildfires raced through southern parts of France and over 1,000 people died in Portugal from the heat. (See numbers of the day below). BBC

* Gas back on? - Reuters reported overnight from two anonymous sources that Russia was likely to turn Europe’s gas supplies back on through the Nordstream 1 pipeline later on Thursday after a 10-day outage for scheduled maintenance, which would ease fears of imminent rationing of gas to industrial users and electricity generators, and reduce some of the risks of a Eurozone recession later this year.

* Housing not starting - Data released overnight showed US housing starts fell 2% to 1.559m in June from May, which was less than the consensus forecast by economists for a rise of about 1.4%. US 30 year mortgage rates have almost doubled this year to nearly 6% as US longer-term interest rates have risen sharply in anticipation of more aggressive tightening by the world’s biggest central bank, the US Federal Reserve. It is expected to hike its main rate 75 basis points to a range of 2.25-2.5% next Thursday morning NZ Time. AP

* Rising profits cheer - US stocks rallied 2-3% this morning despite the signs of strong inflation and slowing economic growth, partly because early profit season results show companies have been able to increase their profits despite the sharp rises in costs as they exercised market power to increase prices faster than those costs. About 9% of S&P 500 firms have reported June quarter earnings, with two-thirds beating analysts’ expectations for profits so far. Some investors are betting the market has bottomed out. CNBC

* RBA review details - Australia’s Treasurer Jim Chalmers formally announced an independent review of the Reserve Bank of Australia this morning, including whether the bank’s current inflation-targeting framework is appropriate and how it performed during Covid. The review will be led by the Bank of England’s financial policy committee external member Professor Carolyn Wilkins, macroeconomist Professor Renee Fry-McKibbin, and secretary for public sector reform Dr Gordon de Brouwer. AAP

Quote of the day

‘Just do it’

"Mask-wearing should be like wearing a seatbelt.” Ashley Bloomfield in a Newshub article where PM Jacinda Ardern was criticised for not wearing a mask at a gathering of youth Parliamentarians in the Beehive yesterday.

The photo below is from the PM’s Instagram.

"What we mean when we recommend mask-use is that you should do it." Covid 19 Minister Dr Ayesha Verrall said when asked about her boss’ photo.

Some 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: Inflation not seen since the eve of the creation of our independent, inflation-targeting Reserve Bank in 1990 has unleashed a blame game that has yet to target the central bank. The Opposition is blaming the Government, which is complicit, but it is the Reserve Bank that should be first in the firing line.

Paid subscribers can see more analysis and detail on the historic inflation figures below the paywall fold and hear more in the podcast above.

That includes my argument for a proper independent Australian-style review of the Reserve Bank’s ‘least regrets’ decisions in the heat of the Covid crisis in March 2020, which caused at least a third of the inflation and can be fairly blamed by a whole new generation of young renters being forced to give up their hopes of home ownership, or leave the country.

The Reserve Bank should have a lot more regrets

Regrets, I've had a few But then again too few to mention I did what I had to do I saw it through without exemption - Frank Sinatra singing My Way

When it comes to monetary policy right now, Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson are doing their own karaoke duet of the ‘Chairman of the Board’s’ signature tune.

At times, Orr has even appeared Edit Piaf-like in his defence of the Reserve Bank’s actions.

Non, rien de rien. Non, je ne regrette rienNi le bien qu'on m'a faitNi le mal, tout ça m'est bien égalNon, rien de rienNon, je ne regrette rien - Edit Piaf singing ‘Non, je ne regrette rien.’

So are they justified in having few or even no regrets? In my ‘Harry Hindsight’ view: no. And now there must be an accounting for those regrets, and some learning.

So far, the Reserve Bank’s only self-reflection has been to self-justify and run its own regular five-yearly review of its monetary policy mandate. Meanwhile, Robertson’s arguments have been all about deflecting blame overseas. The Opposition has chosen largely to focus its attacks on the easier political target of Labour’s ‘addiction to spending,’ rather than break the habits of political lifetimes and criticise the independent central bank. Neither of those three strategies is credible in the long run, and all three players only need to look to their colleagues in Australia to see that a truly independent and deep review is needed.

As mentioned above, the new Labor Government of Australia is about to launch a bi-partisan and independent review of the Reserve Bank of Australia’s money printing, which did go on for longer than our central bank’s, but has had broadly similar effects on house prices and inflation.

Also as mentioned above (and below), we now have credible and trenchant criticism from establishment figures of the Reserve Bank such as former Reserve Bank chief economist John McDermott (2007-18) and former Reserve Bank Board Chair Arthur Grimes (2003-13), who was instrumental in building our independent inflation-targeting regime in the first place.

There must be a serious, deep and independent review of the Reserve Bank’s actions in 2020 and 2021, if only to win back the trust of the generation of renters (without generous parents) who are now fleeing to Australia to find renewed hope of home ownership and family lives.

So how did we get here?

The Reserve Bank decided in mid-March of 2020 to throw the kitchen sink at the economy to reassure borrowers, home owners and banks that there would not be a depression because of Covid lockdowns. It said at the time it wanted to pursue a ‘least regrets’ policy.

However, within months it was clear the panic was past and the economy was bouncing back into the shopping centres and open homes with a surprising rapidity, along with house prices, jobs and spending. In retrospect, the Reserve Bank should have stopped money printing within a few weeks of the end of the first lockdown in June, or even once the bond markets were unfrozen in May. It should never have removed the LVR controls in April 2020. It should never have started the cheap loans to banks in December 2020, let alone continued expanding them to the present day.

In my view, the Reserve Bank’s mistakes were not made in that momentous week of March 16 to 23 of 2020 as the Government collectively decided on hard lockdowns and the Reserve Bank launched a $30b money printing and bond buying programme, as well as slashing the Official Cash Rate by 75 bps to 0.25%. Least regrets and the kitchen-sink-throwing were appropriate then, in the fog of fears about about 30% unemployment and a global financial collapse. But within a couple of months, the fog was clearing.

Now the regrets equal (some of the) 7.3% inflation

The biggest mistakes were to remove the LVR controls at the end of April and to go on expanding the money printing plans to $100b by August 2020, even though it only used just over half of that capacity in the following year.

Now, after yesterday’s record-high 7.3% inflation data for the June quarter from a year ago, it’s clear the central bank should have at least a few regrets and should be held accountable for them, along with Finance Minister Grant Robertson, who was asked for and gave his approval to the biggest things thrown into that kitchen sink and left there: the money printing; the LVR removal; and the cheap bank lending.

The political blame game over the inflation has so far pussy-footed around the main issue. The money printing, (ongoing) cheap bank loans and LVR removals fired house prices 45% higher by November 2021, and is now being reflected in the demand-driven inflation in building materials, construction costs and rents.

The massive expansion of lending and the sharp rise in house prices was clear by mid-to-late 2020, but it took until June 2021 to explode into the real economy of rising housing costs.

The kitchen sink of monetary policy and prudential policy loosening was done with the clear knowledge of a restrained housing supply and the risk any demand stimulus would have a leveraged effect on house prices, and eventually rents. That is exactly what has happened.

How much of the inflation was domestically generated?

Just over a third of the 7.3% annual inflation reported yesterday can be blamed on that monetary policy loosening. The rest can be sheeted home to higher global food and fuel prices, although that at least partially is due to the massive money printing also done in the United States, Europe, Britain and Australia over the same period. Aotearoa-NZ was not alone in printing money to buy bonds to lower longer term interest rates.

Our Reserve Bank can rightly claim credit for stopping the printing sooner than the rest (July 2021) and starting rate hiking (October 2021) sooner than the rest. Although by then, the Reserve Bank had already printed as much, if not more, in proportionate terms to GDP, than those other central banks, and took the extra step of relaxing LVR controls.

By late 2020 the local genie was out of the bottle

However, within four months, it was clear the worst was over. Instead, the Reserve Bank went on printing and did not properly impose lending controls, stop printing and hike interest rates for another year. That was when the genie got out of the bottle, although it’s still worth saying the domestic demand-driven inflation genie is only responsible for about a third of the inflation.

Even if the Reserve Bank had kept the OCR at 0.25% until October 2021, simply not starting the cheap lending to banks, stopping the printing immediately, and re-installing the LVR controls ,would have reduced much of the damage, especially to house prices and rents, which, for example, are now rising at the fastest rate in history outside of Auckland (5.8%).

It’s time the Reserve Bank and Labour had at least a few regrets and acknowledged them. The Opposition also needs to front up and call for that review, which would at least separate the politicians from the process.

Here’s a more appropriate song for the moment.

I only want one dayOne lousy day, that's allOf every day that's been beforeSince time began

I know my prayer's in vainBut for a second, I'll pretendThat I can start today again - Paul Kelly singing ‘If I could start today again.’

What to do now (and not to do)

The temptation for the Reserve Bank now would be to over-react and hike much, much higher than its current plans. Financial markets priced in a rise in the OCR to just over 4.0% yesterday, which is in line with the Reserve Bank’s forecasts from May. If it wanted to do more, it could start by ending and unwinding the $12.7b of cheap loans to banks through its Funding for Lending programme. It could also further tighten LVR settings and unravel its bond-buying programme much faster.

From a fiscal policy point of view, enacting some sort of angry, fast spending crackdown would be counter-productive and too painful for those who can afford it least. If the Opposition were being intellectually honest and wanted to do the least damage, it would propose a windfall profits tax from those businesses who retained the $20b in wage subsidy cash in their savings accounts, and some sort of wealth or land tax to reduce house prices and pressures on rents.

No, I didn’t think so…

Elsewhere in the news overseas and here this morning:

* Eliminating GDP - China launched new mass testing of millions in Shanghai and Tianjin overnight as the BA.5 variant establishes itself in our largest trading partner, threatening to extend a sharp economic contraction as President Xi Jinping continues to pursue a Covid elimination strategy. Nomura estimated last night 264m people in 41 cities were locked down and were responsible for nearly 19% of China’s GDP, with vaccination going so slowly that only 80% of over-65s will be vaxxed by July next year at current rates. Reuters

* Rationing GDP - Reuters reported this morning Gazprom has told customers in Europe it cannot guarantee gas supplies because of 'extraordinary' circumstances, increasing fears President Vladimir Putin will stop Gazprom from turning the gas back on later this week. The European Union told members to cut gas consumption immediately to rebuild stocks before the winter and avoid heavy rationing for industrial users and home heating. However, even limited gas rationing is expected to cut European GDP by 1.5% of GDP over the next year.

* China’s mortgage stress - Chinese authorities moved overnight to censor social media posts about a gathering mortgage boycott by owners of unfinished apartments, while also considering concessions to lenders to complete projects and mortgage holidays for borrowers. Fears are growing the implosion of China’s apartment development sector will add the pressure on growth from Covid lockdowns. Bloomberg, Bloomberg

* US mortgage stress - In more signs that sharply-higher US interest rates are slowing the world’s largest economy towards recessionary levels, data out overnight showed home builder sentiment slumped in July to its lowest level since the worst of Covid in early 2020 (see more in chart of the day below). The result was much worse than expected, but, ironically, helped drive a rally on US stock markets as hopes grew it would see the US Federal Reserve hike only 75 basis points next Thursday, instead of 100 basis point. Reuters

* Grimes blames RBNZ - Former Reserve Bank Chair Arthur Grimes has launched a scathing attack on the bank’s handling of Covid stimulus, which led to a 45% rise in house prices and upwards pressure on rents. Grimes was quoted on the front page of the Dominion Post today by Thomas Manch as saying the Reserve Bank had been incompetent by easing too much before and during Covid, and now needed to cause the economy pain to stop inflation expectations getting out of hand. (See more in quotes of the day below).

* Australia’s central bank review - New Labor Treasurer Jim Chalmers said yesterday he wanted a full bi-partisan and independent review of the way the Reserve Bank of Australia handled Covid, with the terms of reference due within days. WAToday

Number of the day

Housing inflation’s contribution to the CPI shock

35.7% - That’s the share of the 7.3% annual inflation that is due to higher rents and higher house-building costs (55.6 basis points of the 170 basis points for the June quarter).

Quotes of the day

Arthur Grimes accuses the Reserve Bank of incompetence

“They're completely to blame for allowing this to happen. They’ve been incompetent, they’ve been really incompetent.

“There’s going to be people who made plans and interest rates are going to be a lot higher than what they budgeted on, and they’ll have to be higher, because of the mistakes the Bank's made, and it’ll catch people unawares: bankruptcies and people losing their houses.

“If we’re getting 7% domestic inflation now, and rents going up, and if wages start going up a lot, then it could become quite entrenched above 3%. And that’s when the Reserve Bank really has to cause more pain to bring it down.” Former Reserve Bank Chair Arthur Grimes as quoted in the Dominion Post by Thomas Manch.

Another leadership challenge for Green Co-Leader James Shaw

“There has been a small group of people who have been wanting to see the back of me ever since they saw the front of me.” James Shaw talking to 1News.

Chart of the day

US builder confidence fell 12 points to 55, vs expectations for 65

Some 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, demands to loosen restrictions on bringing in migrant workers grew to a crescendo amid widespread delays, cancellations and employer concerns about wage inflation. In Thursday’s Chorus, I looked at whether a loosening is a good idea on its own, and what a bipartisan deal on migration along with infrastructure spending should look like.

Also, the Reserve Bank hiked its official interest rate as expected and house prices kept falling, but I took a closer look in Wednesday’s Chorus at the central bank’s $12.7b worth of cheap loans for banks, which are diluting the effects of its tightening and giving already-very-profitable banks a taxpayer subsidy.

I also challenged the assumptions about our ‘squeezed middle’ in Friday’s Chorus and detailed in Tuesday’s Chorus how our bi-partisan 30/30 mantra on public debt and the size of Government is sucking our future dry. In Monday’s Chorus, I looked at how a pathway to citizenship for New Zealanders living in Australia would expose employers here to much more ‘brain drain’ pressure.

In Friday evening’s live hoon webinar for paid subscribers, which is in recorded form above for all subscribers, I took a lap around these issues and more in geopolitics and the global economy with co-host Peter Bale and special guest Professor Robert Patman from the University of Otago.

We talked about:

* Sri Lanka’s political and economic implosion;

* what Boris Johnson’s departure might mean for Aotearoa-NZ; and,

* How the Pacific Islands Forum went and why China may have over-played its hand in the Pacific.

Here’s Peter’s Weekly World Bulletin email newsletter for more background.

This is my weekly summary and sampler of the big news of the week we’ve covered on The Kākā for both free and paid subscribers. The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. Join our community by subscribing in full.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and anyone on a benefit. We also have a new special $65 a year deal for over 65s who are renting and reliant on NZ Superannuation.

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 intensity of calls to wrench open the migration tap are building to a tipping point, either before or after the election.

But we can’t only pull the migration lever again. There should to be a bi-partisan agreement on how populated and productive we want Aotearoa-NZ to be, and who should pay for the $200b of infrastructure needed to grow much more productively, along with housing everyone affordably and cleanly.

Just pulling one lever would only embed and worsen the high-population-growth, low-productivity-growth, low-wage, low-investment and high-house-price model NZ Inc has become. Given the current state of the political economy, this sort of societal and economic Groundhog Day appears the most likely result. But I suggest some options for what that bi-partisan set of truces and deals to make it happen could look like.

A howel of demands for more migrants

It’s now a crescendo that is reaching fever pitch and it’s only a matter of time before the Government relents, or the Government changes, and it happens anyway.

Deep in a winter of discontent, employers of all shapes and sizes, the Opposition and even many in public services such as hospitals and schools are now pleading for the Government to pull the migration lever. They want much easier access to lower-wage and usually temporary workers, although they’d also love to bring in as many higher skilled workers as possible with the carrot of an easier path to residency.

So far, the Government has held the line on its tighter ‘rebalanced’ system of only allowing accredited employers to import a restricted set and number of workers, and (mostly) only then at pay rates 31% above the minimum wage. But the pressure is building to breaking point, powered by signs everywhere of usually reliable essential services breaking down (suspended elective surgeries, school holiday flight cancellations, shortened shop and cafe hours, construction delays and building materials shortages, an age care sector near collapse), and growing fears of a wage-price spiral that worsens the inflationary cost-of-living crisis.

The trouble is this collective walk-run-stumble to looser migration settings is happening without any of the hard decisions on whether and how to fund $200b worth of infrastructure investment needed in tandem with this fresh surge. The end result of only pulling the one (migration) lever without pulling both levers (migration and infrastructure) will be the same intense pressure on capacity and prices of both the existing infrastructure and the new housing they are supposed to enable.

‘We’ve got to open the place up’

Ahead in the polls and with an anti-inflationary bellow at his back, Opposition leader Christopher Luxon said this week Aotearoa-NZ should pull the immigration lever urgently.

“We’ve got massive skills gaps everywhere, we’ve got to open the place up. And the accompanying piece to that is making sure we’ve got the infrastructure to support it as well because we’ve done a poor job of syncing those two bits together ... but yeah, we’re very pro-immigration.” National Leader Christopher Luxon telling the Sydney Morning Herald’s Latika Bourke in an interview in London that he urgently wanted more temporary and permanent migrants to boost productivity and alleviate inflation, including extending the eligibility for working holiday visas from 30 to 35 and allowing repeat visits.

Luxon understands the risk of only pulling one lever, but hasn’t developed any of the policy or political support for policies that would make a differnce any time remotely fast enough to cope with another 500,000 people in five years or so. Spending the $200b over 30 years, as suggested by the Infrastructure Commission, would require either massive amount of new debt issuance and/or some form of new or higher regular tax on everyone to both keep the debt at a reasonable level and service it at higher interest rates.

Neither have permission to borrow, tax and build. Yet.

Finance Minister Grant Robertson has already ruled out that sort of level of investment by the state, which would effectively double Aotearoa-NZ’s overall investment level to 30% of GDP per year. He has airily suggested options for ‘demand management’, which essentially means water and congestion charges. He does not have the political license for either. Three Waters is actually just a sophisticated way to bring in water charges and lift water borrowing without having to ask for ratepayer permission. It appears doomed. Labour can only hope voters don’t notice the lack of either credible progress or a plan before the next election, or that they continue believing the magical thinking of some that the infrastructure can be done without big debt, taxes or congestion and water charges.

The daily drumbeat of non-delivery and the attempts to distract with the smoke-screens of funding reviews and business case development will eventually erode the magic from that thinking and turn into a Government-rejection voting machine.

Luxon has yet to propose a way to match anything like a $200b infastructure funding plan to match his “very pro-immigration” stance. He has already ruled out Three Waters and has yet to commit to congestion charging. His spokespeople have ruled out Let’s Get Wellington Moving and Auckland Light Rail, although they do want to build more motorways. Luxon is also nowhere near a comprehensive and credible plan that produces affordable housing, transport, health and education at the same time as high population growth. That would require hospital, school and busways on a whole new level.

So what’s the problem right now?

On the face of it, there’s everything to love about a migration surge over the next couple of years. It would rev up an economy slowing towards at least a mild recession next year and take some pressure off some of the wage inflation building in the system. It would also deliver a huge morale boost to those in essential services such as hospitals, schools, transport operators and the food and grocery logistics system that help was coming. So many people are just plain exhausted after two and a half years of dislocations to work life, home life, school life and the intense pressure of constantly trying to deliver 100% of the 2019 level services with just 85% of the staff.

It could also be argued that a fresh surge of construction workers would re-energise the infrastructure build that is already underway, helping to fill some of the infrastructure deficit. And there’s plenty of people suggesting that the migration surge will only replace the exodus of Kiwis going overseas with their recently learned skills to earn higher wages, especially with the prospect of a path to citizenship in Australia and extra time on OE in Britain (an extra year to three years and a wider age window of 18 to 35 instead of 18 to 30.)

The ready, fire, aim problem

The bigger problem is that pulling in an extra 500,000 people in five years would amplify the congestion, the housing unaffordability, the emissions reductions shortfall and all the other shortages in hospitals and schools.

It would also amplify the tax-free and leveraged capital gains on housing once Luxon reversed the interest deductibility and brightline tax changes for property investors. That may not be the stated reason for only pulling the one lever (migration), but it sure is handy as ‘collateral (non) damage’ when trying to flip median-voting homeowners in the suburbs, which is the core task for Luxon.

There are other ways

So how could it be different? What truces would need to be declared and deals done to shift the consensus to pulling both levers in a more strategic way that planned to match the population growth with the infrastructure investment with a credibility and longevity that convinced private sector investors and home owners alike? Expectations management, as the Reserve Bank has found, is almost as important as matching those expectations and delivering.

We know the scale of the work needed for the existing (relatively low) forecasts for population growth (that’s the $200b), but we have yet to work out and agree what level of actual population growth both parties want. We have also yet to work out how to pay for the infrastructure, and more importantly, who should pay. These are all difficult conversations with supporters and the public. Centrist ‘low-target’ politicians avoid them like the plague, all the while hoping their opponents do walk into these minefields. Everyone has detonators at the ready.

To have these discussions sensibly and credibly, they require the sorts of bipartisan truces and deals that have been declared in the past 30 years around inflation targeting, consumption taxes, NZ Superannuation, urban densification and various middle-class welfare spending such as interest-free student fees, Working for Families and the Accommodation Supplement.

So what truces and deals are needed?

How could we build and pay for over $200b of infrastructure and public services over 30 years? What types of agreements would give voters and businesses the surety that the immigration would be matched with infrastructure?

In my view, those deals would have to include:

* a new settlement of the financial relationship between central Government and Councils that ensures they are helped with debt and given new and reliable revenue streams (possibly GST or shares of any new wealth, capital and/or land tax/levies) that are able to leveraged up into multi-decade investments because the incentives are aligned in way that squashes regular ratepayer revolts;

* both major political parties would have to agree to go forward with congestion and water charges, which are in effect an agreement to increase taxes to both pay for new infrastructure and manage demand in a way to minimises the scale and need for new concrete, steel and drilling of road and rail tunnels;

* both parties would have to agree to reduce or give up the mega-project plans ($7.4b for Let’s Get Wellington Moving $14.6b for Auckland CBD to Airport Rail) and focus instead on much-more-immediate mode shift from cars to buses, bikes, scooters and walking; and,

* both parties would have to agree on the scale and speed of the population growth they want over the next 30 years, and what they want to see achieved in housing affordability and emissions reductions over that time.

We’re closer than you might think

The key is removing the mega-plans in tandem with agreeing on congestion-charging funded mode shift. That massively reduces the scale of the problem of convincing voters to accept higher taxes, and it in-effect forces Labour-Green and National-ACT to give up a couple of their core demands in equal measure. It also means emissions reduction and the ‘just’ part of the ‘just transition’ might actually happen.

In effect:

* the Labour-Green side would have to give up on their big train tunnels in Auckland and Wellington’s tunnels and light rail;

* the National-ACT side would have to give up on their motorway plans and convince their own supporters of the benefits for motorists and taxpayers of a fast mode shift that frees up a few existing road and motorway lanes for (electric) Ferraris, (electric) double-cab utes, (electric) delivery vans, (electric) buses and (hopefully hydrogen-powered) trucks;

* in return, Labour-Green would get the fast and just transition to subsidised bus-led, walking and (electric) cycling-driven big cities that encourage much more (affordable, safe and warm) new medium density housing;

* Labour-Green would also get the sort of just transition they have talked about but not been able to win support for across the divide, along with air cover to fight off the political bombing runs of Groundswell-ish types protesting against ‘ute taxes’ and ‘toy train sets’;

* in return, National-ACT would get to keep relatively low income tax rates and (possibly) low or even no wealth, capital or land taxes; and,

* National would win electric vehicle-buying subsidies that help (their core supporters) farmers, suburban and provincial families and tradies into electric vehicles they can drive on clear roads (albeit with congestion charges).

All this may seem pipe-dreamish on my part, but there are signs there in recent years a deal could be done. Both National and Labour have flirted nervously with the idea of congestion charging for years, and both would like political air cover to do both congestion charging and subsidise electric vehicles. Labour and the Greens would also like the political air cover to ramp up public subsidies for cheaper, closer and more frequent bus and (existing) train use, along with subsidies for bikes and fast (partial) conversions of roads to cycleways and walkways.

National-ACT definitely don’t want to have to convince their suburban, rural and provincial supporters they should pay higher taxes for big railway and motorway tunnels in Auckland and Wellington. They’d also like to avoid land and capital taxes if they could.

A new deal for Councils is the key

The key to the whole package of deals is around council finances. Anything decided in and around the Beehive is now hostage to a myriad of ratepayer-revolts quashing investment, borrowing and rates rises. This is quite likely after this October’s elections.

The pathways are being built for this ‘new deal’ for councils. Not that anyone would know it because of the Three Waters and other noise, but there is actually a full-scale review going on right now around these issues of shared funding of infrastructure and new revenue tools for councils. It could be the vehicle to suggest and agree a deal.

The Productivity Commission and Infrastructure Commission have also both just produced major reports that scope out the potential risks and scale of rapid population growth without enough accompanying infrastructure spending. Ideas for congestion charges as demand management tools and the suggestions about avoiding big, expensive tunnels and rail lines are already out there in safe spaces.

The Productivity Commission has also recommended a Government Policy Statement that addresses the population planning issue and connects it directly to infrastructure planning in a way that means the economy and society have ‘absorbtive capacity’ for more migration.

The Climate Commission has also prepared the political ground for the types of electric vehicle subsidies and mode shift plans that both sides will need to call on when the time comes to convince their ‘tribes’.

Really? You’re joking right?

My base case is that none of these deals get done and the short term drivers will mean Opposition parties take the immediate opportunities in front of them to score political points (ute tax, ‘anti-car’ policies and ‘multi-billion-dollar toy train sets’) and for the Government to adopt a defensive crouch and ‘low target’ set of policies (no congestion charges, no mention of higher debts or any new taxes to fund them).

Back to the (crowded and expensive) future

The migration lever will then be pulled, either in desperation before the election by Labour, or by National once in power. The same infrastructure-lite approach will be taken by the Government that starts inflating house prices again and leads us back to where we were just before the pandemic.

Back then, we had the fastest population growth in the developed world, the highest rents relative to income in the developed world, the best performing housing market in the world for owners and the fourth highest proportion of residents living overseas in the OECD. We also had among the most expensive public transport fares in the world and were well under our targets for emissions reductions.

Now, our population isn’t growing nearly as fast, but would again once the migration lever is pulled. We still have the most expensive rents and houses in the developed world, and a new generation of residents are looking to move permanently overseas because wages are too low and living costs (mostly housing and food) are too high.

Readers may doubt it, but I remain hopeful and very keen to suggest options and solutions that I can’t be held responsible for delivering, but would be more than happy to hold those responsible accountable.

Again, this is a piece of public interest, I feel, so here’s the usual question and I await your response. Should we open it up for all immediately?

Elsewhere in the news here and overseas this morning:

* Data overnight showed US CPI inflation rose 9.1% in June from a year ago, which was above forecasts for a rise of around 8.8% and the highest rate since November 1981, although stock markets were not rattled and longer bond yields actually fell on the belief likely Fed rate hikes would deepen a recession later this year and/or next year;

* The Bank of Canada surprised everyone by hiking its cash rate by a full 100 basis points to 2.5% overnight, while the Korean central bank hiked by an expected 50 basis points to 2.25%;

* ANZ Group in Australia confirmed it was looking to buy MYOB; and,

* Later today, the Government is expected to announce free and/or cheaper access to masks and rapid antigen tests.

Chart of the day

How the Kiwi diaspora in Australia was built

Number of the day

50 basis points - The Reserve Bank raised the OCR as expected by 50 basis points to 2.5%. There was not much reaction. Most economists still think the OCR will peak at 3.5% later this year and the Reserve Bank won’t get to lift it in line with its last forecast in May of a 3.95% peak. Some see the Reserve Bank cutting again, or at least forecasting cuts, by later next year.

Some 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: Covid has exposed joint underlying crises in our hospital system and our labour market, which were created by a 30-year long mantra of low public debt and low taxes adopted across the machinery of local and central Government, and accepted by politicians and median voters either tacitly or directly.

That mantra has never been stated as such out loud, but it governs every aspect and level of Government and our major public services day in and day out. It effectively means that the size of Government should be no larger in the long run than 30% of GDP, and that is enforced by keeping net public debt no larger than 30% of GDP.

Paid subscribers can see more analysis and detail on the mantra and its effects below the paywall fold now, although I’ll open it up after midday for sharing publicly, given the public interest involved. Subscribers can advise in the poll below if they want it earlier, or even immediately.

Elsewhere in the news here and overseas this morning:

* Russia turned off all gas supplies to Germany overnight as part of scheduled maintenance on its Nordstream 1 pipeline, but Germany fears the Kremlin will choose in ten days’ time not to turn it back on, forcing rationing for industrial users and a sharp recession through the Northern winter; Reuters

* Hundreds of protestors outside bank branches in the central Chinese province of Henan were beaten by Police after they demanded access to US$5.8b of cash frozen after fraud hit the banks, and after some customers were wrongly designated by local officials as Covid cases to stop them protesting; and, BBC

* A survey of over 900 women doctors in Aotearoa-NZ found they thought the system was at risk of catastrophic collapse because of many years of under-funding and staff shortages. RNZ Stuff

The 30/30 mantra that’s sucking our future dry

It governs every aspect of our daily lives and all of public life in Aotearoa-New Zealand, but few know about it or have thought it remarkable enough to debate publicly. In many cases, it is just assumed to be such an obvious and good thing that it’s not worth contesting or noting.

The mantra is that no central or local Government will build a public service, set a tax or run deficits that mean the size of central Government or the size of net Government is much more than 30% of GDP in the long run. Effectively, it’s a 30/30 mantra because it means the tax to GDP ratio is set at around 30% of GDP and net Government debt is not allowed out go much above 30% for more than a couple of years. This interdependent rule circumscribes what Government can do, how much it can invest and what politicians are ‘allowed’ to propose to voters.

It has meant that over the last 30 years, our Governments (both local and central) have effectively run the most sinking of lids they could on Government-provided services such as healthcare, education, welfare and public transport. It is the strand of Governmental DNA that runs through everything. It is the unspoken force behind directives from public service leaders to the front lines and in their advice to incoming ministers and councillors. Its legal basis is the 1989 Public Finance Act.

There’s are good examples in plain sight every day and the effects are just as evident in the crises engulfing our health system at the moment and in the crisis emerging in the wider labour force. Covid was the shock that has exposed the weak underpinnings the 30/30 mantra has created for our economy and society. We’re discovering that mantra only works when our population is growing fast because of high levels of temporary guest worker migration and an ongoing-and-forever slide in interest rates that powers house prices higher. Now the migration has stopped and interest rates have risen (at least for now), the weakness of our economy’s underpinnings are clear.

Just this morning, health workers and ambulance staff are warning of a ‘catastrophic collapse’ in services because of staff, infrastructure and equipment shortages built up over many years of straining to keep spending on healthcare and worker wages low. Business groups are pleading with increasing desperation for the Government to properly releases the shackles on temporary worker migration.

When the tide goes out, the naked are exposed. Covid was a social and economic undersea earthquake that happened in 2020. The tide going out is in effect the sea drawing back before the tsunami comes back in.

A simple example

Here’s just one example. This morning the Erin Gourley reports for the Dominion Post that prospective Wellington City Council councillors are being told by the Council’s CEO Barbara McKerrow and CFO Sara Hay in a briefling released later today that they’ll have few choices to talk about with voters other than to consider selling Council assets. Here’s the detail, with the between-the-lines messages spelled out below:

The council – which has a big portfolio of commercial assets including ground leases under many commercial buildings, a 34% shareholding in Wellington Airport, and ownership of the KiwiPoint Quarry – may have to sell some off in order to “recycle the proceeds to other council priorities”.

A pre-election report is presented each year to candidates looking to run for election and summarises key issues for the council, including details of the council’s finances and the challenges ahead for the next council term.

Candidates reading this year’s report, released on Tuesday, should be left under no illusion that the tests awaiting them will be real and demanding – building a city capable of housing up to 80,000 more residents, in an evolving climate, with huge and growing infrastructure needs and declining revenue. Erin Gourley for the Dominion Post

Why is this the only option? Because most of the levers councillors could use to change the trajectories of spending on public services are unable to be used because of the 30/30 mantra. Also, the current situation of creaking-to-breaking-point infrastructure and huge future investment needs are the inevitable result of the 30/30 mantra in tandem with a high population growth strategy. The just-as-inevitable moment of truth we now face is because the safety ‘pressure valves’ of low-wage migration and ever-rising housing prices stopping an implosion and/or implosion have been turned off by the Covid shock.

For example, let’s say councillors wanted to invest much more heavily in water infrastructure and public transport to solve the housing affordability and water quality crises in Wellington. They are told they can’t use borrowing because debt isn’t allowed to be more than 280% of revenues. Why is that? Council debt limits are effectively governed by the Local Government Funding Agency (LGFA), which is a Treasury-run joint bond issuance agency that is carries a Crown guarantee. It means that councils, especially the faster-growing large ones such as Auckland and Wellington, cannot go over that two to three times revenue level because it would cause credit rating downgrades for the councils, and possibly the sovereign rating of the central Government itself.

The constant demand to reverse fiscal creep

That is not allowed because those downgrades would increase borrowing costs and interest rates for everyone, including ratepaying and median-voting home owners, who depend on ever-rising leveraged and tax-free house prices to offset their low wages. Higher debt levels would probably require a higher level of central Government taxation than the current 30% of GDP.

Currently, the ‘fiscal creep’ built into fixed income thresholds for our income tax system are expected to drive revenues to GDP above 30% over the next couple of years, and even more than spending (see chart below). That’s what is driving National’s calls for tax cuts and why there is consensus about there not being a need or desire for wealth or capital gains taxes.

The low-tax mantra at every turn

So why don’t councils just increase their own taxes in the form of rates or new fees? Unlike in Australia, where the states do charge property stamp duties and are granted a share of centrally-collected GST, our councils have few revenue-raising tools other than rates, parking fees, building consent fees, library fees and rubbish fees. Some have water charges.

Any attempts to increase rates or council debt to solve these issues are driven back by voters and/or the central Government because taxes aren’t ‘supposed’ to be more than 30% of GDP and public debt isn’t supposed to be more than 30% of GDP.

Hiding in plain sight

It took me an awful long time to understand the underpinnings of this interlocking system that proscribe the options for politicians and voters. It was actually laid out in public by the Labour and Green parties before the 2017 election when, in an attempt to convince voters, the public service (and themselves) that they were on board with the 30/30 mantra and therefore a ‘safe’ pair of hands, they committed to the ‘Budget Responsibility Rules’ that were designed to get net debt as measured then under 20% of GDP and keep Government spending around 30% of GDP. That spending limit can only be achieved with balanced budgets and debt around the 20-30% of GDP mark.

Hence the Labour-led Government’s go-slow on infrastructure and housing investment in its first two to three years as it bore down on capital spending and operating spending to achieve those targets. It’s why KiwiBuild failed and why it refused to agree to its own Welfare Advisory Group recommendations to increase benefits to the levels needed to significantly reduce child poverty. Its also why there is constant pressure downwards on wage growth in the public service. Without it, the ageing population and the naturally higher expenses to GDP of healthcare mean the spending to GDP ratio would inevitably rise and break the mantra. That is only sustainable with rising house prices so homeowners can offset that low wage growth with tax-free and leveraged capital gains.

The crises now rolling through our health system are an inevitable result of a decades-long starvation of operational and capital spending to keep achieving the 30/30 mantra. The drive for low wage growth in the private sector is also a result, indirectly, of the mantra. Without significant public investment in infrastructure and R&D requiring higher debt and taxes, the private sector cannot get the productivity growth needed to justify higher wages. Again, that is only sustainable with low consumer price inflation imported from overseas and ever-rising house prices.

The tide just went out and the failure of our 30/30 mantra to allow enough investment in health and real-wage-growing public infrastructure is there now for all to see. The opening of the borders for those who have choices to leave and the arrival of the winter flu season with Covid have thrown its failure into stark relief.

Chart of the day

At the wrong end of the rankings

Aotearoa-NZ now has the highest Covid case rate per 100,000 population in the developed world, as pointed out in this chart via Eric Topol’s substack Ground Truths.

Quote of the day

A portrait of sociopathy

 “If we have 50,000 riders they won’t and can’t do anything. I think it’s worth it. Violence guarantee[s] success.” Uber’s Travis Kalanick via The Guardian from leaked documents on his response to fears French taxi drivers would assault Uber drivers.

Number of the day

Down 0.3% - Electronic card spending in the core retail industry (excluding vehicle-related industries) fell 0.3% in June from May in seasonally adjusted terms, after experiencing a slight increase (0.9%) in the previous month, Stats NZ reported yesterday. Core retail includes consumables (eg groceries and liquor), durables (eg furniture, hardware, and appliances), and apparel (eg clothing and footwear). In actual terms, total retail spending using electronic cards reached $6.0b in the month of June, up $112m or 1.9% from June 2021. That compares with CPI inflation of around 7% _ i.e. that was a real drop in consumer spending.

Comment of the day on The Kākā

‘A delusional low-wage, high-living-cost country’

“I shook my head when I read about Arden’s work in Australia re immigration. Initially I thought what a stupid thing to do, then I realised if we have to compete with Australia on a level playing field for our workers the we’ll either have to finally improve things here or resign ourselves to being a second class backwater. (If we aren’t already). A low wage high living cost country aspiring to be a first world country is delusional particularly one who’s economy is based on agriculture. Very few first world farmers make money farming, they live off subsidies provided by more profitable industries taxes. Our farming heyday ended in the 70’s and I fear the penny has yet to drop!” CraigB on yesterday’s Dawn Chorus

Indeed. The magical thinking is strong for us all. Who stayed.

Some fun things

Ka kite ano

Bernard

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TLDR: This week PM Jacinda Ardern pushed back at talk Aotearoa-NZ has joined the ‘west’ too strongly in a new cold war between the United States and China, British PM Boris Johnson (finally) resigned (sort of) and former Japanese PM Shinzo Abe was shot and killed.

Closer to home, two-year mortgage rates were cut 30-40 basis points to around 5.45%, commodity prices fell again as global recession fears mount, and consumer confidence here slumped despite record-low unemployment and household income growth actually being more than than the CPI inflation rate.

Also:

* the Infrastructure Commission told the Government and Wellington’s Councils that their choice of $7.4b of tunnels for ‘Lets Get Wellington Moving’ was not the best option for reducing carbon emissions, although the Councils approved it anyway; and,

* the Government announced plans to appoint a single Grocery Commissioner inside the Commerce Commission in the hope of doing a ‘2 Degrees’ on the groceries duopoly of Foodstuffs (Pak’n’Save/New World/Four Square) and Woolworths (Countdown).

In Friday evening’s live hoon webinar for paid subscribers, which is in recorded form above for all subscribers, I took a lap around these issues and more in geopolitics and the global economy with co-host Peter Bale and special guests Professor Robert Patman from the University of Otago and ANZ economist Finn Robinson.

We talked about:

* British PM Boris Johnson’s demise (finally);

* PM Jacinda Ardern's two big foreign policy speeches at Chatham House in London and the Lowy Institute in Sydney, which struck different tones on China, Russia and our independent foreign policy;

* Shinzo Abe’s assassination;

* the unprecedented joint warning in public from the bosses of MI5 and FBI to business leaders in a speech in London warning of China's corporate espionage; and,

* a preview of next week’s Pacific Islands Forum, where China’s recent attempt to pull various Island nations into its sphere of influence will be at the top of the agenda, along with how Australia, Aotearoa-NZ and the United States can do more on climate change and elsewhere to push back.

Also, I talked with Finn Robinson about the curiously weak noises coming from consumers, despite unemployment being at 3.2% and household incomes actually outpacing inflation in consumer prices. Finn wrote this excellent note this week on the issue.

Here’s the charts we refer to in the podcast. Firstly, this one showing how divergent confidence is from unemployment.

And then this one showing how spending isn’t quite as depressed as confidence. At least yet.

Peter and I also discussed:

* the big four banks cutting their two year mortgage rates by around 30-40 basis points to around 5.45% after two year wholesale ‘swaps’ rates fell 80 basis points from their June 16 peak of 4.56% in response to cooling global economic growth and inflation expectations in recent weeks; and,

* the fall in commodity prices to pre-war levels as fears grow that the ‘demand destruction’ from inflation’s post-war spike and much-higher interest rates are doing the central banks’ work for them.

There’s more on those interest rate moves here from me earlier in the week.

Earlier in the week, I looked in depth at the move to create a new Groceries Commissioner inside the Commerce Commission.

I also covered another survey showing the depth of hopelessness among young renters.

This is my weekly summary and sampler of the big news of the week we’ve covered on The Kākā for both free and paid subscribers. The public interest journalism I do daily on housing unaffordability, climate change inaction and poverty reduction is possible with the support of paid subscribers. Join our community by subscribing in full.

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