The Kākā by Bernard Hickey

TLDR: In the podcast above of this week’s ‘hoon’ webinar for paid subscribers, co-hosts Bernard Hickey and Peter Bale bring talk with special guests Robert Patman and Josie Pagani about China’s backlash against a strengthening of NZ’s security ties with the United States.

This is our weekly sampler email for both free and paid subscribers.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.

Five things of note this week

Aotearoa-NZ strengthened ties with the United States

This week PM Jacinda Ardern met with US President Joe Biden in the White House. They talked about gun control, the Christchurch Call and trade, but most importantly they signed a detailed joint statement that was heavily critical of China in the Pacific and elsewhere, and which strengthened our security and defence ties with the United States.

China lashed back at the joint statement

Chinese officials attacked what they saw as a strengthening of our military ties with the United States and a ramping up of joint anti-China rhetoric in the strong joint statement. They suggested it might affect our trade ties.

Here’s what I wrote on Friday about the back and forth.

Cabinet threatened the grocery duopoly with a breakup

The Government threatened to break up the supermarkets duopoly if they don’t play nice with plans for mandatory wholesale access.

Here’s what I wrote on Tuesday.

The grocery duopoly’s oppressive lease clauses revealed

There were revelations that supermarkets on Thursday that the supermarkets duopoly have been using special clauses in leases to stop competitors in all sorts of retail categories being allowed into shopping centres.

Here’s the deep dive I published today on that.

Yet again, a sugar tax is rejected

Here’s the chorus I wrote on Thursday, which led with the latest research showing sugar taxes work to reduce consumption, but the Government continues to oppose them.

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: It turns out our supermarket duopoly have been forcing shopping centre owners to sign leases with confidential clauses that allow Foodstuffs and Countdown to veto potential direct and indirect competitors from being in the shopping centres, including retrospectively for three years after they leave the centres.

Described as oppressive and predatory, the clauses are widely used and allow the owners of Pak’n’Save, New World, Four Square and Countdown supermarkets to veto competitors from being in these centres, including tangential businesses such as bakeries, fruit and vege stalls, bakeries, nail salons and florists. They also force the shopping centre owners to weaponise the Resource Management Act to block competition, requiring the shopping centres to appeal competitive developments through the District Plan process.

An example of the industry standard but confidential leases and their ‘suite of oppressive clauses’ was tabled with Parliament’s Economic Development, Science and Innovation Select Committee in a submission on Thursday by Food and Grocery Council CEO Katherine Rich on the Commerce (Grocery Sector Covenants) Amendment Bill. She was backed up by National Maori Authority Executive Chairman Matthew Tukaki. I spoke to both of them in Parliament after their submissions. Our conversations are in the podcast above.

The ramparts built into shopping centre leases

We knew they were bad, but not this bad.

The Food and Grocery Council’s Katherine Rich had heard about the clauses written into shopping centre leases by the Foodstuffs-Countdown duopoly, but was surprised just how powerful they were as tools to lock out competitors of all sorts. Rich got hold of examples of the leases and included them in her submission on Commerce (Grocery Sector Covenants) Amendment Bill. She would like to see the definitions in the bill about what can’t be used in leases to be widened to take account of just how wide the definitions used by the grocery operators are.

“There are actually a suite of oppressive clauses that have the same effect of blocking not just grocery retail, but almost any retail that comes close to a supermarket.

“While supermarkets have very narrow definition of what a supermarket is, when it comes to liquor laws and other parts of legislation, in leases, a supermarket is described as an exhaustive list of almost everything so they cover almost anything that can be sold to anybody at any time. And it's without limitation. So it's future proofed if they want to add to the list.

“Most New Zealanders wouldn't think that childcare services, banking, finance, arts and crafts, men's shoes, hairdressing and whole bunch of other sorts of services would be deemed a supermarket. But in supermarket leases they are.

“It includes everything that I can think of perhaps apart from tattoo parlors and antique dealers, but who knows that could be added at a later time. It sounds like I'm being flippant, but the reason I think the definitions are so broad is because the supermarket wants to have full control and veto power about who else the landlord leases to.

“That has a big impact on the fabric of centres, the fabric of our communities because a lot of the mum and dad shops, the butchers, bakers, the delicatessens, the hairdressers, the pharmacies, I thought had all gone because of competition, I now wonder whether it's because they've been ruled out and these leases up and down New Zealand.” Katherine Rich

Outsourcing the weaponisation of the RMA

The supermarkets also included clauses that ensure the shopping centre owners lobby councils to stop new competitors opening up new shopping centres nearby.

“The one thing that we found the most surprising was some really oppressive clauses that do things like that require landlords to block district plans, new stores, new developments, and campaign on behalf of the supermarket's to oppose any new developments that may come close to having an effect on a store.” Rich

The FGC wanted the select committee considering the bill to obtain more copies of the leases.

‘Fair cop Guv. We won’t do it again’

Woolworths NZ, which owns Countdown, confirmed in response to my emailed questions that the clauses had been used, but that it agreed with the plans to outlaw them.

“Clauses like this have been common in the past for a range of commercial leases, and in our case, many of our leases are decades old.  We agree with the government that they should be removed and we’re actively doing this. We are also not enforcing any covenants. We support the proposed Bill and welcome the clarity that a law change will bring.” Woolworths NZ spokeswoman by email.

Foodstuffs is made up of two cooperatives (Foodstuffs North Island and Foodstuffs South Island) supplying owner-operators of Pak’n’Save, New World, Four Square and Liquorland. It also owns the Gilmours wholesale food supply operation.

Foodstuffs also said it supported the banning of restrictive covenants on land and exclusivity provisions on leases.

“Foodstuffs North Island and Foodstuffs South Island support the Government’s legislation banning the use of restrictive covenants on land and exclusivity provisions on leases. While government progresses the legislative process, both co-operatives have made the commitment they won’t be enforcing restrictive land covenants on land they’ve sold, or registering covenants when selling land in the future, and are taking steps to remove the restrictive land covenants that are in place. This work continues to be a priority.” Foodstuffs NZ Head of Co-operative Public Relations Emma Wooster via email.

It’s noticeable the full quote doesn’t refer to the leases and Foodstuffs’ submissions also don’t refer to the lease provisions.

The hope for new competitors

Both Rich and Tukaki wanted to see the policing of the removal of the leases and covenants to eventually move to the new Grocery regulator being set up, and to be included in annual reports.

Tukaki did not see Costco (which is setting up one store in Auckland) or Aldi as the likely new entrants. He would like to see Foodstuffs spin off one or two of its brands, including Four Square. Woolworths’ Wholesale Distributors Ltd also owns the SuperValue and FreshChoice brands of supermarkets. He is also hopeful The Warehouse might be able to further ramp its supermarket offerings.

Tukaki sees iwi as potential partners in creating a third competitive force and said he was aware of discussions about that.

I welcome suggestions from paid subscribers in the comments below for further lines of inquiry.

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 the Reserve Bank warned of a rise in mortgage rates to 6% and a peak-to-trough fall in house prices of 15%, but said the economy and homeowners could handle it without forcing the economy into recession. It also rejected Opposition claims that Labour’s fiscal policy and employment mandate had forced the Reserve Bank’s faster move to higher interest rates.

Elsewhere, China launched an aggressive push for much deeper trade and security deals in the Pacific to add to the one it already has with the Solomon Islands. In response, the United States opened a new Indo-Pacific Economic Framework that it hopes will contain China, even though it doesn’t offer extra trade access into the world’s largest economy. Aotearoa-NZ and Fiji joined it.

In this week’s live hoon webinar for paid subscribers, which is in recorded form above, Peter Bale and I talk with special guests Professor Robert Patman from the University of Otago about the latest geo-political news and Green Finance Spokesperson Julie Anne Genter about monetary and fiscal policy.

This is my weekly summary and sampler of the big news of the week I’ve covered on The Kaka 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. It has allowed us to make it all free for students, teachers and those working for advocacy groups and political parties in these areas. Anyone in these groups should just sign up with their work, school, university, polytechnic or advocacy group emails and we’ll convert to the full paid tier behind the scenes.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.

The five things that changed this week

The Reserve Bank turned more hawkish

The Reserve Bank hiked its Official Cash Rate 50 basis points to a six-year high of 2.0% this week. That was an unprecedented second ‘double-whammy’ 50 point hike in succession, but that wasn’t the surprise. The central bank also raised and steepened its forecast track for the OCR in a way that would see mortgage rates rise to around 6% by early next year and help drive house prices down 15% from the peak in November last year to a trough late next year.

The Reserve Bank described its approach as “briskly” raising interest rates to get annual inflation down from 6.9% in the March quarter to under 3% late next year, and that it was “resolute” about getting back into its 1-3% target band.

Here’s my preview on the day and my report on the next day.

China went fishing for friends in the Pacific

China’s Foreign Minister Wang Yi embarked on a series of visits to nine Pacific Island nations this week, offering a series of deeply integrated trade, security, data sharing and police cooperation deals similar to the one it has just signed with the Solomon Islands. The depth and breadth of the proposals surprised many and alarmed the ‘western’ powers in the Pacific.

In response to China’s latest push for influence in the Pacific, the United States announced a widening of its ‘Quad’ security alliance with India, Japan and Australia to a new Indo-Pacific Economic Framework (IPEF), which Aotearoa-NZ and Fiji immediately joined. IPEF is the US-driven alternative to the Trans-Pacific Partnership, which was originally designed to include the United States in a grouping that excluded China and created a massive free trade block. But Donald Trump pulled the United States out and Joe Biden does not have domestic support for an easing of trade access to the world’s largest economy.

IPEF is largely about writing the rules for and securing supply chains and services trading arrangements that don’t include China.

Here’s what I wrote about IPEF this week.

Global recession warnings flashed red

Fresh data was reported this week showing the US and Japanese economies contracted in the March quarter because of Covid supply chain disruptions and weak consumer spending due to demand destruction from real wage deflation.

China also warned its strict lockdowns to maintain Covid elimination had reduced output in the world’s second largest economy, and Aotearoa-NZ’s largest trading partner. Here’s what I wrote about that this week.

Britain announced a 25% windfall tax

Britain’s Conservative Government made a U-turn and decided to go ahead with a 25% windfall profit tax on oil, gas and electricity companies to raise £15b to paid for energy discounts for households.

I talked in Friday’s Chorus about the prospects for a windfall tax here to claw back some of the $20b in cash payments to businesses that are now stored in company bank accounts or being paid out as dividends.

Fresh quake shocks for Wellington’s CBD

The Ministry of Education moved 1,000 staff out of its relative-new head office building on Bowen St in Wellington after it was found to have hollow-core pre-cast concrete floors that are now deemed quake prone. Another 150 buildings in Wellington’s CBD use the same flawed construction system, delivering another blow to the capital city’s economy after an awful few years dominated by Covid lockdowns, protest blockades at Parliament and brutally high rents and house prices.

I talked about this in Friday’s Chorus too.

Chart of the week

Real wages deflated, but real household incomes still rose

Here’s the Reserve Bank’s summary from its MPS this week:

“A strong labour market and higher costs of living have driven wages higher in recent quarters. The share of annual wage increases greater than 5 percent is near its peak prior to the global financial crisis (GFC). Despite this, wage growth for those staying in the same job has not generally kept up with inflation.

Overall, household incomes have been supported by workers switching jobs for higher pay, promotions with the same employer, and working longer hours (figure 2.10). Once these factors are taken into account, aggregate labour income growth has been stronger than consumer price inflation over the course of the pandemic – albeit to a much lesser extent in the past year.” Reserve Bank May 25 MPS

Have a great weekend

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 the Government released a tame Emissions Reduction Budget and presented a tighter Budget, while overseas, the United Nations warned 47m more people will starve within months if the war in Ukraine continues and Australian PM Scott Morrison faces an election loss this week.

I discussed these events and more in our weekly ‘hoon’ live webinar for paid subscribers to The Kākā, which is in recorded podcast form above for all to listen to. This is our weekly ‘sampler’ email 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. It has allowed us to make it all free for students, teachers and those working for advocacy groups and political parties in these areas. Anyone in these groups should just sign up with their work, school, university, polytechnic or advocacy group emails and we’ll convert to the full paid tier behind the scenes.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.

Five big things this week

Is that it?

On Monday the Deputy PM Grant Robertson and Climate Change Minister James Shaw released the long-awaited Emissions Reduction Plan, which is the Government’s roadmap to achieve the emissions reductions budgets set by the Climate Commission.

The $2.9b of spending over four years listed in the plan is being paid for by $4.5b of receipts from the Emissions Trading Scheme (ETS), which has been cordoned off into an Climate Emergency Response Fund (CERF) . It disappointed those hoping for faster and more aggressive action to shift people out of cars and onto bikes, buses, trains, footpaths, electric cars, e-bikes and scooters. It also did not include details of how to bring Agriculture into the ETS. That is due later this year.

Here’s what I wrote from the ‘lockup’ presenting the plan.

The 12 blocks of Tasty Cheese Budget

On Thursday, Robertson tabled his fifth Budget, including a $27-a-week-for-three-months one-off cost of living support payment for people not already getting the winter energy payment or a benefit. The price of a block of ts The Opposition criticised the Budget as profligate, although it actually represented a slight tightening of fiscal policy over the next four years.

Here’s what I wrote on Wednesday, Thursday and Friday about the background to Budget 2022 and the details announced on the day.

A looming global food crisis

The UN warned on Thursday night that another 47m people faced starvation within a few months if the war in Ukraine and Russian blockades of grain shipments from Black Sea ports continued, adding to the 276m already hungry because of climate change and civil wars. Wheat prices rose another 6% on Wednesday night after India, the world’s second largest grain grower after China, banned exports.

The Economist-$$$ reported yesterday that Russia and Ukraine usually provide 12% of the world’s traded calories.

They supply 28% of globally traded wheat, 29% of the barley, 15% of the maize and 75% of the sunflower oil. Russia and Ukraine contribute about half the cereals imported by Lebanon and Tunisia; for Libya and Egypt the figure is two-thirds. Ukraine’s food exports provide the calories to feed 400m people. The war is disrupting these supplies because Ukraine has mined its waters to deter an assault, and Russia is blockading the port of Odessa. The Economist-$$$

The United States is considering sending long-range anti-ship missiles to Ukraine to destroy Russian vessels enforcing the blockade and accused Russia of holding the food security of tens of millions hostage.

The UN’s World Food Programme also called for the blockade to end.

Scott Morrison is set to lose power this weekend

The Opposition Labor Party is ahead of the governing Liberal/National coalition by around five percentage points in the last polls before this weekend’s Federal election. PM Scott Morrison looks set to lose because women see him as sexist and his Government has taken little action to address climate change.

Stocks slumped on fresh recession fears

US stocks briefly fell into bear market territory overnight, taking their falls from their peaks in January to over 20%. Here’s what I wrote on Tuesday.

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: Budget 2022 is the Government’s response to calls for help for the ‘squeezed middle’, but also a slight tightening of fiscal policy as it tries to minimise the inflation pain wrecking its election chances.

The ‘rabbit in the hat’ in this Budget is a one-off $350 cost of living payment for those not already getting the winter energy payment and earning less than $70k/year.

The other news headlines include:

* a two-month extension of the fuel excise cuts and the half-price bus, train and ferry fares launched in March;

* a permanent halving of public transport fares for people with community services cards;

* immediate legislation to stop supermarkets blocking competitors from using land through the use of covenants;

* a relaxation of the house price and loan caps for first home buyer grants and loans;

* just $168m over four years for the Māori Health Authority for direct commissioning of services, which represents just 1.5% of the extra $11.1b being spent on health over the next four years;

* a $1.8 billion funding increase for Health NZ and a further $1.3m boost next year to enable it to ‘start with a clean slate’, including ‘cleaning up’ previous deficits of $550m;

* an an extra $191m over two years to lift Pharmac’s medicines budget to $1.2b per year, with a focus on funding better cancer treatments;

* an increase in dental grants from $300 to $1,000;

* an extra $2b in funding for education operating spending and $855m for capital expenditure on schools;

* a new $300m affordable housing fund for grants to community housing providers;

* an extra $327m over four years to set up the new combined RNZ/TVNZ public broadcaster;

* a scrapping of the rule that treats Child Support payments made to beneficiary sole parents as income, delivering an estimated 41,000 parents an average of an extra $24 a week;

* replacing the school decile system with a new ‘Equity Index’, with $75m a year in additional equity funding for schools in areas with high socio-economic needs;

* an extension of the Warmer Kiwi Homes programme for an extra year, until June 2024, enabling over 26,000 more insulation and heating retrofits for the homes of low income earners; and,

* a new Business Growth Fund to improve SME’s access to finance, following the model of similar funds in the UK, Ireland, Canada and Australia, with the Government contributing $100m as a minority shareholder alongside private banks.

Giving cash away without ‘spraying’ it

Meeting the demands of a bunch of magical thinkers was never going to be easy, but the Government has done its best with with Budget 2022, giving some cash to help middle-income voters deal with higher living costs, but not so much that those same voters would think the Government was ‘splashing too much cash’ in a way that would drive up inflation.

Trailing National in the polls and facing criticism it isn’t doing enough to help the ‘squeezed middle’ deal with higher costs of living, the Labour Government has thrown a payment of $350, spread over three months, to those people earning under $70,000 who aren’t already getting the winter energy payment.

But overall, the Government has restrained its spending in a way that means Budget 2022 actually reduces the fiscal impulse from Government to the economy, and in theory reduces some of the Government’s domestic inflationary pressures that the Opposition is so unhappy about. Budget 2022’s fiscal impulse over the next three fiscal years represents a combined 4.2% subtraction from the economy. That’s more than the combined 3.0% subtraction forecast in the December 2021 Half Yearly Economic and Fiscal Update.

“The fiscal impulse for each year is slightly more contractionary than forecast at the Half Year Update as the Government’s year-on-year contribution to aggregate demand decreases more relative to each preceding year, indicating that, overall,fiscal policy is dampening inflation pressures.” Treasury in Budget 2022’s Economic and Fiscal Update.

As expected, the Government left its operating allowances set in December broadly unchanged, and did not change its capital allowances. It also confirmed it would reach budget surplus one year later than expected because of slower than expected global economic growth.

Treasury forecast net debt would fall to 15% of GDP by 2026, well below the 30% ceiling set by Grant Robertson earlier this month.

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: Today’s Budget will cement in three decades of Government spending, tax and investment incentives that delivered a low investment, low wage and high house price economy. The already-low chances of a ‘Build Back Better’ pivot have now completely disappeared as both sides of politics get back to business as usual after Covid.

See more detail and my analysis below the paywall fold. I will open it up for all if paid subscribers would like that. Just say so in the comments below.

Elsewhere in the news overnight and this morning:

* global stock markets slumped again this morning as fears profit-harming recessions are brewing in the world’s biggest economies, although market interest rates fell too;

* Turkey blocked an attempt overnight by Sweden and Finland to formally apply to join the 30-country NATO alliance, which needs unanimous approval to expand; and,

* Fonterra is looking to break into the US infant formula market to fill massive supply shortages caused by a lack of imports because of domestic industry protections and a lack of competition between a few dominant players.

The ‘Build Back Better’ moment has passed

The framework of this afternoon’s Budget, the first built for a post-Covid world, is already in place, and it’s largely the same as budgets of years gone by. The ‘Build Back Better’ moment has passed and the Government is now back to business-as-usual, which means:

* ‘keeping a lid’ on public debt so private homeowners can keep low interest rates, high mortgage debt and continue reaping highly-leveveraged and tax-free capital gains;

* sticking with a low public investment approach that starves cities of infrastructure for housing and low-emissions transport to keep debt low and avoid a supply-driven crash in house prices;

* retaining a punitive and inadequate welfare system that sentences yet-more-tens-of-thousands of kids to yet-more generations of poverty in order to keep the size of Government around 30% and deliver regular income tax cuts for those on middle incomes;

* keeping the investment incentives in favour of leveraged investment in residential land, rather than in research, development and international business expansion;

* holding on to an economic growth formula of relatively high migration of guest workers, low wages and low productivity growth, where the way to get ahead is to buy residential land and hold on for the next burst of tax-free capital gains; and,

* maintaining the size of Government at around 30% of GDP in the long run and using any fiscal headroom to hand back cash through tax cuts and middle-class welfare.

How do we know not much has changed?

Finance Minister Grant Robertson has already set the parameters for Budget 2022 and they remain in line with the low public debt, low infrastructure investment, punitive welfare and climate inaction settings of previous Governments of both colours.

The brief period in the wake of the first Covid elimination about ‘Building Back Better’, a slogan reanimated by US President Joe Biden’s new administration (and also now rarely used), has faded into the noise of calls for tax cuts, complaints about Government spending ‘too much’ and a surging polling performance by the National-ACT opposition under new leadership.

Robertson has already said in various speeches and comments in the last two months that:

* the $6b operating allowance for the first year of the four year period to be laid out in Budget 2022 will not change from when it was first announced in the Half Yearly Economic and Fiscal Update (HYEFU) in December;

* this allowance will be mostly taken up with retrospective spending on cleaning up the deficits and restructuring costs inherited from DHBs as they are wound up and put into two new authorities from July 1 as Health NZ-Hauora Aotearoa and the Māori Health Authority-Te Mana Hauora Māori;

* the multi-year capital spending allowance of $9.8b set in December after a $2b increase then would not change because of fears it might boost construction cost inflation;

* the Government would not use the 15 percentage points of GDP of fiscal headroom available under its new debt ceiling track to invest in new housing or climate infrastructure any time soon;

* the Emissions Reduction Plan revealed this week would spend just $1.17b of a $4.5b Climate Emergency Fund over the next two years while also being fiscally neutral and unable to use the Crown’s balance sheet; and,

* a slower economic outlook would mean a return to surplus one year later than the 2023/24 forecast in December, increasing the pressure to restrain spending and borrowing.

The Government is prioritising keeping a ‘lid on debt’ above longer term investments or changes in welfare, housing and climate spending, as indicated in this Question Time exchange (Hansard Question 2) in Parliament yesterday between PM Jacinda Ardern and National Leader Christopher Luxon (bolding mine):

Christopher Luxon: How can Kiwis have any confidence in tomorrow's Budget spending announcements when one of her first big promises—Auckland light rail—was supposed to be finished two years ago, but still doesn't even have a business case, let alone a single piece of track? 

Rt Hon JACINDA ARDERN: Because in the middle of an economic crisis, the likes of which we've not seen in a hundred years, we have received two triple A credit ratings from the two leading agencies, GDP is up 5.6 percent, we have some of the lowest unemployment on record, and our economy is in a better position than it was pre-COVID. If the only other point of comparison is, for instance, how this Government has done compared to the Government post the last economic crisis from the global financial crisis, then, toe to toe, we have outperformed.

The PM’s first response when challenged on the investment failure was to trumpet the AAA credit ratings, which are an endorsement of the low debt, low investment, low interest rate, low productivity and low wage strategy.

Robertson also previewed the Budget on Tuesday by promoting the Government’s management of the state’s finances to ‘keep a lid on debt’ and keep pressure off inflation. It is the central priority of the Government, as it was for previous Governments led by National, and is being reinforced by the Opposition’s argument that Government spending is driving inflation.

That is not correct, as shown in this IMF chart released this week showing most of the domestic inflation was caused by the Reserve Bank’s loosening of LVR controls and $55b of money printing (domestic demand), albeit with the expressed approval of Robertson and the Government. The domestic supply issues are a function of the long term problems of under-investing in R&D, international business, infrastructure and housing.

Until the core incentives changes, nothing else does

The battle over the direction of the Government depends on a collective decision on how to tax wealth from capital gains on residential land. Until that core incentive and the surrounding supports of low mortgage rates, low public debt and low public investment to increase housing supply are changed, nothing much else changes. That’s reflected in the current calls for much higher migration of guest workers, which were the main source of nominal economic growth in the decade before Covid. The Reserve Bank’s decision to unleash a housing-wealth-driven stimulus to rescue the economy in March 2020 was responsible for the economic growth since then.

This Budget is very much back to business as usual with no prospect for a change in those underlying settings of Government, given the PM has ruled out a wealth tax during her time in politics and the National-ACT Opposition is set to win back Government next year with promises to double-down on the status quo settings by reinforcing the incentives for multiple home ownership and high temporary net migration.

What the status quo has delivered

The best illustrations of the result of the three-decade bipartisan approach to public finances are these IMF charts showing:

* Aotearoa-NZ’s poor track record of public investment in ground transport, which includes roads;

* our weak investment in public and private R&D (after all, why invest in a business when the returns from rental property can be leveraged, are tax-free for owner-occupiers, are Government Guaranteed, and are much less volatile than real business or capital market investors);

* the performance of our housing market relative to other countries;

* the formula of high household debt to back leveraged tax-free property matched with low public debt to keep interest rates relatively low; and,

* the resulting underperformance on productivity and outperformance on property price inflation.

The formula is intact with little change in this Budget and is set to be strengthened with a change of Government that:

* keeps public debt and interest rates low by investing relatively little in public infrastructure so households can leverage up for tax-free capital gains;

* keeps choosing residential land investment and high household debt over business investment because of the tax and leverage benefits for voting home owners; and

* keeps wage inflation relatively low and nominal GDP growth relatively high through high net migration of temporary workers, which serve to both keep both public debt and interest rates low, and keep upward pressure on house prices.

I’ll be in the Budget lockup with Lynn from 10am to 2pm today and we will put out a special Budget 2022 email and podcast soon after the release of the Budget at 2pm. I welcome suggested questions and lines of inquiry from paid subscribers below.

In geopolitics, the global economy, business and markets

Stocks slump again - US stocks fell 4-5% this morning on renewed fears this year’s real wage deflation and cost inflation shock, along with a rapid tightening of monetary policy, is driving the US economy towards a recession that hammers corporate profits. CNBC

Walmart and Target crash - Walmart’s shares fell nearly 20% in two days trade, its worst performance since 1987, after it warned high inflation was ramping up wage costs and inventory problems were hurting sales. Target shares also crashed 25% this morning after a similar profit warning. YahooFinance

Taihoa ehoa - Turkey blocked initial applications by Sweden and Finland to join NATO overnight, saying it was unhappy with their support of PKK Kurdish rebels fighting for independence from Turkey. Insiders believe Turkey’s block is a negotiating tactic and it will eventually relent after concessions on the Kurdish question. CNN

‘Foreign agent’ - The U.S. Justice Department took the unprecedented step overnight of accusing casino mogul Steve Wynn of being a foreign agent of China, saying he lobbied former US President Donald Trump on Beijing’s behalf in 2017. Wynn owns casinos in Macao. CNN

Warming and acidifying oceans - The World Meteorological Organization published its 'State of the Global Climate in 2021' report overnight showing the world's oceans grew to their warmest and most acidic levels ever in 2021, while melting ice sheets lifted sea levels to record highs. The report will be used as an official document for the UN Climate Change negotiations known as COP27 to take place in Egypt later this year.

Russian climate move - The European Union announced a €300b package of spending to slash Europe’s emissions by 55% from 1990 levels by 2030 as it scrambles to wean itself off oil and gas full stop, as well as Russian oil and gas. AP

Heading for 10% - Britain’s Office of National Statistics reported overnight that UK consumer price inflation rose to an annual rate of 9% in April from 7% in March. However, the result was a touch below economists’ forecasts for around 9.1%.

High, but stable - Eurostat reported Euro area inflation was 7.4% in April from a year ago, which was an unchanged annual rate from March.

Scoops and news of note here

‘We want to help’ - Fonterra, which has been locked out of the US infant formula market for decades because of domestic industry protections, is looking to break in to help the United States deal with supply crises. The Food and Drug Administration announced overnight a lifting of restrictions of imports of various types of formula to help ease the shortage.

Jonesy Construction fails - Geraden Cann has another story of a first home buyer, Rahul Srivastav, done over by a small construction firm collapse, via Stuff. This time it’s in Wellington. More is brewing

Srivastav said he had joined 31​ other affected buyers on a WhatsApp group, and many were in a worse position, having paid large amounts towards builds that were less complete. Srivastav said he was an unsecured creditor, and he did not know what would happen to his home.

One reason for the collapse was a shortage of building materials, which Jonathan Milne reports on in detail for Newsroom.

A fun thing

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: So much for a climate emergency. The Labour/Green Government has unveiled a politically and financially tame Emissions Reduction Plan, which still puts most of the load on buying credits offshore and has backloaded most of the spending here out past 2024.

It has kicked for touch on the politically difficult decisions around congestion charges, agricultural emissions and the electricity market. It also chose not to ban the importation of petrol and diesel cars and utes from 2035 or shut down connections to the domestic gas network from 2025.

Its flagship ‘cash-for-clunkers’ scheme isn’t scheduled to start in earnest for at least another two years, with the key decisions on how it will operate, who will be eligible, what types of cars to be exchanged and how much per car it will cost yet to be decided.

This is my initial wrap from the Beehive ‘lockup’ of the 344 page First Emissions Reduction Plan (ERP) released at midday after a short news conference with Deputy Prime Minister Grant Robertson and Climate Change Minister James Shaw. I have opened up this email and podcast to be free for all from the start as part of my public journalism mandate. I welcome suggestions for followups and further lines of inquiry in the comments below from paid subscribers, who are able to comment. I will update this through the day with reaction and detail.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who rent and are reliant on NZ Superannuation alone for their income.

What’s in the plan

The ERP includes $2.9b of new spending over four years from a $4.5b Climate Emergency Response Fund (CERF), which is itself funded by revenues from the Emissions Trading Scheme.

However, only $1.17b of that is in the first two years, with most of that used to:

* subsidise the conversion of industrial coal boilers, mostly in dairy factories ($230m);

* to vaguely fund Waka Kotahi’s efforts to encourage cycling ($373m);

* to subsidise moves to reduce emissions from waste ($100m);

* to pay for research and development to find technologies to reduce agricultural emissions ($92m); and,

* to fill up a past Waka Kotahi funding shortfall from low public transport usage during Covid ($47m).

Almost a third of the spending in the first two years is going to help the agriculture sector adjust, even though it has contributed nothing to the current Emissions Trading Scheme (ETS) that the spending is coming from and is not due to be part of the scheme until 2025 (the decisions on what form that takes have still not been made.)

Finance Minister Grant Robertson said Treasury had advised of an extra $800m in ETS revenues because of higher carbon prices, which offset $840m allocated in December for ‘international climate finance’, which refers to foreign aid spending on emissions reduction and climate mitigation work in the Pacific and elsewhere refers to buying international carbon credits for a market that does not exist yet. Robertson said just $2.9b of the $4.5b fund available had been allocated.

The ‘flagship’ cash-for-clunkers scheme unveiled in the plan actually only commits $32m to a trial in the first two years for 2,500 vehicles at a cost of $12,800 per vehicle, with decisions yet to made on the remaining $537m to be spent in 2024/25 and 2025/26, which would only allow the conversion of 42,000 clunkers for low-emissions vehicles, and only to those households earning less than the median wage.

The measures would see just 30% of the light vehicle fleet being electric or hybrid by 2035, with only a 35% reduction in vehicle kilometres travelled. The overall effects of the plan would be to reduce the number of cars on the road by 181,800 by 2035, down from a current light vehicle fleet of 4.4m.

The measures to encourage the adoption of electric vehicles and the specific adoption of public transport amount to just $52m of the $2.9b trumpeted. Just $12m was allocated for electric bus purchases, with diesel buses being bought for another three years and still being used until 2037.

What’s not in the plan

The plan was as notable for what was not in it, as what was in it, including:

* no plan to ban imports of petrol and diesel-powered cars by any date, which was recommended by the Climate Commission and widely done overseas;

* a decision not to stop new connections to the domestic gas network from 2025;

* no decisions on congestion charges for Auckland or anywhere else, other than a vague suggestion of more consultation and no action for at least two and a half years;

* no announcement of an extension of the half-price bus, train and ferry fares beyond the current three months;

* no funding for future larger subsidies of public transport to ensure some sort of just transition;

* no significant measures to encourage investment in renewable electricity generation or remove the current one million tonnes of coal currently being fed into Huntly by Genesis Energy to power Auckland; and,

* the assumption about the closure of Tiwai Pt has been removed from the plan, which adds to the burden of moving to 100% renewable electricity and means the 30% fall in wholesale electricity prices cannot be relied upon to enable the transition.

In summary, my view:

The key things to know here are:

* the Government had already decided to make its climate spending fiscally neutral, meaning it will only spend the revenues from the ETS;

* the Government has ruled out borrowing to fund new climate infrastructure or measures to reduce emissions;

* the Government decided to underspend from that fund, effectively tightening fiscal policy by taking in more from the ETS than it is spending;

* it painted the plan as equitable, but a full third of the spending in the first two years goes to the farming sector, who contributed nothing to the ETS, and there is nothing in the first two years to help those on low incomes;

* the Government has made no politically painful decisions, kicking the can down the road on congestion charges, road conversions to cycleways, subsidies for electric cars, climate friendly infrastructure and bans on internal combustion engine imports.

The Government has done the least it possibly can to meet its limited emissions targets under the zero carbon act, and has done nothing either truly transformational or politically difficult. It’s main priority in this plan was to:

* reduce Government debt now, rather than use the balance sheet to invest for future generations;

* avoid giving the impression of being ‘addicted to spending’, as the Opposition has accused Labour of; and,

* avoid any decisions that might alienate or lose the vote of median voters, who mostly live in suburban homes they own and have at least two cars in the driveway, including, most likely, a double cab ute, and who rarely if ever use public transport.

Ka kite ano

Bernard

PS: I will update this through the day and I welcome your comments and suggestions for further questions below.

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 Kākā’s hoon about the week that was in the podcast above included Peter Bale and me talking with special guest Professor Robert Patman about the latest geo-political and economic fallout from Russia’s war on Ukraine, along with closer looks at Budget 2022 on Thursday, the week’s crypto-crash and double-digit house price deflation.

This is our weekly sampler email for both free and paid subscribers.

A reminder to free subscribers reading here that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier using their ‘school’ or ‘ac’ email addresses to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are reliant on NZ Superannuation.

Five things of note this week

War in Ukraine generates more inflation

Gas supplies cut - Russia cut off one gas pipeline through Ukraine and Poland to the rest of Europe, forcing European gas futures prices up more than 20%. Russia also cut off its electricity supplies to Finland after Finland indicated it would formally apply early in the coming week to join NATO. The European Union is close to agreeing a Europe-wide ban on imports of Russian oil by the end of the year.

Sweden is also on the verge of joining NATO, which Russia said it would respond to with measures of a “military-technical” nature. Meanwhile, US howitzers are already being used in eastern Ukraine by Ukrainian forces. The M777 155mm howitzer can fire a GPS-guided shell 40km with pinpoint accuracy. Patman talked in the podcast above about these howitzers being reported to have hit targets inside Russian territory.

Here, petrol prices rose over $3/litre and all eyes will be on the Government’s Emissions Trading Plan this coming week as to whether it is extended beyond three months.

The Emissions Reduction Plan and Health Budget

The Government will release its Emissions Reduction Plan in a two-hour ‘lockup’ in The Beehive that ends at midday on Monday. I’ll be inside and do a special email as it is released. It is speculated to include an extension of the current half-price discount for public transport and a congestion charge for Auckland. There’s also talk of a congestion charge. I welcome the suggestions for queries in the comments below from paid subscribers.

In the Budget itself on Thursday, the Government is expected to focus the bulk of its $6b operating allowance (unchanged from what was announced in December) on funding the Health system restructuring (and tidying up DHB debts and deficits) and leaving the multi-year capital allowance unchanged from December at $9.8b.

Double-digit house price deflation

The crypto-crash

This week the algorithmic stable coin Terra-USD collapsed, taking the Luna digital currency with it. The most-used fiat-backed stablecoin Tether also ‘broke the buck’ briefly on Thursday night, although was back at US$1 this morning.

I was asked to talk about the collapse on TVNZ’s Q+A yesterday and spoke in a panel discussion with Jack Tame and Rebecca Stevenson. Here’s the full panel sesssion resulting video report:

The migration ‘rebalancing’

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 Government has unveiled what it calls a ‘rebalancing’ of migration settings to offer new and faster pathways to residence for higher paid migrants.

But it held off forcing low wage temporary migrant employers in hospitality, tourism and aged care to pay the new $27.76/hour median wage threshold for at least 12 months.

Labour’s decision not to go full cold turkey on low wage migration reflects the political pressure of being behind National in the polls and facing calls from employers in Covid-affected industries for relief from higher wage inflation. See more analysis of the migration ‘rebalance’ below the paywall fold and in the podcast above.

Elsewhere in the news overnight:

* US inflation fell to an annual rate of 8.3% in April from 8.5% in March, but the result was higher than economists’ forecasts of around 8.1% 8.5% so wholesale interest rates rose a bit and the Nasdaq fell another 2%;

* The European Central Bank’s President Christine signalled in a speech the ECB would have to hike its official rates from below 0% in late July to fight inflation that hit 7.5% in April; and,

* Ukraine turned off a gas pipeline for a third of the Russian gas that goes through Ukraine to Europe, citing safety problems because Russian backed troops had started siphoning gas off the pipeline.

Going not so-cold-turkey low wage guest workers

PM Jacinda Ardern and Immigration Minister Kris Faafoi yesterday announced the full reopening of the border from July 31 and the long-awaited migration ‘rebalancing’ at a BusinessNZ event.

The rebalancing included:

* a new Green List of skilled occupations with more guaranteed pathways residence;

* the exemption until April 2023 of a range of Covid-affected sectors from new requirements to pay guest workers at least the median wage of $27.73/hour;

* those exempt sectors will have to pay at least $25/hour; and,

* new rules reducing work rights for international students studying for non-degree level courses.

The changes are aimed at reducing the use of low wage migrant labour, but have not gone all the way to weaning the tourism, hospitality, retail and aged care sectors off temporary migration. The politics was too tough for the Government, along with pressure of high inflation elsewhere.

Useful longer reads

The arsenal of democracy

ESG funds tend not to invest in arms companies. Maybe they should…

Here’s Adam Tooze’s latest Chartbook on how well the military industrial complex is doing right now.

ka kite ano

Bernard

My apologies for the shorter Chorus today. My laptop died this morning, so I have done it it on my phone. There is more detail in the podcast attached.

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

TDLR: This is a podcast of the live weekly ‘hoon’ webinar I do with Peter Bale most Friday afternoons for paid subscribers. This week we spoke about the wealth tax debate, National’s rise above Labour in the polls, the scale of our infrastructure deficit and what’s being done about it, what a higher debt ceiling means and how the war in Ukraine is going.

Here’s more detail on what we talked about here:

* Te Waihanga’s estimate of our infrastructure deficit and how much more we’d need to build to cope with future population growth, improve our water quality and prepare for climate change ($1t in today’s money over 30 years or a doubling of investment to 10%/GDP per year);

* Finance Minister Grant Robertson’s response that such a doubling was not financially or politically possible, and that we can’t build our way out of our infrastructure deficit;

* Robertson’s unveiling of a new 30% of GDP debt ceiling, which is effectively 30 percentage points higher than the last one, but that he doesn’t want to use the spare fiscal headroom, yet;

* The Government’s decision to freeze new capital spending and leave its $6b operating allowance unchanged in the May 19 Budget to avoid adding to inflation;

* Reserve Bank Governor Adrian Orr’s comments that a 30% fall in house prices was feasible and that our banking system could cope with that just fine, along with an estimate that sustainable house prices were 5-20% below current levels in his select committee clashes with Green MP Chloe Swarbrick and National MP Nicola Willis; and,

* PM Jacinda Ardern’s painful prevarications and eventual capitulation on whether she would propose a wealth tax in her political lifetime.

Enjoy, although please accept my apologies for my poor sound quality this week. I was stuck in my car. And many thanks to the paid subscribers to The Kākā who support this sort of work I do reporting on and analysing issues around the political economy, in particular housing unaffordability, climate change inaction and child poverty.

This is a regular recorded podcast open for all subscribers in which I talk with Peter Bale and sometimes guests. The live webinar currently on from 5pm to 6pm on Fridays is open to paid subscribers.

A reminder too that we have a special $30 a year deal for under 30s and that students and teachers should sign up for the free tier to get converted to the full subscription for free. And we have a new special $65 a year deal for over 65s who are 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