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| Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz | ||||||||||||
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Truss has wrecked more than her own political career since she became British Prime Minister less than two months ago: her personal reputation, her party’s credibility, and the UK’s finances. The latter is the costliest result of Trussonomics. Rather than borrowing at rates comparable to those enjoyed by Germany or the US, Britain now needs to pay as much as Italy or Greece. That is how markets now perceive Britain’s political risk. So, what has happened in Britain? And what lessons can New Zealand draw from the Truss disaster? Truss’ starting point was not crazy. Her diagnosis was that the UK government had become too big, too expensive, and too complex. To unlock its potential for economic growth, the UK needed a change of direction. Her analysis, however, led her to an incorrect and, frankly, bizarre conclusion. Without any corresponding spending cuts, it consisted of massive tax cuts. The resulting fiscal hole was so large that it triggered a strong reaction in the financial markets. As a result, British government debt yields soared, the pound plummeted, and the Bank of England had to take emergency measures to calm the market. The political fallout was equally bad. Truss fired her Chancellor for implementing her own policies. Her new Chancellor reversed all her decisions immediately and then acted as a de facto Prime Minister. And that was before Truss also lost her Home Secretary and bullied her parliamentary colleagues in a vote in the Commons. After weeks of utter chaos, Truss’ party is dead. In a general election held today, the Tories would likely win just a few dozen seats, giving Labour an unprecedented 400+ majority in the House of Commons. Politicians from across the political spectrum should learn from the Truss disaster. First, the episode emphasises the importance of good fiscal management. Markets can lose faith in a country quicker than you can say ‘mini budget’. When deficits become eye-watering, whether through unfunded tax cuts or expenditure increases, markets will respond quickly. Second, once fiscal reputation is lost, it is difficult to regain. Although Truss’ policies have now been reversed, the damage she has caused will last for a long time. Third, supply-side reforms do not equal tax cuts. Governments can reduce business costs in many ways without reducing taxes. Despite their difficulty, such reforms are worth the effort and do not undermine fiscal credibility. Truss has shown the world how not to do policy. And that remains her only political achievement. |
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| Roger Partridge | Senior Fellow & Chairman | roger.partridge@nzinitiative.org.nz | ||||||||||||
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Inflation may have peaked at 7.3%. But talk from Reserve Bank governor Adrian Orr late last month that the bank’s ‘tightening cycle was ‘very mature’ was at best premature. Tuesday’s announcement of Q3 inflation at 2.2% suggests inflationary expectations are now deeply embedded. Most economists now predict inflation will remain well above the Reserve Bank’s 1-3% target for the foreseeable future. Kiwi households will endure a lot more pain before it is brought back under control. Both Orr and Finance Minister Grant Robertson have been eager to place the blame for high inflation on external factors. And of course, pandemic-related supply chain bottlenecks, labour shortages and the war in Ukraine have put upward pressure on prices. Yet, at 7.2% for the year to September 2022, New Zealand’s inflation is more than double Switzerland’s current inflation rate of just 3.2%. Meanwhile, Switzerland’s inflation is forecast to fall below 2% next year. Part of the explanation for Switzerland’s low inflation is that its currency’s appreciation has acted as a buffer against rising import costs. At the same time, New Zealand is not alone amongst OECD nations suffering from runaway prices. But, like Switzerland, New Zealand has enjoyed far greater energy independence than many of the world’s worst-performing economies – especially in Europe. Hydro reserves have provided both countries with effective insurance against electricity price volatility. Sadly, at least when it comes to inflation, that is where the similarities between New Zealand and Switzerland end. The Swiss understand the importance of stable prices. Consequently, the Swiss National Bank’s independence is enshrined in Switzerland’s constitution. So too is the requirement for the SNB to give priority to price stability. Meanwhile, as regular readers of this column will know, the Reserve Bank now has a hotch-potch of formal policy targets: price stability, maximum sustainable employment, and house prices. And then there are the Bank’s other contemporary areas of focus including inequality, climate change and Māori culture and language. These are all important topics, but distractions for a central bank. From the mid-1970s, Kiwi households endured nearly two decades of inflation. Restoring price stability was a painful process, with mortgage interest rates peaking at over 20%. History tells us that we are poor at learning lessons from history. But perhaps we can learn from Switzerland. The sooner the Reserve Bank’s remit – and focus – is narrowed the better. |
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| Dr Michael Johnston | Senior Fellow | michael.johnston@nzinitiative.org.nz | ||||||||||||
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In 1963 philosopher Hannah Arendt published Eichmann in Jerusalem: A Report on the Banality of Evil. Adolf Eichmann was a senior Nazi bureaucrat, responsible for the deportation of Jews and others deemed undesirable by Hitler’s regime, to concentration camps. In 1960 he was captured by Israeli secret services in Argentina. He was put on trial in Jerusalem, which is where Arendt encountered him. The picture Arendt painted of Eichmann was of an ordinary man simply content to follow procedures. To him, deporting people to death camps was little different than transporting apples or garden hoses. He was, Arendt thought, the model of an amoral administrator. Some commentators criticised Arendt’s analysis, arguing that the very fact that Eichmann was able to do what he did without remorse defines him as evil. But that misses the point. Arendt didn’t say that Eichmann wasn’t evil. She said that evil is, all too often, commonplace and boring. Even tyrants – those giving the orders rather than following them – can be ‘ordinary men’. That brings us to the banality of evil shoe salesmen. New Zealanders of a certain age will remember Bata Bullets, a popular brand of children’s sneakers. Most kiwi kids of the 1970s probably owned a pair at some stage. Those who lived in Wellington, it turns out, may have purchased theirs from a certain Russian warmonger. Yes, you read correctly. Apparently, Vladimir Putin once sold Bata Bullets in our capital. According to Wikipedia, “multiple reports have suggested Putin was sent by the KGB to New Zealand, allegedly working for some time undercover as … a Bata shoe salesman in central Wellington”. Later, Putin headed the KGB, an organisation every bit as evil as the Nazi gestapo. And now he has unleashed war on Ukraine and threatened the world with nuclear weapons. I grew up in Wellington. Perhaps I bought a pair of Bata Bullets from Vladimir Putin. Perhaps I sat near him on a train or passed by him while he was feeding the ducks at the botanical gardens. These thoughts underscore Hannah Arendt’s insight that perpetrators of appalling crimes often appear “terrifyingly normal”. We have seen the face of evil and it sold us sneakers. |
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