Deputy prime minister Grant Robertson plays down Government's spending's role in inflation

Government spending is not contributing a significant amount to inflation, Deputy Prime Minister Grant Robertson says.

Yesterday, Statistics New Zealand revealed inflation had hit 5.9 per cent in 2021, the highest level in 31 years.

Speaking on Newstalk ZB’s Mike Hosking breakfast show Robertson said two areas – transport and housing costs – contributed to around 71 per cent of that increase.

“We have seen a 30 per cent increase in the price of oil over the course of the last year and within the housing element of it there is building supplies which are obviously driven in large part by international issues.

“There are some issues obviously around the fact that we have a housing deficit – we are doing our level best to catch up on that, we are building a lot of houses, we have got a lot of consents coming through but this is a global phenomenon and you will see right around the world countries with highly elevated rates of inflation.”

Robertson said it was hitting people hard in the pocket.

“I don’t want to underestimate that. It is really challenging for people but an awful lot of it relates to Covid supply chain and things that unfortunately will work their way through the system this year.”

Inflation in the US has also spiked up to 7 per cent but Australia’s inflation is much lower than New Zealand at 3.5 per cent.

Robertson said the Australian rate for the last quarter of 2021 was about the same as New Zealand’s.

“We continue to be careful with our spending but the reality is if you were to cut health spending that doesn’t change the price of petrol. We have got to be pretty careful of not cutting our nose of to spite our face.

“Obviously we are prudent with what we do but there are a lot of things we do need to be investing into in New Zealand. We have got to keep doing those.”

He said the Reserve Bank was ultimately the agency charged with price stability and keeping inflation low while the government would continue to look after those who are most affected by the rise in the cost of living.

“We know historically that inflation tends to affect those on the lowest incomes the most and so we have lifted incomes for the lowest income earners both through increases to benefits, and there is a further one of those coming on the 1st of April, but also things like the minimum wage as well and also we have got a role to play in competition policy.

“I do think that is an important element both in the fuel and supermarket sectors we have been working hard to make sure they are as fair as possible for people.”

The high inflation is expected to prompt the Reserve Bank to increase the official cash rate and lending rates have already risen in response to that.

Robertson said New Zealand had had historically incredibly low interest rates.

“Obviously the Reserve Bank has given a signal of their trajectory that they are on there and that will have some impact on people in terms of their household budget but as a country what we have to do is press on to be more productive, create more high paying jobs and make sure that we are spending the money we have wisely to support people into those careers and into that work. But there is no doubt cost of living increases are challenging.”

Rising costs mean workers are likely to demand higher wage increases in what is already a tight labour market.

Robertson said wage negotiations were between employers and employees and it could only control the minimum wage.

“We have consistently lifted that to help meet the cost of living but one of the things that will happen over the next period of time is people will be looking in a fairly tight labour market to what they might be able to get in terms of wage increases.

“That in the end can start fueling things. What we have got to do is be more productive, get more out of every hour that New Zealanders work and that means improving our skills, lifting our investment in research and development.”

Robertson said it also meant getting free trade deals over in the UK and Europe.

“These are the things the government can do, not immediate but about making sure the economy overall is working well and producing jobs. This is what every country in the world is facing and we do have monetary policy tools that are designed to deal with this and the RB will no doubt be thinking about that.”