Why is the Prime Minister still smiling?
News this morning that the Reserve Bank has cut the Official Cash Rate for the first time in five years will be music to the Government's ears. It's the first bright news on the economy front Labour has had in a very long time.
Granted, as National's finance spokesman Bill English points out today, "the good news is the bad news'' in the sense that governor Alan Bollard's decision to go earlier than many economists thought he would is based on the truly horrible state of the New Zealand economy and his fears that the current recession is going to get worse before it gets better.
Bollard is now admitting the CPI is going to hit 5% in September, and combined with weak economic activity, very high oil prices, a continued correction in the housing market, and sluggish domestic demand, the economy is going to stagger along for the rest of this year.
Yet for the mortgage belt upon which this and every government depends, none of this matters as much as Bollard's decision to cut the OCR from 8.25% to 8%, and his additional remark that "provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further''.
I can just visualise Helen Clark and Michael Cullen doing a little jig in their Beehive offices this morning. A further lowering in the OCR is just what the doctor so desperately wanted. And the more aggressive stance that Bollard seems to be taking to cutting hopefully means more money in homeowners' pockets before the election.
He is taking a big risk, of course. Bollard is gambling that household spending will continue to come off the boil for the remainder of the year, and that oil prices don't go for another big spike that would combine to send inflation into territory not seen in several decades. But the Government won't be complaining.
There are a couple of other reasons why Clark is smiling at the moment. National confirmed its industrial relations policy this morning, which changes little except for introducing a 90-day trial period for workers, cleverly dubbed "fire at will'' by Labour. I think this will haunt National during the campaign, and for little political upside. If employers won't be unscrupulous and sack people after the three-month trial is up, then why have one at all? I don't believe employers need encouragement to "take a risk'' and hire people. Either they need the staff or they don't. All this policy will do is allow Labour to play up the fear of workers being exploited under National Party policy. And I think it will be deeply unpopular with voters.
The other reason, curiously, is the Winston Peters donation scandal. I'm not so sure this is bothering Clark terribly much. Why do I think this? Well, for one thing, when junior partners in a coalition or confidence and supply arrangement get into trouble, it's almost always the smaller party that suffers - the Alliance, for example, in 2002. Peters is in trouble, but I can't see it rubbing off on to Clark even if she did sack him as Foreign Minister. Indeed she'd probably pick up support.
The second reason is that the irony of the donor scandal is that it once again raises the whole issue of anonymous rich people trying to buy elections. And while the heat is currently on Peters, I wonder how long before it will again turn back to the National Party, which has more experience with secret trusts hiding large corporate donors than any other party.
People in glass houses and all that, and I think John Key is sailing close to the wind by suggesting Peters has somehow been influenced by donations he has received over the years. As if National has never written policy that is favourable to the people that give it money, or has never rewarded those with deep pockets with the odd knighthood or board appointment.
It also limits National's ability to go quite so hard on the Electoral Finance Act in future. Granted the law is complicated, virtually unworkable, and probably unfair. But it does limit the ability of parties to slip donations under the carpet in the way NZ First is being accused of doing, and as National (and Labour) have done in the past.
And National knows it can't go after Peters too hard in case it needs him after the election. The temptation must be there, though, given if it did manage to finish Peters off an early election would be in its favour. The fear, however, is that if the attempt backfired and Peters survives, National can kiss goodbye to any post-election deal with NZ First.
So provided Peters doesn't completely throw his toys and march out of the government, therefore prompting an early election, I don't think this week has done Labour any harm at all.
Which is why the Prime Minister is still smiling.
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Just ask any small employer who has taken a punt and then got burnt with a PG. Mostly they are advised to pay up rather than take on hefty legal costs. It makes you very cautious about giving anyone a chance who has a dodgy history of any kind. With SMEs earning so little there's no room for extra costs.
I just wonder if all this murk swirling round Peters might make more of us determined to vote in a majority government. MMP was, after all, meant to keep them honest! Instead the poor old taxpayer gets gulled and swindled over and over again whole they all live the high life.
By the way, is there an official barista for the Cabinet and if not why not?
The OCR rate cut won't help the mortgage belt on fixed mortgages for some time and due to the credit chaos overseas, banks in NZ will still have to pay high interest to get funds from overseas to lend out here so OCR rate cuts now won't be of benefit until mid next year. Meanwhile the house the borrowers are sitting on which was the basis of their 'wealth' will continue to rapidly drop in value. This really goes to show that NZ's boom of the last 10 years was caused by 1. Rampant easy credit in the U.S fueling the world economy and buying of Chinese goods and 2. Kiwi's borrowing $60 billion in overseas funds to buy stuff with. Also imported fuel prices will in NZ, take flight way up.
However on the plus side the OCR cuts will at long last bring the kiwi dollar down which will show in positive results mid next year for the agriculture and manufacturing export sectors and for NZer’s with investment funds overseas when they repatriate their returns.
Labour benefited while the sun was shining in the global economy in the same way National suffered in the wake of 1987 affecting the early 1990’s and the 1997 Asian currency crisis. If this rough formula holds true then Helens smile, like the cat in Alice in Wonderland will be all that is left of her govt after election ‘08. But hey she hasn’t even announced when the election will be yet…
I think COlin underestimates the conservatism of a lot of the electorate. Many will have seen people unfit for jobs holding roles that can't be removed, and all know about some of the ludicrous PG;s that float around, so may have a lot of sympathy for the small business owner beset by regulations and processes. This could be seen as a reasonable small relief for them.
You oversimplify with your comment that "Either they need the staff or they don’t". I know of several small businesses who choose not to expand having been burnt with manifestly unsuitable employees they were unable to release. One curtailed his plans to expand his business into the North Island as a direct consequence. I suspect it is a major hidden barrier to economic growth.
I think that where the 90 day trial might help, is with people who are in the "could be OK, but there are some risk factors" category who might be given a chance. This could include people with some "police history" or long term unemployed. They could be given a chance with no (low) risk to the employer. On the other hand, presumably it also makes moving to a new job a little bit riskier. They have this policy in Australia, and of all the people I hired, I only used it once. Doesn't seem to be a big issue over there.
A surprise. No doubt about it.
You've probably hit the nail on the head there Colin, with the suggestion that Bollard must really think the economy is crumbling quickly to make this move this early.
But with inflation so high, one would think that lower mortage rates won't be effected in the short term.
Also, $2.50 a litre gasoline......here we come!
Actually not much of a risk. International commodities markets (real drivers of NZ inflation) are headed south, plenty of evidence that domestic consumer spending is headed in the same direction.
I doubt there's much dancing at the Beehive. The flow on benefits of a lower OCR won't be felt until long after Helen and Cully have been voted out and they're smart enough to know that. It's bizzare to watch as Helen steadfastly leads those around her to defeat just as Howard did across the ditch.
Sorry Colin, you display with this comment a lack of appreciation of what it means to run a small business in NZ: <i>If employers won’t be unscrupulous and sack people after the three-month trial is up, then why have one at all? I don’t believe employers need encouragement to “take a risk” and hire people. Either they need the staff or they don’t.</i>
This topic has already come up on Mike Moreu's <a href="http://stuff.co.nz//blogs/toonedin/2008/07/09/a-hard-hitting-topic/" rel="nofollow">blog</a>.
If you genuinely cannot understand why there might be <b>genuine</b> reasons for an employer to sack someone in the first few months, then reading those posts might assist your understanding.
Colin, I have to disagree that National's employment policy "changes little" aside from the 90 day no rights policy. Despite National's spin this policy is essentially the same as Don Brash's in 2005.
It includes barring unions from the workplace, undermining collective bargaining by allowing employers to create their own non-union collective agreements, cutting holiday and sick pay and making saleable the fourth week's annual leave. And this is just what they've announced in their policy today.
You said earlier in the year that you didn't see how a government could "make wages drop". This is your blueprint.
Take a look at the graph below and see what happens to wages when you undermine collective bargaining and bar unions from the workplace.
http://www.thestandard.org.nz/wp-content/uploads/2008/03/average-weekly-earnings-800.jpg
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I didn't think Reserve Bank Governors were supposed to "gamble". Normally high inflation = ratchet up interest rates. Strange times.
I don't think this will prevent a National victory this year, but it could kill off an absolute parliamentary majority. Then JK can find out what it's like to cobble together minor parties in order to govern.