Middle East war risks return to Covid-era inflation peaks for NZ economy
Sunday, 12 April 2026
OPINION: Whether it be a ceasefire or a failed ceasefire, the worst of the pain from the Middle East conflict is still to come.
As has become obvious, the hurt will come in two ways: Through general living costs even if oil starts flowing normally soon, and via a slowing economy that will hit businesses, consumption and employment.
The inside hints from the Government’s adviseratti are that Treasury’s tentative top inflation number could be as high as 7.5%. That compares to the 4.2% released by the Reserve Bank this week.
Reporters have tried to prise the Treasury figure out of Finance Minister Nicola Willis – who will only say the figure is higher than the 3.7% she had previously disclosed. She has argued, quite defensibly, that the financial folk at No1 The Terrace have not yet translated the finger-in-the-wind figures into concrete scenarios for the May Budget, so it would be premature and unfair to put them in the public arena.
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Of course there are other reasons too. If the 7.5% figure is in the ballpark, then it is as bad as the 7.3% June 2022 peak of the Covid-driven annual inflation rate, and well above the 4.7% in December 2023 which this Government inherited.
The 7.3% Covid inflation peak was in line with that of many other countries, but this Government has made much of Labour’s extra spending as a driver of that painfully high rate. To face a similar number – or indeed anything much over 5% or 6% - will beg the questions of how, and why, that is happening if spending has been so much more responsible.
Whatever the inflation outcome, and however slowly the RBNZ increases the official cash rate to throttle back any “secondary” inflation, (and how it will act if supply-fuelled inflation is twinned with a recession) there is a pile of hurt coming.
And with the pressure on households through greater employment uncertainty, higher petrol and supermarket bills, and on businesses from high diesel prices and reduced demand, the pressure is mounting on the Government to offer more assistance.
Prime Minister Christopher Luxon this week reiterated that the Government can’t alleviate all the pressure for everybody and it was applying the Royal Commission of Inquiry into Covid 19’s template of timely, targeted and temporary assistance, “which I think most New Zealanders would understand and appreciate”.
He might be lucky, if the electorate accepts the shortage of cash in the Crown coffers and the need for overall restraint.
But the problem with targeting according to status (employment, family size, age etc), such as in the Government’s $50 a week for working families with children, is that it does not address the variable needs of individuals or businesses. (It is an argument the Government should recognise from its approach to programmes that focus on, say, Māori, even if ethnicity is an evidence-based marker of need.)
So, the person who can walk around the corner to work gets the same $50 from the Government’s plan as someone who has to drive 50km a day to work. And $50 a week more than the person without children, or the person without work, who must drive 60km a day.
Economist Shamubeel Eaqub has pointed out something similar – the geographical and work-related anomalies of “targeting” even for something as narrow as fuel costs. For instance, healthcare and social assistance workers in regional areas face some of the longest commutes in the country. For education and training, people in Hurunui, Central Hawke’s Bay, Southland, and Clutha face significantly longer commutes. Even in urban areas such as Auckland commuting distances vary greatly.
And that’s before you consider the stresses on businesses and the pressure that will build on the Government for other specific help, especially as transport costs soar because diesel prices have doubled.
So far it has resisted, although the hint it may “tweak” the regional investment fund so it can subsidise air routes in and out of small provincial towns may be the first squall of a bitter winter.
Which brings us back to the Royal Commission into Covid 19 and the Government’s use of its comments on fiscal policy to hammer the previous Government.
The commission said the wage subsidy (funded from the “good” half of the $60 billion in Covid-related spending) “was consistent with the timely, temporary and targeted criteria. It was timely, in that money entered the economy quickly, it was targeted to employers facing a sizeable drop in revenue and was temporary in that it applied only while lockdowns restricted the ability to work”.
But it said the other half – some $30b – of the previous Government’s spending “was not directly related to the pandemic, including infrastructure projects, and nature conservation and school lunch programmes”.
Firstly, although that comment was based on Treasury’s words, that is not exactly what Treasury said.
It said the allocation was spent on “a wide range of initiatives with varied objectives – some aimed at more directly responding to the impacts of Covid-19 and others aimed at providing fiscal stimulus or achieving social or environmental objectives. Examples of these other initiatives included tax changes, training schemes, housing construction, shovel-ready infrastructure projects, increases to welfare benefits, the Small Business Cashflow Scheme, Jobs for Nature, additional public housing places and school lunches.”
Now, some of those projects were clearly marginal as a response to Covid. Others – such as the extra money for school lunches and for the unready shovel-ready projects – were highly dubious and deserve to be called out.
But more than $10b of that $30b went on efforts to help businesses, including tax changes ($5b), business grants ($4.2b) small business cashflow schemes ($2b) and training assistance.
If the wage subsidy is deemed to be a direct response to the Covid crisis, why are these not?
That’s for the commission to answer, but as far as the coalition is concerned even as pressure builds for more help now, what was good for the Covid-crisis goose is presumably good for the fuel-crisis gander.
Because if business assistance was part of undisciplined crisis spending five years ago, then that would equally apply today.
Ministers should be hoping that the Middle East conflict and its economic fallout will abate before the cries from businesses become so loud that the Government is hoist on its own petard.
Good luck with that too.