Why interest rate cuts alone won’t cure political long Covid

Wednesday, 20 August 2025

OPINION: And like clockwork, after another interest rate cut, the Government has taken a curtain call. It has been madly ‒ and indiscriminately ‒ trying to brand any development as helping with the cost of living.

New rules out for consultation in the energy sector: cost of living. New building rules: cost of living. In fact, just about anything the Government seems to do is branded up as cost of living.

Of course, Tuesday’s interest rate cut is the Reserve Bank making the moves, not anything the Government has done (although paring back spending will certainly have helped at the margin).

A few months ago general consensus was that this would be the last interest rate cut of this rate-tightening cycle. In the absence of an accelerated or sharp real economic downturn, that was going to be about be it. Now the RBNZ has confirmed another couple of rate cuts this year are on the cards.

Just as the persistent deficit presents a structural fiscal problem for the Government, so the cost of living is now presenting a structural political problem. Both gaps need to be closed.

In the case of the fiscals, sluggish growth has meant that the budget gap is extremely hard to close without swingeing cuts. And that even after changing the way it is measured, the Government has years of work ahead to do so.

In opposition, National campaigned on being better at managing the cost of living and the economy than Labour. But on getting into office, the gap between the rhetoric and the ability of the Government to do much about it has become pretty clear.

Households have already taken advantage of lower interest rate cuts to pay down mortgage debt ‒ and compared to past crises, household debt was higher going into it. The upshot is money is being saved, not spent.

Both Christopher Luxon and Nicola Willis said on Wednesday afternoon they expect that to change.

Paring back spending by more than the Government has already done is considered politically unpalatable by the public ‒ plus would be difficult in the current Coalition. Some sort of supply-side relief to spur growth such as tax cuts would exacerbate the fiscal situation in the short run ‒ not to mention there are a large number of (also structural) problems making demands on the public purse.

Any sort of fiscal stimulus to get the economy moving would risk putting inflation back out of band and would also worsen the deficit. It would also completely undercut the Government’s entire narrative ‒ and in one of the few areas where it dominated the political debate ‒ on debt.

On both the fiscal and cost of living, there are few good choices. Just difficult trade-offs. But politically, the current plan looks lacking. It is the middle of winter and nothing is going quite right.

Trying to relate everything back to the cost of living and giving relief to “low and middle-income working New Zealanders” (a catchy phrase if ever there was one) is not a good strategy.

Relating it to the economy and opportunity and driving down costs over time ‒ absolutely. And a bunch of changes are positive. But trying to make everything about the cost of living ‒ the immediate political problem ‒ just risks the public rolling its collective eyes when things actually do happen that helps the cost of living.

This is not a small political problem. Willis said on Wednesday that the data doesn’t lie. And it doesn’t. But cost of living is a felt thing.

And that is why somehow solving the “cost of living crisis“ was never really in the Government’s gift. Inflation bakes in higher prices, and lower levels of inflation simply mean price rises slow down. And then, because of the high prices farmers are getting for protein in particular, other key prices have shot up. Plus insurance, plus rates.

It was always going to be hard for the Government this winter. The power of positive thinking and talking the place up was never going to mean the economy would automatically pick up. And the second quarter ‘Liberation Day’ simply undermined confidence even further.

But it has been harder and the return to growth more delayed than expected. Essentially the Government has political long Covid. Five and a half years after the first lockdown, the legacy of the pandemic is still keeping the economy sick. New Zealand, of course, is not alone in this regard.

The question now is about the Government’s choice of treatment.