BRYCE WILKINSON: Cost of living crisis won’t be solved by subsidising prices

Voters are rightly worried about the cost of living. How can they balance the household budget? Should they move to Australia?

It is a nationwide issue. After allowing for inflation, population growth and seasonal effects, real national disposable income per person fell 4.3 percent from the September quarter 2022 to the September quarter 2024. A modest subsequent rise has reduced this decline to 1.5 percent.

If you are feeling harder up now than in the second half of 2022, you are not alone. If you are not, you should feel fortunate.

And do not forget that incomes per person in Australia have been well above those in New Zealand for decades before the slump of 2022 to 2024.

What caused the recent decline? A great many things, some of them world events beyond the control of any New Zealand government. Higher world oil prices are one example.

But a major factor is very slow wage and labour productivity growth.

Stats NZ’s growth cycle statistics for the market part of the economy show output per hour worked grew by 1.3 percent a year from 2000 to 2008. From 2008 to 2020 it was only 0.9 percent a year, and from 2020 to 2024 it was just 0.1 percent.

At 1.3 percent a year, real wages can double in 54 years. At 0.1 percent, it would take nearly 700 years.

So, if you want the next generation to be better off than today’s generation, think twice about voting for parties that only pay lip service to faster productivity growth. Also think about which policies are least likely to induce ambitious and productive young New Zealanders to emigrate.

What might be done to address this cost of living problem? Much could be done given voter support, but very little will be done, judging by the election campaign promises of several political parties.

Some political parties are relying on voters to confuse price with cost. One even has a “Cost of living action plan” that uses subsidies, price caps and market regulation to cut everyday household bills.

The premise is false. Forcing a price down does not reduce the cost of supply. The public must fund the cost of supplying what it consumes regardless of price. Otherwise, it will not be supplied.

“Free” school lunches, medicines or hospital care are costly. So are fuel, electricity, housing and much else.

An imposed low price just means the public has to pay more indirectly. It will be through some combination of higher council rates and tax burdens, lower wages and lower profits for KiwiSaver balances.

If extra waste results from subsidised prices, the cost of living goes up, not down. A worrying share of food for ‘free’ school lunches will likely be thrown away.

Forcing prices below cost can also mean people who could pay have to go without. When the last Government auctioned KiwiBuild houses at fixed prices, all but the lucky lottery winners missed out.

Supporters of forced price cuts have at least one valid point. Lower prices will help households that can avoid their share of the higher indirect costs.

But such ‘vote for me’ political adverts commonly fail to identify which households will have to pay more than their share of these greater indirect payments.

A second hidden problem is that lower prices help the well-off most because they buy more. For example, subsidies for new electric vehicles did not help those who could not afford one.

A third counter to the “at least some will benefit” argument is that the same people would be better off with the equivalent in cash and prices that cover costs. Cash gives them choice. Some may prefer to spend it on a visit to the GP rather than on a few months of “free” school lunches.

Indeed, our large system of cash welfare benefits accepts that cash best helps households in need.

What then should voters see as a meaningful response to their cost of living pressures?

Policies to reverse the productivity slowdown need to take centre stage. The slowdown, not greedy grocers, is why incomes have not kept pace with what people had expected.

Governments cannot do everything. But voters can demand that they spend and regulate better than they do. Central and local government together spend and redirect around half of national disposable income, much of it poorly. At the same time, regulation has bred a risk-averse culture that says ‘no’ to investment in infrastructure, new housing and much else.

Both spending and regulation need to be tested much more rigorously for value for money. Politicians who stress that need are onto something useful.

This article was first published at the NZ Herald and was sourced from the NZ Initiative

Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative. Bryce was made an Officer of the New Zealand Order of Merit in the 2025 New Year's honours for his significant contributions to public policy formation and economic research, spanning his influential work at Treasury during New Zealand's major economic reforms and his extensive research on fiscal discipline and regulatory quality.