• rmacculloch

Did the PM just get her economics wrong?

The news is dominated today by the welfare payout of $350 which is being made to "New Zealand tax residents over the age of 18 who earned up to $70,000 in the last financial year". Apparently over 2 million are set to receive it !?

The PM rebuffed claims that the payout would be inflationary: "A tax cut would also likely contribute to inflation but offering a targeted, time-limited payment would limit the possibility of that according to Treasury", she said. Hang-on.

First, since when is a welfare payout to millions of people, amounting to over half of NZ's entire working-age population, "targeted"? Second, the payout is aimed at low & middle earners. Economics 101 says they tend to have a high "marginal propensity to consume". Bigger earners save more of their extra income. Probably all, or nearly all, of those receiving the payout will spend the full $350 (which is the same as saying they have a propensity to consume close to 1). That's nearly $1 billion of more spending.

So for the PM to argue that the "targeted" nature of this scheme would "limit the possibility" of the payout being inflationary appears to be ... wrong. Worse still, economics is such a tricky subject it could well be that those who genuinely are in poverty could be left worse off by this policy - due to the extra inflation caused by the middle earners going out and spending this extra cash. Not that Treasury or the RBNZ will have done that calculation.