The IMF’s acting director of its Asia-Pacific department, Anne-Marie Gulde-Wolf records her interview with Reserve Bank Governor Adrian Orr last Thursday.

The first shots were fired last week when Infometrics Chief Economist Gareth Kiernan accused the Government of fuelling inflation with its high spending.

Then yesterday, in an echo of Ruth Richardson’s famous aphorism that “monetary policy needs mates”, Reserve Bank Governor Adrian Orr said the Bank could not deal to inflation on its own.

It needed fiscal support.

At the heart of the debate now is the additional $6 billion in spending Finance Minister Grant Robertson is proposing to add to next month’s Budget, coming on top of the additional $74.1 billion the Government spent on Covid relief.

There is a question about the Government’s policy of continuing to spend some of that unused Covid funding, such as the $542,000 allocation last month to Ngati Tuwharetoa to restore significant locations in northern Tongariro National Park and the western shores of Lake Taupō as part of the $1.219 “Jobs for Nature” programme unveiled in 2020.

And National’s finance spokesperson, Nicola Willis, is critical of the additional $6 billion, much of which will be allocated to restructuring the health system.

Orr, in a recorded interview with the IMF’s acting director of its Asia-Pacific department, Anne-Marie Gulde-Wolf, said the challenge in front of central banks was how did they tighten their monetary policies to constrain inflation expectations without creating a recession?

“There are an unbelievable number of continued economic shocks hitting the environment, whether they be health, geopolitical concerns and of course, underlying this, the continued climate change challenges that we have,” he said.

“I would say that central banks aren’t going to achieve their mandates on their own; low and stable inflation and maximum sustainable employment.

“We are going to need support.

“Central banks are going to have to communicate very, very clearly about our purpose and why we are looking to lift interest rates in the current environment.

“We’re going to have to be very clear with our fiscal authorities around what we are doing and how they could assist around more targeted effective fiscal policies.”

At face value, Orr would appear to be saying that to help control inflation, the Government would need to constrain its spending.

But filling in for the Prime Minister (who is in Singapore) at the weekly post Cabinet media conference, Robertson chose to interpret Orr’s comments another way.

“What I would say is that we will always continue to carefully look at our expenditure and make sure that New Zealanders are getting value for money from there,” he said.

“But we’ve got a housing crisis. We’ve all acknowledged that.

“Could the Government still decide to stop building state houses?

“We, yes, we could, but there would be cutting our nose to spite our face.”

Robertson said the Government needed to make those sorts of long term investments so it would continue carefully balancing its program.

“The governor of the Reserve Bank in the Monetary Policy Committee and not only our own fiscal and monetary policy do work together, but it is the core mandate of the Reserve Bank to keep inflation between one and three per cent over the medium term.

“They take their job seriously, and we can all see what they’re doing in that regard.”

But Orr argued that, in some ways, the Government’s Covid cure, its closing of the borders, had exacerbated the current inflation situation.

“We were able to stall the onset of the Covid virus pandemic among the general public for quite some time, importantly until we were around 95 per cent vaccinated across the population,” he said.

“So in terms of health, we have done very well, but it has come at the cost of having a closed border to international people movement, and that creates significant strain on resources.”

Orr said that the Bank had worked very closely throughout the pandemic with what he called “the fiscal authorities” but which he meant “the government.”

“Once that pandemic was in full bloom, you know, we had to work incredibly closely with industry and, of course, our fiscal authorities,” he said.

“We have a very strong and close relationship to understand what they were doing on the fiscal side and how we could support through both our prudential work, but also our monetary policy work.

“And so monetary and fiscal policy became very close, which was a wonderful thing.”

Now that “wonderful thing” may be beginning to lose its bloom.

Robertson yesterday was now willing to concede any substantial fiscal tightening in the upcoming Budget.

“We have to look carefully at all of our initiatives to make sure that they value for money and that they’re doing the things that New Zealanders would expect us to do,” he said.

“But in this Budget, for example, we are completely rebuilding New Zealand’s health system.

“There is a one-off component to the operating allowance, which is for that purpose.

“Other than that, the operating allowance is similar to levels that we’ve seen recently, but the job of making sure that we carefully balance our spending is one  I take seriously.”

The health spending is a problem.

The District Health Boards continue to run up huge deficits.

The CTU economist, Craig Renney, has estimated that to meet current DHB deficits, rising costs and population and demographic changes would need an annual operational funding increase of  $1.43 billion.

Robertson appeared to be promising something like this last December when he unveiled the Half Yearly Economic and Fiscal Update.

“Through Budget 2022, we will ensure that the new (health) entities have a solid base for tackling this challenge,” he said.

In fact, health spending is going to be the pressure point over the next year, or so as not only the reforms but also the wage pressures springing from staff shortages and the rapidly growing numbers in the population aged over 65 begin to impact on the system.

This places National in an awkward situation.

It has promised $1.7 billion in tax cuts should it become the Government after the next election.

In themselves, those cuts will add to the inflationary pressures.

But National, though it opposes the health reforms, is stopping short of saying they would reverse them if they became the Government.

National’s health spokesperson, Dr Shane Reti, has told POLITIK that if National were to be successful in 2023, the reforms would have had 15 months of implementation.

“And so for me, I will need to see what the environment is when we arrive because with all the many, many stakeholders I’ve spoken to over the past six months, they’ve all said that Shane, we won’t thank you for doing large structural change if you’re successful in 2023, we’re exhausted; we’re too tired,” he told POLITIK.

“And so it was made very clear to me that the sector would not accept structural change.”

And that is going to be the political challenge for National; trying to find acceptable areas of Government expenditure to cut.

Robertson clearly understands the politics of cutting expenditure.

This all leaves the ball back in Adrian Orr’s court with the only implement he has got, interest rate increases, carrying their own political risk of a recession.