Like a lot of banks throughout the world the Reserve Bank of New Zealand (RBNZ) is pushing up interest rates in order to combat inflation. This is the standard institutional response and is a blunt and equally inequitable tool wielded with little thought.

Having artificially depressed interest rates to virtually unprecedented levels, coupled with quantitative easing, mortgage lending rose, property prices soared and inflationary pressures followed.

Whilst this was reactionary to the economic pressures created by Covid, it too was just another blunt tool in the box, used with little forethought as to the downstream consequences.

In December 2021, the official cash rate in NZ was 0.25%, it is now, 3.5%. Mortgage rates as an average have correspondingly increased from circa 2.75% to 6%, an increase of 118%.

This understandably has the impact of dampening consumer spending but it is a measure that affects only a portion of the NZ population, when it is all of the population that has any sort of income, that is contributing towards inflation.

Looking at household expenditure; if a family has a loan for a car, for a fridge, for a holiday, or a wedding, unless it’s secured on the house as an extension of the mortgage, the interest rate is fixed. If they are in a rental property, then the rent is also fixed for the term of the lease; not in any of those circumstances do interest rates rises have any material effect on the household expenditure.

However, if they happen to have a mortgage and statistically, of the 1,780,000 households that exist in NZ, 32% of do, then those with floating loans will find themselves with a significantly increased cost of debt.

The burden of fighting inflation is unfairly disaggregated over the 32% of the households that have mortgages which is 570,000, an average of $359k per household.

Their average repayments (P&I) have gone from $1,656 pcm to $2,313 pcm, which is close to an $8k per annum increase, or around $12k as earned income. Obviously that gears up or down depending upon the level of debt.

This is a burden borne by the minority for the benefit of the entire country given everyone who has either earned or has income benefit, contributes towards the overall inflationary pressures.

In a democratic society, this is wholly unreasonable.

Households with mortgages are not the sole contributor to inflation so they shouldn’t be the one primarily tasked with bearing the cost of the solution.

In the same way most of the cost of living in a civilised society is borne collectively by its participants, so should the cost of combating inflation.

It would far more reasonable that the working population, they who earn income and pay taxes, be the ones who are primarily tasked with the burden of fighting inflation and this simplest way to do that is to increase income tax.

I would argue for a variable rate in the same fashion as income tax is levied, in bands based upon levels of income. The more earned, the more that is paid because on average, the greater earners spend more and they must therefore be the greater contributors towards inflation.

The increasing of interest rates is an austerity measure; it depresses household expenditure and slows the economy by increasing the biggest contributor of household debt, mortgage payments. This is both a physical and psychological brake but increased taxes have the exact same effect.

Looking again at crude numbers; the increased cost imposed by that base rate increase from 0.25% to 3.5% is a gross increase in cost for all households with mortgages of circa $4.56Bn annually.

To allocate that across the tax base of 2.8m working people would equate to $1,628per person as an average increase in tax.

It is a more reasonable distribution; far more reasonable than the average $8k (and rising) imposed upon mortgagees, and it has the same consequence and realises the same fiscal gain that the government can either use or store, as opposed to a belt-tightening exercise that benefits no one except the banks.

Is this a truly equitable solution… no, because it ignores beneficiaries, pensioners and at the moment businesses, all of whom have a part to play in creating the problem and they too ought to bear some of the burden of a solution.

Personally, as a person and company with mortgage debt, I’d sooner the tax option than the rate rise option and if that meant foregoing contributions from the vulnerable, that would be fine by me. I would though expect something from businesses on corporation tax.

The RBNZ governor’s prescient thoughts on the problems the bank (primarily) created was to say ‘I told you so’. He was referring to a statement he made warning of interest rate increases.

Thus spoke a man who created the rain and then criticised those who bought umbrellas and it is those musings that pass for critical thinking in an organisation that ought to be better.

It is another facet of a Labour government that isn’t working or thinking that as just reward for what is widely condemned as a major mis-handling of the economy during the Covid pandemic, the RB governor was been given a further 5 year term on the recommendation of the bank’s board, most of whom he appointed!