Making sense of the national accounts

Doing so is more than usually challenging right now. We had the huge disruption of the draconian national lockdown last year, and some more limited sets of restrictions since then. Some of the economic aspects of that were impossible to measure accurately, although no doubt in many areas SNZ will continue to try valiantly to refine their estimates. Largely-closed borders continue and thanks to the ill-judged decision of politicians and bureaucrats to scrap departure cards a few years ago we are now flying quite blind around recent net migration estimates (SNZ use a model, but – like any model – their model struggles to cope with a dramatic regime shift). Some of the difficulties are amplified by New Zealand’s long-term underinvestment in good economic statistics – a choice of successive governments, sometimes aided and abetted by SNZ management.

New Zealand has two measures of quarterly GDP. The expenditure and production-based approaches are both trying to estimate the same thing (as will the forthcoming income measure) but data collection challenges mean that it isn’t for several years that the two series are more or less reconciled (and even then not always that well).

GDP long term

But if the two series are, eventually, more or less reconciled that isn’t much consolation now.

Here is the more recent period, this time per capita and indexed to 100 in 2016q3, the last date for which the current estimates of the two approaches are almost identical.

nz per capita

Over 4.5 years a gap of 3.7 per cent has opened up between the two series. And there is no good ex ante reason to prefer one estimate over the other.

In per capita terms – using the current SNZ official population estimate – that is the difference between 2.4 per cent and 6.2 per cent growth in real per capita GDP over the period shown. One of those numbers is not too bad, the other is pretty dire. For the Covid period – so since the last pre-Covid quarter in 2019q4 – it is the difference between a 0.9 per cent fall in real per capita GDP and a 0.7 per cent increase. I usually simply average the two approaches, so a best stab in the dark is probably that we are back to around pre-Covid levels, but really who knows.

And it is complicated by the fact that the population estimates themselves are a moveable feast. SNZ’s official estimate – using their 12/16 model-based rule. They estimate that the resident population has increased by 6500 over the year to March on account of immigration. But one of the few hard numbers we know is the number of people coming and going from New Zealand (in total, for whatever reason) and those numbers show a net outflow of 56446 people between 1 April 2020 and 31 March 2021. It is at least possible that as the 12/16 estimate converges to hard numbers (SNZ know with confidence what happened 16 months later) that we end up with a rather low contribution from net migration in the last 12 months or so?

A revision along those lines might sound like a good thing – if the resident population was smaller then given GDP average per capita real GDP was higher. But I doubt it is as simple as that because many of the components of the GDP estimates themselves will have been estimated, from sample surveys, that have behind them a view on the population. Revise down the population and it is likely that the subsequently-reported GDP estimates will also be a bit lower.

One of my favourite charts over the years has been on real GDP per hour worked. My normal approach is to use the two GDP estimate and the two estimates of hours (QES and HLFS), index all the series and simply use the average that results. Here is the chart for the last 10 years

real GDP phw June 21

The decade was mostly pretty bad, but who knows what has gone on in the last 12 months. Some of the apparent noise reflects differences in the two hours series: the HLFS estimates hours worked and the QES hours paid. Usually they are much the same thing, but not in the midst of a lockdown with a wage subsidy. But that was mostly a problem for the June and September quarters last year.

No one is going seriously argue that Covid has been good for productivity, so even if the latest estimate looks quite appealing it is unlikely to endure. Now, of course, you’ll recall the divergence in the two GDP measures, so I could show you are a chart with really big differences in the productivity estimates depending which GDP measure one uses.

Perhaps you think that the lift in productivity shown in the chart is mostly a compositional effect. When hours worked dropped it is often the lowest paid, lowest productivity hours that drop off first. But even there our two surveys report quite different things: QES hours in March were (seasonally adjusted) 1.8 per cent lower than they had been in December 2019, but HLFS hours were 1.4 per cent higher. There is, inevitably, noise in these series, but it does leave analysts somewhat at sea at present. And not even sure where the errors, and future revisions, might be. I’m pretty confident that labour productivity has not really increased by 2 per cent in the last 15-18 months, but what that means for the component estimates I don’t know.

I’ve sometimes shown comparison with Australia, especially for real GDP per hour worked.

Aus GDP 2

There is much, much less volatility than in the New Zealand estimates. Of course, it also seems unlikely that underlying productivity per (stratified) worker has stepped up through Covid, but…..hours worked in Australia are estimated to have been 3.4 per cent lower in the March quarter than in the December 2019 quarter, so there is a a somewhat plausible composition story there. In fact this is what happened in Australia in the 2008/09 recession.

aus 08

And as the labour market recovered, productivity fell back to trend.

Some of the measurement challenges are unavoidable, but it does look as if the (highly regarded) ABS is making a better fist of things than SNZ.

We can be confident that the economy is in much better heart than it was last June, but – per official statistics anyway – that really is about all. Fortunately, we have business opinion surveys because perhaps more than usually we really rest on them for anything much of a sense of where the economy is right now. And for some things that matter longer-term, notably productivity, we really are just flying blind at present, backed perhaps by basic theory that whatever good shutting borders has done for public health (a real gain) it is almost certainly at least somewhat bad for productivity.

Immigration policy for New Zealand post-Covid

It must be quite a challenge for Rotary clubs to maintain a regular roster of speakers. Four years ago someone at the Wellington North Rotary Club had heard about my ideas on immigration policy and New Zealand’s lamentable economic performance and they invited me along to tell my story. The text I used then is here. A little while ago they invited me back and when we discussed what I might talk about I agreed to pick up where I’d left off in 2017 – at the very peak of the then immigration surge – and reflect on a better immigration policy for New Zealand as and when the borders eventually reopen (in the year to April, SNZ estimates a net outflow of about 9500 non-New Zealanders who’d been here for some substantial period of time.

So I spoke to them yesterday. One can’t cover everything – or even anything much in the depth the subject warrants – in 20-25 minutes, but for those interested my text is here.

Sadly, of course, the stylised facts of New Zealand’s economic underperformance haven’t changed for the better over the intervening four years. Productivity levels remain low and growth weak. Business investment has been pretty sluggish around low rates, and if anything the export/imports shares of GDP have probably fallen a bit more (even before Covid at least temporarily cut both further). Our real exchange rate stayed high, and if long-term real interest rates have fallen they were/are still well above those in almost all other advanced countries.

What has changed, for now anyway, is the substantially closed borders, which mean that it is very hard for most non-New Zealanders (Australians aside) to get in. No one envisages, or wants, current arrangements – or anything like them – to be permanent, but it does mean the conversation and debate starts from a rather different place than it might have a few years ago.

Perhaps what hasn’t changed so much is that much of the media debate – and apparently the political interest – seems to be on short-term visa holders. And almost every day now we hear stories from employers complaining about how hard it is to get staff, holding the border restrictions responsible.

It isn’t surprising that there has been some dislocation, disruption, and difficulty for some firms. After all, the borders were basically closed overnight, for public health reasons, and that disrupted a lot. That included typical sources of labour firms had become used to tapping, but it also included changes in the patterns of consumption demand (and the derived demand for labour). Add to the story, of course, the surprising pace of the overall economic rebound – spurred by huge fiscal deficits (not just last year when they were needed, but now when they aren’t) – which has led some economists to conclude that the economy and labour market are now operating at very close to full capacity. At full capacity you would hope it wasn’t always easy, or cheap, to find staff (on the other hand, it might be relatively easier for people to find jobs).

I don’t intend to make this a long post, but before running some quotes from my speech, I thought I’d include a couple of charts with some data that surprised me a bit when I dug it out. The first is the number people here on two of our main short-term work visa programmes – Essential Skills visas (a label that really should be in quote marks, or prefaced by “the so-called”) and Post Study Work visas.

visa 1

I knew the government had offered visa extensions in many cases, but if you’d asked I’d have guessed that total numbers would have dropped anyway as a reasonable number of people went back home. But, in fact, the numbers here – in these two most skills-focused categories – are almost the same as they were at the start of last year. And numbers on both visas are a lot higher than they were even five or six years ago.

Now, there have been material drops in the numbers here in a couple of other categories (both series quite seasonal).

visa 2

And those patterns are pretty much what I’d have expected. People have gone home as they’ve finished courses of study, or working holidays, and few/no new people have arrived. But on the working holiday front remember the counterpart – not too many New Zealand young people will have been heading off on their OEs over the last 15 months or so. The types of jobs (here) the two groups might have been looking for may have been a bit different – so some real mismatch issues in some places/roles – but it isn’t as if there are fewer potential workers overall.

As I noted in my speech – bearing in mind the rapid growth in short-term visa numbers in the run-up to Covid.

No doubt some firms have specific difficulties from the sudden dislocation. But there is something wrong with the story when it is seriously claimed – and this is the implication of what so many of these businesses are saying – that a low productivity economy, achieving underwhelming productivity growth, needs more and more immigrant workers each year just to function effectively.   Such a story might – just might – have a modicum of plausibility if this was a dynamic fast-growing economy where more and more firms were finding more and more opportunities to successfully compete on a world-stage.  But that is nothing like New Zealand’s story.  

And, as I’ve noted previously, most OECD countries are not only more productive than New Zealand they are also less reliant on migrant labour. Many business concerns reflect – understandably so – the (sometimes quite legitimate) perspective of a company, but economic policy management is about a country, and the two are quite different.

All that said, one of the points of my speech was to argue that the longer-term immigration settings, around residency approvals, matters far more to economic performance than the rules around limited period work visas. At 45000 residency grants a year, in 22 years the population will be heading for a million more than otherwise (by contrast, at peak there are about 100000 people here on Essential Skills and Post-Study work visas). If you believe in the enabling economic power of immigration, or think that in New Zealand’s case large-scale non-citizen immigration has been quite damaging economically, that is really where one should focus. Open borders people do – in principle, they’d allow (almost) anyone in, to stay. And so do I.

Here is the text from the last couple of pages of my speech on the way ahead

A couple of weeks ago the Minister of Immigration gave a speech foreshadowing changes to policy settings around immigration, apparently with a focus on the limited period visas.  There were no specifics, and there was no supporting analysis.   There are probably some sensible changes that could be made, but like their predecessors, this government seems all too fond of having officials and ministers decide who should be able to use migrant labour, where and when.  I’d rather go in the opposite direction and get officials out of things as much as possible. 

I would favour two main changes.  First, I would reverse the decision a few years ago to allow students to work while here. If you are here to study, study, don’t compete at the low end of the labour market.   And I would get governments out of approved lists, or even salary thresholds, and replace it all with a model in which any employer could hire a person on a temporary work visa but that visa would be

  • Subject to a fee, payable to the government (perhaps $20000 per annum or 20 per cent of the employee’s annual income, whichever is greater). That sets a clear and predictable test for whether non-New Zealand recruits are really required, and a genuine incentive on employers to search for and develop New Zealanders (especially for less well-paid positions).
  • Subject to a term limit (no individual could be here on one of these visas for more than three years, without at least a one year return home)

But despite the headlines these short-term work visas are still the second order issue.  Much more important is whether the government is willing to make any significant changes to the residency programme, or whether business as usual will shortly be resumed.

Neither the government nor the Opposition seen willing to engage on that issue.  And if the government deserves a little credit for very belatedly asking the Productivity Commission to report on the New Zealand immigration model, strangely they seem to be proposing to make policy before the Commission reports.

What should they be doing?

First, we need to explicitly recognise that the residency programme (the driver of medium-term policy-led population growth) itself comprises several different types of people. 

It includes people we are never going to restrict.  If your daughter does an OE in London and finds a British man to marry, he’ll be entitled to move here permanently.  No one would want to restrict those numbers, and there is no quantitative limit. 

It includes those we take in as refugees.  There is no economic motive for the refugee quota, it is all about humanitarianism.  

But the bulk of the programme is purely discretionary.  And the numbers involved have borne no relationship to the rather limited (highly productive) economic opportunities here.

There are all sorts of myths about migrants to New Zealand.  By international standards the skill levels mostly aren’t too bad – being a distant island means you really only get in legally, and it is an economics (rather than family) driven programme.  But the skill levels aren’t spectacular.  And why would they be?  Much as New Zealand is a pleasant enough, and peaceful, place to live it is (a) remote, and (b) now not very prosperous, and (c) small.   The smartest and most ambitious and most driven of the potential migrants are much more likely to go to other migration-welcoming countries if they can get in.  A country whose own people leave en masse isn’t a great advert for abundant economic opportunities.

And we aren’t even ruthless about demanding highly-skilled people.  We run specific programmes for people from Pacific countries who don’t have the skills/education to qualify as skilled migrants.  And we give extra points to people who are willing to live outside the main centres, even though the main centres are where most of the economic opportunities and higher paying jobs are.  We structure the system to subsidise NZ universities, by favouring applicants with NZ degrees and work experience even though NZ universities are nowhere near best in the world, and NZ’s economy is a low productivity beast.   And so on.  There is talk from time to time about attracting the best tech people, but why would they come here – small, remote, not very wealthy, no great universities, no relevant centres of expertise or funding, and so on? 

And so we bring in lots of pretty-average people, adding nothing systematically to NZers’ prospects   There is nothing wrong with being “pretty average” – that’s most people – but it isn’t going to do anything to transform our productivity performance.  Hasn’t so far, and no reason to suppose it will any decade soon.

New Zealand’s economy could do such much better.  But all the signs are that it probably can’t match the best with a population that is growing rapidly – much more rapidly than the productivity frontier countries.  Distance hasn’t been defeated and if anything may have become more important.  There is lots of wishful thinking around the New Zealand debate, but any serious confrontation with the stylised facts of New Zealand’s experience, augmented with the experience of other former settler societies, is that large-scale immigration just hasn’t helped for a long time.  You might think the US is an exception, but it isn’t really.  It was – like us – one of the handful of richest countries in the world 100 years ago, and despite having had much more rapid population growth than European countries (and no ravages of war or communism) the gaps have narrowed.     Denmark is probably the standout performer today.  

If political parties were serious about reversing the decades of relative productivity decline – and there is no sign of it – there is a variety of things mutually reinforcing things that should be done, which together would prompt much more business investment and a more outward-oriented economy: 

  • We should take a much more open approach to foreign investment – I’d remove all controls in respect of investors from OECD countries.
  • We should be lowering the tax rate on business investment – our company tax rate (which matters a lot for foreign investors) is in the upper part of the OECD range, and what you tax you get less of.
  • We need to free up land use, within our cities and across the country.

One could list other things (GE issues for example).

But most importantly, we need to end the delusion – for that is what it is – that a very remote country, which lots of its own people leave, which has fallen steadily behind an increasing number of other countries, and where foreign trade is shrinking as a share of GDP, is a sensible place for government policy to promote large scale immigration.  It wouldn’t make sense for Taihape; it doesn’t make sense for New Zealand.    Immigration policy is one of the largest structural policy interventions in our economy.    And now – before we reopen the borders – is the time to act.

So let’s not go back to granting huge numbers of residency permits.  Cut out the Pacific quotas – no reason to favour people from those countries any more than those from (say) Britain and Ireland (that we once favoured), and cut back the total approvals to, say, 5000 to 10000 really highly-skilled people (if we can find them) with no preferences given to NZ qualifications and experience, simply looking for the best and most energetic.  Add in refugees and the spouses/partners of New Zealanders, and you’d be looking at an overall number of residency approvals each year of 10000 to 15000.  In per capita terms that would be a similar rate to the US. 

Successful countries make their economic success primarily with and for their own people.  We can again do it here. We have talented and fairly well-educated people, we have reasonably open markets, we have a history of innovation, but distance really works against us and we will mostly prosper by doing better and smarter with (and investing more heavily in) the natural resources we have – things that really are location-specific.  Lots of other bright ideas are, and will be, dreamed up by people here.  But if those ideas work well, they’ll typically be much more valuable abroad.   You may not like it – neither do I really – but it is what experience shows.  We’d be foolish to simply start up the same old model and expect better results in future.

Colonial constructs

A couple of weeks ago the Sunday Star Times had a full page article – in a Money supplement, self-described as offering “Intelligent Money News, Tips and Insight – by Jade Kake headed Debt as we know it is a colonial construct (the online version runs under the title “Maori have colonisers to blame for concept of individual debt”.) The column ends even more starkly: “Debt is a colonial construct”, observing that “the implications of which continue to be felt in the colonies”.

As it happens, Ms Kake herself could probably be described – without animus – as something of a “colonial construct”. When I looked her up it turned out she was Australian (born, bred, and educated), of parents who themselves had been born in New Zealand and the Netherlands respectively. Lots to celebrate there one might have thought, and certainly it would have been inconceivable – impossible really – prior to, say, 1769. These islands and the descendants of their first settlers had been almost entirely cut off from the rest of the world- whether people-to-people movements, trade or technologies. And one of those missing “technologies” was credit – or debt.

There doesn’t seem to be any real debate about that. Ms Kake states it herself, and when I looked up some books on the pre-contact Maori economy they all made more or less the same point. There was some gift-exchange elements, but nothing at all resembling credit/debt as it had been known for some time – rather a long time in some places – in much of the rest of the world. A few years ago there was a book by the American sociologist David Graeber called Debt: The First 5000 Years. and I’ve written here about debt jubilees from thousands of years ago But that innovation, and evolution, had completely passed this part of the world by. Consistent with the absence of so many technologies and trade here, material living standards were very low.

“Colonial” is one those ill-defined words. Sometimes it means lots of permanent settlers from abroad, and sometimes just a period of control and government by a foreign power. In New Zealand, of course, it involved both, although the control by the foreign power was very short-lived. But, as people sometimes point out, even if these islands had never fallen to any foreign power, or if there had been little or no foreign settlement, many of the technologies would still have found their way here. Credit/debt is surely one of those sets of technologies. And that is a good thing.

Ms Kake is, of course, less sure (to put it mildly). But even she doesn’t really seem able to make up her mind. On the one hand she laments the arrival of the first bank in New Zealand (an ANZ forerunner) – but interestingly doesn’t mention our first very early quasi central bank, the Colonial Bank of Issue – but by the end of her column she is lamenting what she sees as evidence that it can be a bit harder to get credit if you are “visibly Maori”. If the latter is true it is, of course, unfortunate, but then we are left thinking that really credit/debt isn’t so bad after all. It depends – on what is used for, the reasons it is taken on, the conditions applied etc etc. Hitler’s regime borrowed in World War Two, but so did our side to defeat him. But when private parties take on debt, and do so not under duress, it is generally enabling and empowering.

Could one envisage a modern technologically-advanced world without debt? One could (and I briefly did here, in a debate a couple of decades ago with a visiting monetary reformer), but they’ve tended to go hand in hand. And no doubt Ms Kake would tar arms-length equity investment – also unknown here in centuries gone by – as another “colonial construct”. One might – as I do – wish there was much less household debt (because governments fixed the land supply regulatory disaster and got house/land prices a long way down), without having any particular qualms at all about young couples being able to borrow to buy a first house (rather than, say, generally wait until they were 50+ to buy a house outright). Much the same goes for business credit. Credit/debt is a sophisticated device enabling risk-taking, enabling smoothing of consumption, and so on. Financial development tends to go hand in hand with more intensive economic development and much higher material standards of living – not necessarily causally, although there are probably causal aspects (long-distance trade tends to rely on credit, on trust).

It is simply silly to say the debt is a “colonial construct” – it was simply one of the many things (institutions, cultures, technologies) that residents of these islands got access to when these remote islands finally opened, so late, to the wider world. There was – and is – nothing particular British – or even Dutch or northern European – about debt, technology itself transferred to, refined in etc, those parts of the world from elsewhere well before anyone settled here.

There has been a bit of debate over the weekend about the legacy of colonisation in New Zealand, prompted by some remarks by National’s education spokesman suggesting that in his view colonisation had, “on balance” been beneficial for Maori. One might debate aspects of his framing, and I don’t want to launch into an extensive debate here (a couple of pieces of mine that might be relevant are here and here). But, equally, the state of economic development and material living standards tend to speak for themselves about at least some aspects of such a question.

There is a big academic literature on the influence on imperial government, colonial settlement etc on the level of (say) real GDP per capita of different countries, and I’m not going to attempt to summarise it here. My own take is that the effects of imperial rule are not that large, but those associated with colonial settlement often have been. British settlers to (say) New Zealand and Australia in the 19th century brought with them many of the aspects – legal systems, culture, education or whatever – that had then made Britain the country with the most advanced economy and highest incomes.

Here is the IMF’s estimates of real GDP per capita this year for a variety of Pacific countries.

IMF real GDP

All of these lands were governed for a time in the 19th or 20th centuries by countries from outside. Two had large scale settlement – complete with the attendant, often embodied, “institutions” broadly defined – from places that were among the very richest and most productive on earth. It shouldn’t really be a surprise that the inhabitants of those two countries now – and not just the descendants of the settlers but the descendants of the earlier inhabitants (categories now often quite mixed) – have by far the highest material living standards of any of the countries in this region (all of which had previously been largely cut-off from the technologies of the rest of the world). Of the other countries on the chart it probably isn’t a coincidence that Palau and Fiji had the largest degree of settlement of peoples from outside the region. (As far as I can see the French territories – French Polynesia and New Caledonia – would come between Palau and New Zealand on the chart, but their stories are complicated by the ongoing ties to – and subsidies from – France.)

My best guess is that if, somehow, these islands had not been settled by outsiders but had simply been governed from outside for 100 years or so – as with most of these other Pacific states – real GDP per capita here might be similar to that in Samoa. They have computers, they have phones, they have credit. But they do not have an advanced economy offering high material living standards for their people (many of whom prefer to migrate to New Zealand). There might be reasons to debate this view, but even if these islands somehow generated per capita incomes twice those of Samoa they’d still be very low by advanced country (or modern New Zealand/Australia) standards.

Material living standards aren’t everything by any means. But they do seem to count for quite a lot.

Participating in the labour market

Yesterday morning I was skimming through the online database for the OECD’s recently-released latest Economic Outlook when I noticed that their table for the labour force participation rate was for ages 15-74. Often tables and charts for the “working age population” are done for ages 15-64 but as a growing proportion of those 65 and over have continued working the 15-64 numbers have become increasingly unrepresentative. So I downloaded the data and had a quick look, resulting in this tweet. (2019 because last year’s numbers were thrown around for every country and aren’t necessarily that representative.)

I was a little surprised – not that we were towards the right-hand end of the chart, but that New Zealand was now highest.

But there I might have left it, except that Stuff’s Susan Edmunds got in touch. We had a bit of a chat, and she produced this article. The headline suggests that high house prices might be the explanation (but as I’d noted to the journalist a variety of factors will have affected a range of different demographics).

It is worth stressing here that a high participation rate is neither good nor bad in its own right. It depends. I’m not in the labour force these days, and since I’m fine with that and I’m not a burden on the taxpayer it isn’t really a matter for anyone other than me and my family. My mother was in the labour force for perhaps only two or three years of the 60 years between her wedding and her death. On the other hand, if people are deterred from working by very high effective marginal tax rates or by “overly-generous” welfare provision or highly inflexible labour markets that might be more of an issue. And in wars, states sometimes compel people into the labour force – there might be reasons of state for that, but it is hardly a first-best state of affairs.

But I was still a bit puzzled so dug about a bit more data. First, this chart showing (since 1986 when our HLFS began) the 15-74 participation rate for New Zealand relative to (a) the median OECD country, and (b) the highest participation rate of any country in each year.

OECD partic rates since 86

(Technical note: it is only since 2002 that there is complete data for all today’s OECD countries. Using a fixed sample of the countries for which there is data for the entire period takes out much of the dip in the median after 1990, but converges back to the orange line in the last half dozen years.)

So we now have the highest 15-74 participation rate of any OECD country, but that is quite a new thing. Over the entire period our participation rate has been at or above the median (which was probably my impression), but the closing of the gap is striking. Note that back in 1986, the universal age pension (NZS) was paid from age 60, so from that change alone it is not surprising that our participation rate is now materially higher than it was 35 years ago (in 1986 32 per cent of 60-64 year olds were in the labour force, while about 74 per cent are now).

But where does this highest participation rate show up once we dig a bit deeper, by age and by sex?

It turns out that it is nowhere in particular. For not one of the age/sex breakdowns I looked at did New Zealand score highest in 2019.

Here are the young people, aged 15-24

15-24

Well above the medians but also quite a bit below the highest participation rates, whether for men or women.

This chart, for what is often referred to as “prime [working] age” people (25-54) took me a bit by surprise.

prime age

Not only are the New Zealand numbers not that near the maximum but for women of this age New Zealand was the median country in 2019. So much – it would appear – for the high house price story (at least as it is often applied, with both parents “having” to work even though they might prefer one to take more time out). Of course, house prices are high in some other OECD countries as well, but hardly any have quite the price/income ratios of New Zealand.

The next age group is the last before NZS eligibility now kicks in.

55-64

Here both male and female participation rates are well in excess of OECD medians, and not far off the highest rates (Japan for men, Sweden for women).

What about the 65-69 age group?

65-69

Again, well above the OECD medians for both men and women. but with a few countries higher than us especially for men.

And finally, the entire 65+ age group.

65+ partic

With much the same picture.

So standing back (and assuming the OECD did the 15-74 calculations correctly) we end up with the highest overall labour force participation rate for this working age band not by having spectacularly high participation rates for any particular age or sex sub-category, but from being well above the median in almost all categories, and at the median in a single sub-category (women 25-54).

(Note too that these are participation rates rather than employment rates – simply because that was the OECD table I started with – but note that New Zealand unemployment rates are typically below average among OECD countries.)

What should we take from all this? There are no doubt people who have dug into some of this stuff in more depth than I have here, but a few things strike me:

  • There is no single cause, factor or policy that explains New Zealand’s current participation rate being the highest in the OECD,
  • The high house price story seems unlikely to be that compelling, at least yet. For example, our working age participation rates are not particularly high (especially not for women), and today’s 65+ generation were already at least in their mid-30s 30 years ago (which is when real house prices really began to take off),
  • Our NZS regime is relatively supportive to labour force participation (since there is no income-testing or abatement), but as other countries raise their state pension ages, the income effect will tend to dampen labour force participation here among the 65+ age group, relative to some other OECD countries,
  • Much as I am not a fan of our high (absolute) rate of people receiving working age welfare benefits, or of the fact that our minimum wage is now high relative to median wages in New Zealand, it is only fair to note that our labour force participation rates are at or (mostly) above those in most OECD countries for every demographic shown here.

In the original tweet (above) I contrasted the high rate of labour force participation in New Zealand with the dreadful record on average labour productivity. In 2019 it would have taken a 68 per cent lift in average New Zealand real GDP per hour worked to have matched the leading bunch in the OECD (the US and some northern European countries). But by putting in more labour inputs (some mix of being employed and hours per job) we keep rather closer to the first world on average per capita incomes. The comparisons with the UK – not one of the highest productivity countries – is illustrative. UK average labour productivity is about 40 per cent higher than that of New Zealand, but UK real GDP per capita is only about 10 per cent higher than that here (both on OECD estimates). The UK does not have a low participation rate, but their participation rate (see first chart) is far lower than New Zealand’s (as are average hours worked per capita).

Sometimes the story is portrayed as one of employed New Zealanders working long hours. There is something to that story – working hours per worker in New Zealand tend to be in the upper quartile for advanced countries (only Lithuania was higher in 2019 among OECD countries – although Singapore, Korea and Taiwan are all materially higher). Some of that, in turn, doesn’t reflect long hours each week, but shorter annual leave entitlements than in many European countries. But equally important is long hours over a lifetime – our young people and our old people are simply more likely to be in the labour force than in the rest of the OECD, for a mix of reasons that can’t simply be dismissed as “good” or “bad”.

To the extent those reasons are “good” just think of the per capita incomes that could be sustained here if policies were ever adopted that once again delivered average productivity getting even close to the leading bunch in the OECD.

The PRC and all that

In recent days, there has been quite a bit of coverage of issues around the New Zealand’s government’s approach to the PRC.

There was, for example, last week’s trailer for the Australian 60 Minutes piece on New Zealand and China, which excited a great deal of scorn (and coverage) for what was, after all, a teaser to get people to watch a longer programme. It wasn’t clear what riled people more – the (not new but) clever play on words suggestion about “New Xi-land”, quotes from Mike Hosking, or what but the “elite” reaction was quite remarkably hostile.

As it turned out the actual 60 Minutes programme (you can watch it here) as something of a damp squib. Sure there was the nauseating spectacle of Michael Barnett, Executive Director of the Auckland Chamber of Commerce, talking of being “friends with benefits” with the PRC (complete with the “nudge, nudge, wink, wink” nuance), and openly asserting that whatever the PRC did on the human rights was really its concern only, and not something for anyone else to worry about. Presumably he believes what he is saying, but not the harshest critic of the Jacinda Ardern or Judith Collins would suggest they held that view. And from the Australian perspective, the programme makers seemed to start with the line that the Australian economy was paying a high price for their government’s stand, while New Zealand was prospering…..but with not a shred of evidence examined for those claims. At a macro level, the two economies look very similar right now, with unemployment rates post-Covid now back down not too far from late 2019 levels (Australia possibly a touch closer than New Zealand). And some of the programme even seemed quite sympathetic to the common, but fallacious, view that somehow New Zealand is less able to take a stand, due to size or other unpersuasive reasons. There was, of course, the clip of the 60 Minutes journalist asking Ardern whether she ever held back in making comments on China because of fears about trade. She again claimed that she never did – and surely no one serious in Australia, New Zealand, or China believes her – but 60 Minutes made no effort to unpick that claim either (which, as I noted in a post recently, if true must then mean she is really almost entirely indifferent to, and has feel no serious moral unease about, what China does – and I don’t believe that either). There was nothing about the New Zealand government’s reluctance to call out PRC attempted economic coercion of Australia, nothing about its refusal to criticise the PRC for the arbitrary detention and recent secret trial of an Australian citizen. And, of course, nothing about how weak both main parties here are on issues like political donations or CCP-connected political figures.

Of somewhat more importance was the political theatre in Queenstown yesterday, culminating in a long and wordy communique, in which Scott Morrison and Jacinda Ardern were falling over themselves to suggest that there was no real difference between them when it came to China. Both had their reasons no doubt.

Here is what they had to say.

First, on “coercion”

37. The Prime Ministers affirmed their strong support for open rules-based trade that is based on market principles. They expressed concern over harmful economic coercion and agreed to work with partners to tackle security and economic challenges.

39. The Prime Ministers reiterated their shared commitment to support an Indo-Pacific region of sovereign, resilient and prosperous states, with robust regional institutions and strong respect for international rules and norms, and where sovereign states can pursue their interests free from coercion.

Those references to coercion were new (weren’t in last year’s communique) but notice how weak they are. The first reference (para 37) is not even in the “Indo-Pacific and Global security” section, and neither reference explicitly names the range of steps the PRC has taken against Australia. Since we can reasonably expect that Australia would have welcomed strong and explicit support, we can only assume that New Zealand wasn’t up for it. That reflects very poorly on the New Zealand government – most especially in a joint communique with the Australians. Senior figures in the US Adminstration have made (much) stronger statements than that, specifically about the Australian situation.

Then there was the South China Sea

42. The Prime Ministers expressed serious concern over developments in the South China Sea, including the continued militarisation of disputed features and an intensification of destabilising activities at sea. The Prime Ministers further underscored the importance of freedom of navigation and overflight. They emphasised that maritime zones must accord with the United Nations Convention on the Law of the Sea (UNCLOS) and called on all parties to respect and implement decisions rendered through UNCLOS dispute settlement mechanisms. The Prime Ministers reiterated the importance of the South China Sea Code of Conduct being consistent with international law, particularly UNCLOS; not prejudicing the rights and interests of third parties; and supporting existing, inclusive regional architecture.

Which seemed quite good. I hadn’t heard Ardern or Mahuta say anything at all about the South China Sea – it certainly wasn’t in the list of issues they mentioned in their respective recent China speeches – but it turns out most of this language was also in the previous communique from 15 months ago, with just a couple of (useful) modifications. And – read it again – note that the PRC is not even named. It is good to see, but you get the impression that it was one of those issues that mattered to the Australians and in putting together communiques there has to be some given and take (I’m assuming Ardern’s side is the one keen on the strange “circular economy” paragraph that also survives from one year to another).

Then we got a paragraph that was not there at all last year

43. The Prime Ministers expressed deep concern over developments that limit the rights and freedoms of the people of Hong Kong and undermine the high degree of autonomy China guaranteed Hong Kong until 2047 under the Sino-British Joint Declaration. The Prime Ministers also expressed grave concerns about the human rights situation in the Xinjiang Uyghur Autonomous Region and called upon China to respect the human rights of the Uyghur people and other Muslim minorities and to grant the United Nations and other independent observers meaningful and unfettered access to the region.

I suppose it is good stuff as far as it goes, which is not very far. On Hong Kong, for example, there is no denunciation of the growing number of political prisoners or – in this week of Tiananmen Square remembrance – of the heavy punishments people of Hong Kong are threatened with if they seek to participate in (long-established) vigils). And as for the Uighur comments, they are less pointed that the recent resolution of the New Zealand Parliament which – if it did not name China – did refer to “severe human rights abuses”.

It is also interesting that in the next two paragraphs the two leaders could call out Myanmar much more directly

They condemned the violence being perpetrated against the people of Myanmar and called on the military regime to exercise restraint, refrain from further violence, release all those arbitrarily detained, and engage in dialogue.

Which is good stuff, but might almost equally be said of China….except the thought would never cross Ardern’s mind (perhaps the Australians would not have been keen either).

And what is missing completely is also interesting – no mention of PRC threats to Taiwan, military incursions etc, and not even (that I could see) a mention of the desirability of Taiwan participating in the WHO.

Oh, and there was also this

41. The Prime Ministers agreed to continue working collaboratively, bilaterally, and with our partners in the Indo-Pacific region, to uphold sovereignty in an era of increasing strategic competition. The Prime Ministers reaffirmed their resolve and shared respective approaches to countering foreign interference and agreed the importance of building resilience across all sectors of society, including in education, infrastructure, research, electoral processes, media and communities.

But that is just boilerplate communique-speak, with no substance whatever. It covers over the fact that the New Zealand government has been reluctant to even speak of foreign interference/influence risks – seen most recently in the belated emergence of news of the secret National/Labour deal to clear about the headline risks around Jian Yang and Raymond Huo, while neither party leader will even front with the public on the issue.

The different stance between New Zealand and the 13 western countries (not the Five Eyes) on the WHO study on Covid origins was also quietly swept under the carpet.

So for all the bonhomie and smooth words, it didn’t really amount to much. As I noted earlier, it suited both sides now to paper over the cracks and pretend to a commonality of view. There is a line afoot that only the PRC itself benefits from divergence between western countries (or specifically New Zealand and Australia) on these issues, but that is an argument for more substantive alignment, not for pretending to a commonality that just doesn’t exist. Read the speeches (Ardern, Mahuta), watch the interviews (eg O’Connor): this is a government that simply has no stomach to seriously call out the PRC. Perhaps Damien O’Connor’s respect was “a mistake” – as he now concedes – but it was a slip of the tongue only in that he shouldn’t have said it publicly, not that the idea had never previously occurred to him and a word he’d never previously thought of slipped out. Or repeated references from senior ministers to “respecting” the PRC. Decent people don’t treat with respect regimes responsible for (at least) “severe human rights abuses”.

The appropriate benchmark here is not what Australia says or does (although the consensus across Australian politics is clearly in a quite different place to that in New Zealand – see the recent speech from the ALP’s Penny Wong) but on what is right and proper. There are areas where Australia itself isn’t as strong as it could be – one could think of parliamentary resolutions, autonomous sanctions regimes, the Winter Olympics, and so on.

But the New Zealand government’s stance continues to fall a long way short. Why will the Prime Minister not explain why her government scrapped the Autonomous Sanctions bill that had sat on Parliament’s order paper for several years, with no replacement? Why does her government continue to claim that she will be guided by the UN on “genocide” declarations re the Uighurs, when she knows that China is a veto-carrying permanent member of the UN Security Council. Why does she never speak openly about the South China Sea (an evolving and worsening situation, currently directly threatening the Philippines)? Why is she never willing to highlight threats to Taiwan? Why will she not front up about the Jian Yang/Raymond Huo deal? Why does her party keep recruiting ethnic Chinese candidates with strong United Front ties? Why will she do nothing serious about reforming electoral donations laws (even as multiple court cases and SFO investigations are underway)? Why was she so loathe to comment at the time of the break-ins to Anne-Marie Brady’s house and office (let alone when other NZ universities sought to have Brady silenced)? Why is she not willing to speak out about the Winter Olympics – does she really think the Olympics should be held in a country responsible for “severe human rights abuses”? Why is she not taking any lead to get PRC/CCP-funded and recruited/screened people out of our schools, instead funding Chinese language learning properly ourselves? And so on.

I was going to include in this post some thoughts on, and responses to, a new article in the Victoria University publications Policy Quarterly by Anne-Marie Brady on the New Zealand government’s approach to the PRC. It is a very generous treatment, about the “significant progress” she claims has been made under the Ardern governments of the last four years. I didn’t find it very convincing at all, but I guess it must have been welcomed in the Beehive and in MFAT.

Teaching New Zealand history

A couple of year ago I wrote a post here about the idea of teaching more New Zealand history in state schools. In principle I was, and am, strongly supportive of doing so, and have always been conscious that almost all the New Zealand history I learned has been acquired since leaving school. But I was uneasy about what was likely to be taught, which left me in practical terms ambivalent.

Incidentally, in that post I included a quote – from a newspaper article that day – in which the Deputy Leader of the Labour Party (and then Associate Minister of Education) denied there was any intention to make such teaching compulsory. But from next year it will be, at least for kids from 5 to Year 10.

A few months ago the government put out a consultative document with a draft curriculum for the teaching of New Zealand history to these children (bear in mind that the median age of the students will be 10). Submissions close today.

I wasn’t going to make a submission – what is the point, the government and the bureaucrats have ideological agendas they are unlikely to be deflected from – but after reading someone else’s submission the other day, which I was sympathetic to but disagreed with quite a bit of, I decided to make a short submission, if nothing else for the record.

My full submission is here.

I outlined several concerns that mean I think the proposed curriculum is highly unsatisfactory. Here is the body of my text

First, and although the focus is on young children (from age 5 to those at the end of year 10 just turning 15) there is no sense in the curriculum of any continuous narrative.    Providing such a basic outline of our history should be a basic in any history curriculum of this sort, which (sadly) represents almost all the formal history study most students will ever do.  No one, taught solely using this curriculum, will emerge with a rough sense of, for example, (a) the migration of Maori to these islands, (b) their settlement, their impact on the land, and their society, religion, economics, (c) the interface with more advanced technologies that connected these islands with the rest of the world, (d) the evangelisation of New Zealand and the key role of the Church Missionary Society, (e) key figures in early modern New Zealand history, (f) the economic development –  including large-scale immigration – that by the early 20th century had New Zealand as one of the highest income countries on earth, (g) the gradual process that led to New Zealand political independence. (h) the high rates of Maori-European intermarriage, and (i) key political figures (good and ill) of the 20th century.  Names and dates may be out of fashion – and they can be over-emphasised in the inevitable limited teaching time available – but they help provide a structure for beginning to organise thinking about historical events and times.  

Second, there is no sense of the wider world of which the New Zealand story (particularly since 1642/1769 or whichever date one focuses on) has been a part.    A significant element of pre-European New Zealand was its remarkable isolation – Maori having settled here some centuries earlier there was no evidence of ongoing contact with other societies in the Pacific (themselves typically small and isolated) and with no international trade at all.  It was an astonishing degree of isolation.    The European age of exploration and discovery opened these islands to the world, and the world to these islands – and had begun to do well before 1840.  Whether or not large-scale European settlement ever became a feature of New Zealand, that opening was inevitable and would always have been transformational.  And yet there is no hint of it.    Similarly, there is no sense of the similarities (and differences, for good and ill) of experiences in Australia, Canada, Newfoundland, Southern Africa, the United States and (beyond the English-speaking world) in southern Latin America or North Africa.  None of this can be taught in depth to young kids in a limited time, but it badly distorts the New Zealand story not to refer to them at all.   The people of these islands were isolated for several hundred years, but modern New Zealand is not – and for a least a century in the emergence of modern New Zealand what went on it was in parallel with, often interacting with, experiences in these other places.

Third, there is a strong sense running through the document that a primary purpose of studying history is to judge the past (and those in it) rather than to understand it.   Particularly when such young children are the focus, and when the curriculum is designed for use in schools across the country (attended by people of all manner of races, religions, political and ideological views), that focus is misplaced.    Understanding needs to precede attempts at judgement/evaluation, but there is no sign – in this document, or elsewhere in the curriculum – of children being equipped with the tools that, as they move into mature adulthood, will allow them to make thoughtful judgements or (indeed, and often) simply to take the past as it was, and understand how it may influence the country we inhabit today.    There is little or no sense, for example, that one reasonably be ambivalent about some aspects of the past or that some people might, quite reasonably, evaluate the same facts differently.

Fourth, not only does the document seem to operate in a mode more focused on evaluation and judgement than on understanding, it seems to champion a particular set of judgements, and a particular frame for looking at the history of these islands (evident, as just a small example, in its repeated use of the term “Aotearoa New Zealand”, a name with neither historical nor legal standing, even if championed at present by certain parts of the New Zealand public sector).     This includes what themes the authors choose to ignore – religion, for example, is not mentioned at all, whether in a Maori context or that of later arrivals, even though religions always (at least) encapsulate key aspects of any culture’s understanding of itself, and of its taboos).   Economic history hardly gets a mention, even though the exposure to trade, technology, and the economic institutions of leading economies helped dramatically lift average material living standards here, for all groups of inhabitants.   Instead, what is presented in one specific story heavily focused on one particular (arguably ahistorical) interpretation and significance of the Treaty of Waitangi.  These are contested political issues, on which reasonable people differ, and yet the curriculum document has about it something very much of a single truth.   In truth there a few things about which there is a high measure of agreement today – perhaps the ending of slavery and cannibalism here, under the influence of the gospel and (quite separately) colonial government – and thus a curriculum of this sort will be seen by many (including many parents) as little more than attempts to use the platform of compulsory public schooling as politicised indoctrination.   That is both inappropriate, unwise, and unnecessary.   And probably not helped by the very limited education in New Zealand education that most teachers have had, increasing the likelihood that what will be conveyed to children will be something more akin to a heavily politicised, nuance-free, (but in the case of most individuals well-meaning) “indoctrination”.

If a New Zealand history curriculum is to be anything more than an effort of indoctrination by a group who temporarily hold the commanding heights in the system, this draft should simply be scrapped and the whole process begun again with a clean sheet of paper.   Think, for example, about teaching the history of the last 1000 years, and the two primary strands (Maori, and Anglo/European) that have come together to form the modern New Zealand that we – today’s citizens – inherit, including confronting the fact (awkward for some) that modern New Zealand is primarily a Western-influenced society and people.   Teach about both Maori and European society, strengths, warts, and all, including recognising the ideas and events that made – for example – Britain and north-western Europe (and then its offshoots) not only the wealthiest but the most stable democratic societies.  Teach about the challenges, conflicts and opportunities created as those two societies have interacted over the last 250 years.  Highlights the key individuals, the events, the similarities and differences with other settler societies (including the huge exodus of New Zealanders, of all ethnicities, to Australia – more economically successful – in the last 50 years).  Teach about secularisation and social change, about the similarities and differences between New Zealand and other advanced countries.  But, for the most part, teach facts, teach narrative, teach verifiable stuff, and leave the evaluation for parents, religions, political parties, and for the young people themselves as they emerge into adulthood and – for those interested – more advanced study.

Any such course is inevitably going to emphasise some things rather than others – only by selection and systemisation can things be reduced to manageable scale – and some evaluation is probably unavoidable too. But the government’s document is a heavy-handed unrepresentative piece that has the feel of being dreamed up by some black-armband Social Studies teachers who have studied little history and have little interest in history for its own sake – for understanding our past, rather than (as appears in this document) primarily to judge it.

On a related theme – including how differently people see the same events (different people, different times, different whatever) – in a secondhand bookshop recently I picked up a copy of the Official Souvenir Programme of the 1950 Canterbury Centennial Celebrations. I bought it mostly because all my family were then in Christchurch, and almost all my New Zealand ancestors had lived mostly in Canterbury. But what really caught my eye were the messages at the front of the document from the Governor-General (Freyberg) and the Prime Minister (Sid Holland). Here is Freyberg’s

freyberg

And here is Holland’s

Holland

It is a very different view of (modern) New Zealand and its history than that of today’s Cabinet or the Ministry of Education’s curriculum writers, and yet I sense not a view that the curriculum writers would even recognise or regard as acceptable.

(I read the Holland contribution with particular poignancy, remembering the long journey, on a ship wracked with scarlet fever, that Holland’s father and my great-grandfather – young sons of a poor Yorkshire farm labourer – had made to Christchurch back in the early 1860s).

Monetary policy

My teaser for today’s post was this tweet

If I remember correctly, the last time was probably in mid-2011 when the then OCR Advisory Group was debating when to reverse the emergency cut we’d put in place after the February 2011 earthquake. As it happens that was all overtaken by the intensifying euro crisis.

Yesterday’s Monetary Policy Statement has been described, colloquially, as “hawkish” or at least having taken a “hawkish tilt”. I’m not really sure that is warranted, but it is hard to tell.

The MPC reintroduced a projection track for the OCR for the first time since this time last year, and in that track the OCR starts to be lifted gradually from the September quarter of next year. I have never been a fan – going back to the introduction in 1997 – of the OCR projection track, since it is little more than castles in the air make believe to suppose that anyone knows now what OCR will be appropriate a couple of years hence, in turn driven by the outlook a couple of years beyond that. What we need – and what central banks can tell us sensibly – is where they think things might head by the time of the next review. But, like it or not, we have a forward track. That track was always going to show OCR increases at some point, if only for two reasons (a) the Bank’s model will always have interest rates heading back towards neutral as inflation settles around target, and (b) the LSAP programme – which the Bank claims to believe is highly effective – runs out next June.

And when the Governor was asked at the press conference how much the forward track had changed from what it would have been (unpublished) in March he simply refused to say.

But we do know, because the Committee told us, that “our medium-term outlook for growth remains similar to the scenario” in the February MPS. And their numbers support that: GDP growth over the two years to March 2022 is exactly the same (2.9% in total) as they’d shown in February, and for the following two years projected growth is just a touch lower than in February. On the other hand, they seem to have revised down their potential output growth assumptions a bit, and as a result the output gap estimates have been revised to something less negative/more positive.

RB Output gap projections, average for full year to March
2021202220232024
Feb MPS-1.0-0.60.91.4
May MPS-0.4-0.21.31.3

And although they claim to believe that the economy is still below “maximum sustainable employment” I don’t think their hard numbers really back up that view. The unemployment rate is currently 4.7 per cent, they expect to be still 4.7 per cent next March, and then over the following couple of years when the output gap is projected to go materially positive they only expect the unemployment rate to drop to 4.4 per cent. On their numbers, unemployment must now be very close to the NAIRU (functional full employment, given the regulatory environment and labour market institutions etc).

What else do they tell us about the near-term? Well, there is core inflation. They include this chart

core inflation RB

That is much the same suite of indicators that led me to conclude last month

I think it is is probably safe to say that core inflation in New Zealand is now back at about 2 per cent. That is very welcome, even if somewhat accidental (given the forecasts that drove RB policy). 

Same goes for the (somewhat selective) range of inflation expectations measures the Bank summarises here

infl expecs may 21

That’s good too. Quite a lift in the last few months and now about as close as you are going to see to 2 per cent right across the horizon,

And then the Bank tells us their decision rule

The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum
sustainable level.

But on their own numbers, that seems to be (a) pretty much the current situation, and (b) the outlook. Now, to be sure, that statement isn’t entirely coherent because logically you have to be confident of those outcomes even after you start tightening monetary policy a bit, but set that to one side for moment.

And so I guess that is why I’m left wondering whether it is even remotely fair to characterise yesterday’s statement as having a hawkish tilt. They have rising (to record) terms of trade, significant fiscal stimulus from a big fiscal deficit, they think the output gap is all but closed, and any unemployment gap must be close to being closed, core inflation (and expectations at target) and yet they think that precisely the same monetary policy settings are warranted as was the case six months ago, more aggressive than those in place a year ago (given that the Funding for Lending Programme, which is effective, is a more recent addition). As a reminder, as recently as November they had inflation averaging 1 per cent for 2021 and 2022 (on exactly the current monetary policy).

Perhaps the operative word in that decision statement is “confident”, but realistically (a) when is macro forecasting ever confident? and (b) they must have greatly reduced uncertainty/error-margins now than was the case a few quarters ago. It isn’t as if actual core inflation is 1.5 per cent but the forecasts show it getting to 2 per cent, or actual unemployment is 6 per cent but forecasts show it getting to 4.5 per cent.

I guess the other thing I found striking about the document is that although the Bank has a couple of pages on how to think about short-term price shocks (the sort of boilerplate stuff that has appeared in MPSs every year or two for 30 years) – and I suspect they are quite right on that narrow point (eg that headline inflation of 2.6 per cent for the year to June is not, of itself, something to worry about – any more than similar spikes in, say, 2008) – there is no discussion at all of the increase in market-based measures of inflation expectations here and abroad.

In the New Zealand case those inflation breakevens from the indexed bond market are still sitting a little under (but “near”) 2 per cent, but that is a great deal higher (and thus much more reassuring) than the situation for the last few years. In the US – easiest market to get the data for if you don’t have a Bloomberg terminal – we see something like this

US inflation breakevens 5yr may 21

These breakeven numbers move around a bit but when we look, for example, at the rise in implied expectations after then 2008/09 recession it didn’t overshoot to some ridiculous, unsustained level, but settled back in a fairly orderly way (even amid some political hyper-ventiliation about inflation risks of QE) to something a bit lower than in the pre-recession period. Perhaps this time is different. Perhaps nothing will deliver average inflation anywhere near that high in the next five years. But you might expect an inflation-targeting central bank to at least discuss the point, and the possibility that the combined weight of fiscal and monetary policy will mean a drift (in some ways welcome) to higher inflation as the world emerges from Covid – especially when, at least in economic terms, the Bank’s own chart shows New Zealand to be ahead of most on that score.

And yet there is no any sign from the minutes that the Committee even robustly discussed these issues – even though, for example, just a couple of weeks earlier the Bank of England’s Monetary Policy Committee (known not just for a better class of member, but – as importantly – for more transparency) voted only by a margin of 7:2 to keep on with their bond-buying programme (a programme smaller than New Zealand’s as a share of GDP, in an economy that has been further behind New Zealand’s recovery).

So what is appropriate New Zealand policy now? I find it simply extraordinary that the Bank is continuing on with its huge bond-buying programme as if nothing has changed at all. Not only that we are told that

The Committee agreed that the OCR is the preferred tool to respond to future economic developments in either direction.

They offer no rationale for this statement. It might make some sense if things were suddenly to get a lot worse, but it makes no sense at all from here – inflation at target, expectations consistent with that, unemployment below 5 per cent – either substantively, or in view of all the criticism (often misplaced) the Bank has taken of the LSAP (“money printing”, “blowing bubbles” and so on). As I noted on Twitter yesterday, in the Budget documents there is stable suggesting that the stock of settlement cash balances is expected to rise by tens of billions of dollars over coming year (presumably as bond buying goes on and Crown issuance is pulled back). That just invites more (reputational) problems as well as complicating the eventual unwind of the huge bond portfolio. So had it been me, I’d have been cutting the LSAP now, perhaps terminating it completely within the next three months (all going according to plan). But since I do not believe that the LSAP is making any material difference to anything that matters much in New Zealand – where long-term government bond rates mostly only affect government borrowing costs – I wouldn’t have seen that as any material tightening of monetary conditions. The Bank would of course, but on their numbers there is a good case now for beginning to wind back purchases (as a policy lever).

I wouldn’t favour winding back the FLP or raising the OCR yet, but the FLP should be the next in line (after the LSAP). It is a extraordinary intervention, inconsistent with the general preference for indirect competitively neutral tools. It had a place late last year, but the current macro data suggest it should not be too long for this world (and should not be needed in future downturns now that the RB is confident they can do negative OCRs).

Lest I appear too hawkish, I should add that my decision rule would not be the one the MPC outlined. After a decade or below-target core inflation I think we probably should welcome at least some overshoot, for some period, of the 2 per cent midpoint (in core terms), if only to help cement in the public mind that 2 per cent is a target midpoint and not a ceiling.

Perhaps too the Bank is wrong about the macro situation. Perhaps there is more spare capacity than they think, in the labour market and more generally. I don’t have a strong view on that, but see no reason to think them very wrong (and I noted with interest there was no mention of the potential impact of higher minimum wages and higher benefits on either labour demand or supply, or the NAIRU – but any such effect is likely to be for the worse.)

Everyone tends to fight the last war. The decade after 2008/09 was one when too often central bankers (often egged on by markets) kept over-estimating how much inflation there was in the system, and kept getting it wrong. Perhaps that is still where central banks should err, but I would feel more confident about it in the New Zealand context if there was more evidence of careful thought/analysis, or sustained and searching debate around the MPC table, and of serious public engagement by thoughtful MPC members open to exploring differences. As it is, there is a strong sense of “trust us, we know what we are doing”, with little real evidence that they do.

Am I really more hawkish (less dovish) than the Bank. It is still hard to be sure, but there are things about their numbers on the one hand, and their policy stance on the other, that really don’t seem to add up. These include small points like the difference (a few paragraphs apart in the minutes) about how long it make take for them to be confident: first there was this

They agreed this would require considerable time and patience.

and then just a little later this

The Committee agreed it will take time before these conditions are met.

Those seem to me rather different emphases – the latter perhaps plausible, the former distinctly (probably too) dovish.

(To the Bank’s credit – and not that it greatly matters to them or their deliberations – they do not share the unreasonably over-optimistic productivity growth assumptions built into The Treasury’s Budget numbers).

Finally, I was reading last week The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival published last year (mostly written pre-Covid) and written by Charles Goodhart and Manoj Pradhan. There is a summary version of the story here. I’m still not quite sure what to make of the story, but I’m less unpersuaded than I had expected to be. Perhaps they are wrong, but it would be good to see some thoughtful central bankers and policymakers engaging on the possibilities and risks.)

(a) real interest rates, and (b) NZers’ migration

No, I’m not getting back into some routine of daily posts, and on this occasion the two topics don’t even have anything to do with each other, but are just a couple of a leftovers from things I was looking at over the last couple of days.

In my fiscal posts this week I’ve noted that the government is consciously and deliberately choosing to run cyclically-adjusted primary fiscal deficits in the coming year larger (probably much larger) than we’ve seen at any time since the end of World War Two. I noted in passing that although people are conscious of stories of large fiscal deficits under Robert Muldoon’s stewardship, in fact a large chunk of those deficits was interest payments, and this in an era when inflation was high, sometimes very high. When nominal interest rates are high just to reflect high inflation, the resulting “interest payment” is really more akin to a principal repayment. Back in the day, various people – especially at the Reserve Bank – did some nice work inflation-adjusting various macro statistics.

But just to check my point I put together this graph

real NZ bond yield since 70

What have I done here?

  • got the OECD’s series for long-term nominal bond rates that goes back to 1970 (this will mostly be 10 year bonds or thereabouts, although for a time in the late 80s we were not issuing bonds that long),
  • for the period since 1993, subtracted the Reserve Bank’s sectoral factor model measure of core inflation,
  • for the period up to 1993, subtracted a three-year centred moving average of the CPI inflation rate.

So for almost entire period prior to 1984 real New Zealand government bond yields were negative.

This is, of course, not testimony to different patterns of desired savings and investment, but (mostly) to financial repression. Until 1983 government bond yields were administratively set and – much more importantly – most financial institutions were simply compelled by law to buy and hold government securities (often 25 per cent of more of total deposits). The costs were borne by depositors.

It is also worth noting that pre-1984 the government was also borrowing, at times heavily, directly from the retail market, at times offering real interest rates well above those shown here. And the government was also borrowing, again at times quite heavily, from abroad. In some of those markets, inflation was a big chunk of the headline interest rate, but in none of the major borrowing markets were government borrowing rates by then as repressed as they were still in New Zealand.

Finally, note that in the chart I have compared a 10 year bond yield to a one year inflation rate. But at least since 1995 we have had a direct read on real government bond yields through trading in government inflation indexed bonds. As this chart shows, the pattern over that period is very similar,

IIB yields since 95

Developments in the last few months are interesting, but that is something for another day.

My second brief topic this morning was sparked by a strange quite-long article in the New York Times yesterday headed “New Zealanders are Flooding Home: Will the Old Problems Push Them Back Out”. A lot of work seemed to have gone into it, and some of the individual anecdotes were not uninteresting (and in the small world that is New Zealand, one of the recent returnees was even someone I’d once worked with) but…….no one (do they have factcheckers at the NYT?) seemed to have stopped and checked the numbers. It took about two minutes to produce this graph that I put on Twitter yesterday.

NZ citizen migration

Using the official SNZ estimates, the problem with the story was that arrivals of New Zealanders had not really changed much at all – a bit higher than usual in the March 2020 year, and then lower than usual in the most recent year. There has, of course, been a big change in the net flow of New Zealand citizens but……..that is mostly the very steep fall in the number of New Zealanders leaving. That reduction – over the March 2021 year – is, of course, not surprising in the slightest given (a) travel restrictions to Australia for much of the year, and (b) travel restrictions and/or bad Covid in much of the rest of the world.

But, on official estimates, there simply is no flood of New Zealanders returning home. None.

This morning I looked a little more closely, and dug out the quarterly (seasonally adjusted) version of the data.

nz citizen migration quarterly

It is, of course, much the same picture, but what surprised me a little was the upsurge in (estimated) arrivals back in late 2019, pre-Covid. Here it is worth remembering that until a couple of years ago our PLT migration data was based on reported intentions at the time of arrival, but the 12/16 approach now used looks at what actually happened. It looks as though some New Zealanders who had come to New Zealand in late 2019, probably not intending to stay, ended up doing so, voluntarily or otherwise, once Covid hit. So they are now recorded as migrant arrivals in late 2019 even though at the time they would not have thought of themselves as such.

But it does not change the picture: there is no flood, or even a little surge now, in returning New Zealanders. A problem with the 12/16 approach is that the most recent data is prone to quite significant revisions (and that is particularly a risk when the normal patterns the models use aren’t likely to be holding, but there is nothing to suggest there is a significant influx of returning New Zealanders happening.

There will be always be natives who’ve spent time abroad returning home. It happens even in rather poor and downtrodden countries, and it happens here – always has, probably always will. That adjustment isn’t always that easy, plenty of people often aren’t sure for a long time that they’ve made the right choice. Covid means a few different factors have influenced some of those choices for some people. But there is no “flood”, just a similar to usual (or perhaps now smaller than usual) number of returnees, coming back to a New Zealand of extraordinarily high house prices and productivity levels and incomes that increasingly lag behind a growing number of advanced economies. Those persistent failures – and the indifference of our main political parties – should be worth a story. But not the non-existent flood.

A bit more on fiscal policy

In yesterday’s post I outlined some of my concerns about the government’s Budget, from a macroeconomic perspective. Not only did it seem to be built on rather optimistic medium-term economic assumptions, but several years out – on current policy advised to it by the government – The Treasury still expects a fairly significant cyclically-adjusted primary deficit (which means, once finance costs are added in, a larger-still overall cyclically-adjusted deficit).

CAB primary

There was a good case for such deficits last year, and perhaps even in the year that ends next month. But there is no obvious macroeconomic reason for running larger deficits in this coming year, and still having cyclically-adjusted deficits four years hence (by which time The Treasury numbers project a non-trivial positive output gap). It is now simply a splurge – a government that, unnecessarily, is simply choosing to take on more debt to fund its new spending, rather than fund core operating spending with taxes. In a climate when risks abound.

And all this is an environment where fiscal policy now appears to be unanchored by any specific fiscal goals a government is committing itself too.

I’ve never been one of those who put huge weight on the Fiscal Responsibility Act 1994, now (as amended) incorporated as Part 2 of the Public Finance Act. There are some good aspects to the legislation but I was never really convinced that asking governments to set out their specific short and long-term fiscal objectives, or articulating in statute “principles of responsible fiscal management” would make much difference to anything that mattered about the conduct of fiscal policy. (Here is a post on the 30th anniversary of the Public Finance Act critiquing some rather over the top claims then made for the framework.) In my take, there was a shared commitment across the main parties to balanced budgets (in normal times) and low debt, and the legislation reflected that rather than driving it.

And I guess I take this year’s Budget as vindication of that stance. There was a shared commitment to such things, and now it appears there is not. And the legislation still sits on the books, lonely and overlooked. Check out the requirements of Part 2 of the Public Finance Act, and then compare it with this year’s Budget documents. In particular, have a look at the statutory principles for responsible fiscal management, and the requirements that a Fiscal Strategy Report brought down on Budget day has to contain outlining both short-term and long-term fiscal objectives.

And then go and check out the vestigial thing the Fiscal Strategy Report appears to have become. Here is the statement of the government’s fiscal intentions.

fiscal intentions 21

Take the long-term intentions first (if you can find them). For debt, the government offers no numbers at all – either as to the level they aim to first stabilise the debt at or the longer-term level they would aim to then reduce it to (not even whether that level is higher or lower than the current level). Not even anything conditional on, say, us avoiding future Covid outbreaks and new lockdowns.

And then what about the operating balance? Well, they assure us they will run an operating balance consistent with the long-term debt objective, but (a) isn’t that obvious?, and (b) it tells us nothing at all, since they give us no medium to long term debt objective. And all the rest of it is equally or more vacuous. Now, sure, the Act does not formally require the government to put numbers on their objectives in these areas, but I’m pretty sure the drafters of the Act – the Parliament that passed it – did not think that simply stating “we’ll do whatever we like to pursue our political objectives” (all that “productive, sustainable and inclusive economy” mantra) would meet the bill. The whole section of the Act is rendered empty and futile.

It is even worse when we get to the short-term intentions. The Act is somewhat more prescriptive there

short term fiscal

And there is simply none of that content at all.   No objectives, no serious discussion reconciling with the (non-existent) long-term objectives, and just this explanation for why the government is (for now anyway) abandoning the statutory principles for responsible fiscal management

Doing so in this case for the short-term operating balance intention is the right thing to do, given the unprecedented size of the global economic shock caused by COVID-19 and the need for the Government to provide a strong ongoing fiscal response to protect lives and livelihoods in New Zealand as we secure the economic recovery. 

But as I suggested yesterday, that argument probably made sense (at least the first half) at the time of last year’s Budget and FSR. It doesn’t today when New Zealand’s unemployment rate is under 5 per cent.

There is no rationale – grounded in the Act – no analysis, and no short or medium goals. Simply structural deficits for years to come (see first chart above) – discretionary deficits actively chosen by today’s government larger than any such cyclically-adjusted deficits run in New Zealand at any time since at least the end of World War Two. It hasn’t been the New Zealand way. But it appears to be so now.

As I noted yesterday, maybe it will all come right. Maybe Robertson and Ardern really are at heart a bit more responsible than this Budget suggests and future new spending splurges (which are, I guess, what one expects from a party whose MPs and leader have now taken to openly calling themselves “socialists”) will be funded by persuading the electorate to stump up with increased taxes.

But bad fiscal outcomes – high debt, and little obvious prospect of reversals – don’t arise overnight. And the sort of thing that concerns me is what has happened in some other advanced countries. Here are the cyclically-adjusted primary balances for the US, the UK, and Japan. Remember, a positive number should be a bare minimum for prudent fiscal management (higher the higher are your accumulated debts and the prevailing real interest rate).

uk and us balances

30 years each had relatively low levels of government debt (OECD data for net general government liabilities as per cent of GDP), the UK and Japan in particular. And now they are all among the OECD countries with the highest levels of (net) public debt.

It can happen here too. And if those on the left are celebrating this week their own government “breaking free” of the shackles, they need to remember that political fortunes come and go. The other parties will form governments again, and the precedent this government is setting may guide them in how constrained they feel about increasing spending or cutting taxes or whatever (see the US as an example). In a floating exchange rate economy the disciplines on fiscal policy are more political than market in nature. If your party believes in bigger government, that’s a choice but then insist that bigger government means higher taxes. If your party believes in much lower taxes, that too is a choice, but then insist that smaller revenue have to mean much lower spending. But don’t toss out the window a hard-won consensus around balanced budgets and low public debt – one of the few real achievements of the last 30 years – and substitute for it feel-good politics (whether from the left or right) that avoids confronting choices about who will pay.

I’m still reluctant to believe that Robertson is quite as reckless as this Budget suggests, but for now at least the evidence is tilting against my optimistic prior. And, disconcertingly, there isn’t much sign of the Opposition calling him out.

This, incidentally, is the sort of analysis and discussion that a Fiscal Council provides in many countries.

A questionable Budget

As far as I can see reaction to last week’s Budget seems to be split between those on the government side who thought it was great – in some cases just a start – and on the other side of politics those noting that there was no sign of any sort of plan or set of policies that might lift the economy’s productivity performance, and in turn lift the capacity – whether or individuals or governments – to spend on personal or collective priorities. Those critics are, of course, right.

But what I really wanted to focus on in this post is the size of the deficit the government is choosing to run.

Little more than four years ago the Labour and Green parties published the Budget Responsibility Rules that, they told us, would guide them should they take office (I wrote about them here). They were seeking to persuade us that in office they would prove to be responsible macroeconomic and fiscal managers.

The first of the rules they offered up was this one.

BRR1

Note especially that second sentence: they expected to be in surplus every year “unless there is a significant natural event or a major economic shock of crisis”. Pursuing other policy priorities wasn’t going to be an excuse either: if they thought they needed to spend more on this or that, they’d fund it by taxes.

It sounded pretty good.

Even before Covid, if they were sticking to their own “rules” it is was a pretty close run thing. In the HYEFU for December 2019, for example, the total Crown OBEGAL measure in (very) slightly in deficit was for 2019/20 and exactly in balance in 2020/21. The same set of forecasts showed the economy running just a bit above potential in those two years. It wasn’t exactly the spirit of the Budget Responsibility Rules.

And then, of course, Covid came along. I don’t think anyone is going to dispute the idea that deficits (even large deficits) made sense for much of last calendar year, particularly to support the incomes of those unable to work because of lockdowns etc, Not many people are disputing the case for the wage subsidy, and of course when people couldn’t work and businesses couldn’t trade tax revenue was also going to be down. You’ll recall that the worst of all that was in the March and June quarters of last year (part of the fiscal year 2019/20). Consistent with that core Crown expenses in 2019/20 was 34.4 per cent GDP, compared with 28 per cent the year previously. Whichever deficit measure you prefer, the 2019/20 deficit was large. And few will quibble about much of that.

Right now we are coming to the end of the fiscal year 2020/21. Wage subsidies and similar measures have been used at very stages, especially early in year.

But as everyone also knows, the economy has bounced back more strongly that most (including me) had expected – notably, much faster than the official agencies had forecast. It is, of course, entirely right to note that the borders are still largely closed, global supply chains are disrupted, and prospects in parts of the wider world still look pretty shaky. On the other hand, the terms of trade are doing really well. In total, Treasury does the forecasts, and they reckon that when we finally get the nominal GDP data for the year to June 2021 it won’t be much different in total than they had thought back in late 2019 pre-Covid. The comparison is a little unfair, since there were some historical SNZ base revisions, but they also reckoned (when they did the forecasts in late March and early April) that the June quarter unemployment rate this year would be less than 1 percentage point higher than they’d been forecasting for that date back in late 2019.

That’s great, something to celebrate. But it doesn’t have the look or feel of a “major economic shock or crisis” – Labour’s 2017 words. There was one, especially in the first half of last year, but from a whole economy perspective it has an increasingly been a stretch to make such a case as 2020/21 drew on. And yet core Crown expenses in 2020/21 are expected to have been 33.1 per cent of GDP, not much lower than in the previous year, and more big deficits have been racked up.

But 2020/21 is really water under the bridge now. There is only five weeks of that year to go, and the Budget is about policy for 2021/22 (in particular) and beyond.

And in 2021/22 not only is the government planning to run large deficits but ones that even larger than those for 2020/21. The Budget documents this year were rather light on the analytical material that Treasury usually publishes, but they put in this year a chart of the cyclically-adjusted primary balance.

CAB primary

Cyclical-adjustment here involves Treasury adjusting for the state of the economic cycle (recessions dampen tax revenue quite a bit and raise spending a bit, as the automatic stabilisers play out). In this chart, the Treasury also exclude the EQC/Southern Response Canterbury earthquake costs. And the primary balance excludes finance costs – it is a standard measure used in fiscal analysis, with a common rule of thumb being that if your primary balance is positive, at least you aren’t borrowing simply to pay the interest on the accumulated debt. Labour’s 2017 commitment re surpluses would have implied running positive primary balances almost every year.

There were significant cyclically-adjusted primary deficits in the years following the 2008/09 recession – the twin consequence of the fiscal splurge at the end of the previous Labour government’s term and the unexpected (by Treasury, whose forecasts governments use) shortfall in potential output. But those cyclically-adjusted deficits over 2010-2012 look small by comparison with the deficit the current government plans to run in 2021/22 (and still smaller than what they are planning for next year).

Perhaps you might think the state of the economy in some sense warrants this, but (a) recall that these are cyclically-adjusted numbers, and (b) check out the state of the economy in the two periods. Over the coming year Treasury expects an average output gap of 1.7 per cent of GDP, coming back to zero in 2022/23. They expect the unemployment rate to be about 5 per cent next June, dropping to around (their view of the NAIRU) 4.4 per cent the following June. By contrast, Treasury now estimates that the output gaps in the 2012/13 and 2013/14 years were each around 1.5 per cent, and the unemployment rate in both years was also higher than they expect in the next two years.

What about some longer-term perspectives? I can’t see a Treasury version of this series going further back but (a) the OECD publishes estimates of the cyclically-adjusted primary balance at a general government level, and (b) the Treasury has primary balance (not cyclically adjusted) back to 1972. Neither series is fully comparable – the OECD numbers aren’t done on an accrual basis, and include local government (but it is small in New Zealand), and the older Treasury numbers aren’t cyclically adjusted. But together they can still create a useful picture.

Here is the OECD chart, back to 1989

CAB OECD

Cyclically-adjusted primary surpluses have been the New Zealand norm in modern times – even (a propaganda line Grant Robertson could have chosen to use, but preferred not to for obvious reasons) in 1990.

And here is the not cyclically-adjusted primary balance numbers back to the year to March 1972, using the data from the Treasury’s long-term fiscal time series.

Tsy primary balance

Note that although these numbers are not cyclically-adjusted, even in quite severe recessions the cyclical-adjustment procedure Treasury uses makes a difference of less than 2 percentage points of GDP.

So, one might reasonably note that over the next couple of years when, on Treasury’s numbers, the economy will be running increasingly close to full employment, the government is choosing – wholly as a matter of discretionary policy – to run a primary deficit bigger than any that have been run in the past 50 years, with the exception only of the accrual effect of the government’s EQC obligations post-Christchurch, obligations that were not discretionary or voluntary at that point. To be pointed, one might reasonably note that the primary deficits are (far) larger than any run under Robert Muldoon’s stewardship (the first two years on the chart, as well as 1976-84), and are in contrast to the primary surpluses run in every single year of the Lange/Palmer/Douglas and Clark/Cullen eras.

(What about those big Muldoon era deficits you keep reading about? Actually, a huge chunk of that was interest costs, and much of that was just inflation – real interest rates themselves were often quite low. Another way of looking at the issue is an inflation-adjustment to the deficits.)

It seems like pretty irresponsible opportunistic fiscal policy to me. It is certainly inconsistent with those mostly-admirable Budget Responsibility Rules Labour campaigned on – since not only are they running large deficits with no macroeconomic crisis, but debt is above their own targets.

Of course, from supporters of the government I expect there will be two responses.

The first might be to celebrate – Robertson and Ardern have thrown off the shackles, scrapping (as they formally have) any references to surpluses or balances budgets now or in the future. What is not to like, surpluses or balanced budgets being things for people like Clark, Cullen, Kirk, and Rowling, but not for our brave new leaders. After all, don’t we know that interest rates are low – even if long-term rates now are no lower than they were pre-Covid. If so, it is a dangerous path they are treading: their cyclically-adjusted primary balance outlook now looks a lot more like the sort of ill-disciplined approach to fiscal management we’ve seen in places like the UK, the US, and Japan over recent years. That was already underway with the various permanent fiscal measures the government put in place as early as last March (under the guise of a Covid package) and has continued since.

The second, more moderate, stance might be to acknowledge my point but to argue that (a) the economy is only doing as well as it is because of macroeconomic stimulus, and (b) better fiscal policy than monetary policy. I’m not going to dispute that policy stimulus is likely to have helped achieve the welcome economic rebound, and (more specifically) if the government had taken steps in this Budget to (say) cut the cyclically-adjusted primary deficit to 2 per cent of GDP in 2021/22, closing to zero the following year (while reserving the need for possible fresh intervention if Covid got loose here), the economic outlook would – all else equal – be worse than is portrayed in The Treasury’s forecasts.

But all is not equal. The primary tool for macroeconomic stabilisation is monetary policy. A tighter fiscal policy – getting back to balance quickly now that last year’s shock has passed – would naturally and normally be offset by monetary policy, doing its job. The Bank stuffed up going into Covid and wasn’t then able to take the OCR negative (or so it claimed), but even they tell us that is an issue no longer. For those who believe in the potency of the LSAP – and I think all the evidence is against it – there is that tool too. And the beauty of monetary policy is threefold:

  • it costs the taxpayer precisely nothing (relative price shift instead and those best placed to respond do),
  • it can be adjusted very quickly as the outlook and circumstances change, and
  • using monetary policy tends to lower the exchange rate while reliance on fiscal policy feeds an overvalued exchange rate, skewing the economy further inwards.

Monetary policy is, of course, no good at income relief. That is what fiscal policy did so well last year. But that was last year’s need not – as Treasury’s forecasts – the need now or for the next couple of years.

My unease about the Budget is not helped when I dug into some of the macroeconomic numbers.

For example, The Treasury’s forecasts for growth in the population of working age show expected growth in the five years to June 2024 exactly the same now as in the projections for the 2019 HYEFU. Perhaps, but it seems a bit of a stretch, when we know – from Customs data – that there has been a significant net outflow of people (migrants, tourists, New Zealanders, foreigners) over the last 17 months.

And then there are the Treasury’s productivity growth assumptions that seem heroic at best.

productivity growth budget 21

And this even though their text explicitly refers to some degree of permanent “scarring” as a result of Covid. Perhaps they could enlighten us as to what about the economic environment or economic policy framework is likely to generate such strong productivity growth (by New Zealand standards) in the next few years? Covid isn’t something the government can do much about, but nothing else in their policy programme now or in recent years seems likely to begin to reverse the lamentable New Zealand productivity performance. Without that productivity growth, future revenue growth would also be weaker than this Budget is built on.

It isn’t as if The Treasury expect business investment to soar. At best The Treasury seems to think we limp back to the rates of business investment seen in the previous half decade (when the Governor of the Reserve Bank was exhorting firms to invest more, as if he knew better than them where the profit opportunities lay).

bus investment 21

And then there is one of my favourite, but sad, charts

export import shares

Exports and import shares of GDP both rebound, of course, but only to settle at even lower levels than we’ve seen in New Zealand for decades. Successful economies tend to be ones that are exporting successfully lots of stuff to the rest of world and importing lots of stuff from the rest of the world. That isn’t New Zealand. But then we haven’t been a successful economy for a long time now.

Perhaps fiscal policy will come out okay in the end. But when the government isn’t expecting to be back in cyclically-adjusted primary surplus even by 2025, and when the medium-term economic projections seem to rest on some rather rosy assumptions (these and others), it is difficult to be optimistic. Thirty years of sound fiscal management – one of the few real successes New Zealand economic managers could claim – looks to be at risk. And yet the grim fiscal outlook seems to have had astonishingly little coverage, as if last year’s (appropriate) mega-deficit numbers have disoriented people so far that they’ve lost interest in the hard slog of delivering balanced (cyclically-adjusted) budgets. The appropriate size of government – perhaps even the appropriate degree of dependence on government – is rightly the stuff of political debate, but what is spent should be paid for, not simply grabbed from the population – reducing their future spending options – without the normal political conversations around what tax rates are tolerable and acceptable.