Time to reform the governance of the Reserve Bank

[Here is the link to the coverage of my paper on governance in the Sunday Star Times]

This post had its origins in an earlier OIA stoush –  not mine, but that of one of the Green Party’s parliamentary staff.

For at least 15 years, I’ve thought that the way the Reserve Bank was governed should be changed and that we should move away from the situation (unusual internationally and anywhere else in the New Zealand public sector) where a single unelected official makes all the policy decisions (in the Reserve Bank case, on monetary policy and financial regulatory matters).  Other countries don’t do it that way.  New Zealand doesn’t do it in any other field of policy.

In late 2011, I was filling in time in the office between Christmas and New Year.  Alan Bollard’s second term was coming to an end, and while he hadn’t confirmed he was going it was widely (and correctly) expected.  I’d been saying to people for some time that a change of Governor was the best time to try to trigger discussion on the issue.  So I decided to write a brief internal discussion note making, in writing, the case I’d been making in conversation for years. I didn’t propose a detailed alternative model, and simply urged that change be considered, and that the Bank think about getting in front of the issue.     I wrote the note, and sent it round to only perhaps 10-12 of the Governor’s senior advisers on monetary policy.  I went on holiday, and when I got back word came down that the Governor was not all happy that the discussion note had been written.

Some months later, I took the opportunity to revise the note, and to take on board some useful comments I had received.  By this time, it was confirmed that Alan Bollard was going, but no decision had quite yet been announced as to who would be the new Governor.  Since no one could then think the paper was in any way a criticism of any individual, I sent it around a wider group of the Bank’s policy and analytical staff.  When Graeme Wheeler joined the Bank I sent him a copy, and had an appreciative response.

At some stage in 2013, the Green Party became aware that the paper existed (because the Bank had released another paper under the OIA, and my note was included in the list of references).  Their staffer asked for the paper, and was turned down.  He pursued the matter to the Ombudsman, who accepted the Governor’s argument that if this paper were released he would not be able to allow free and frank debate among staff.  I didn’t have a strong view on whether it should be released –  internal debate is important, and my note had been intended only as a contribution to that.  But it wasn’t a very recent paper, hadn’t even been written when the current Governor was in office, was not on a topic that was under active review, and the Governor’s argumentation was perhaps a little chilling.

Anyway, had the 2012 paper been released a couple of years ago, I probably wouldn’t have done anything more on the issue.  But I had continued to think about the issues, and particularly to think about them in the context of the much wider ranges of responsibilities and powers the Bank now exercises.  The result is this paper.

time for Parliament to reform the governance of the Reserve Bank online version

My preamble is partly to make clear that this is an issue that I have been thinking about for a very long time.  As people occasionally remind me, some of my comments on this blog could be seen as (but are not) motivated by grudges against current Bank management.  As Don Brash will confirm, I was running (less-developed forms of) the argument fifteen years ago.  The best Governor in the world simply should not have the extent of power any Reserve Bank Governor now has.

As important are two things:

  • The Reserve Bank does not write its legislation, Parliament does.  The Bank, and its Governor, operate within laws that Parliament has passed. The responsibility for legislation in this area rests with the Minister of Finance and Parliament.
  • To his credit, Graeme Wheeler seems to have recognised some of the weaknesses of the current system.  I suspect he and I would not agree on the solution (I don’t think staff should make the sorts of decisions the Reserve Bank is responsible for), but what matters at this stage is to get a good discussion and debate going, and to have a careful examination of the pros and cons of various possible models.

As it happens, I’m not sure if anyone is now particularly wedded to the current model.  The Treasury favoured a review in 2012, and they reported that many or most of the market economists then favoured change.  The Governor appears to recognise the risks and deficiencies of the single decision-maker model, and several political parties have also at times talked of proposing change.

This isn’t an issue that should divide people on any sort of ideological lines.  I’ve taken as given the current powers and objectives of the Bank.  Perhaps some of them should be looked at again, but this paper is just an attempt to prompt some discussion about how best to organise and govern a powerful New Zealand public agency, carrying out the wide range of functions that Parliament has assigned to it.

As ever, I’d welcome thoughtful comments and alternative perspectives.

The first page of the paper, an introduction and summary, is here:

Introduction and summary

When Parliament passed the new Reserve Bank of New Zealand Act in December 1989 a key, and innovative, feature of the Act was that the powers of the Reserve Bank were to be exercised by the Governor, and the Governor alone.  The legislation provided substantial operating autonomy to the Reserve Bank, and the establishment of a single decision-maker was seen as a way of providing effective accountability. If things went wrong, the Governor would have been responsible for any decisions, and the Governor could be dismissed, for cause, by the Minister of Finance.

But the model is out of step and out of date.  It is out of step with international practice in respect of monetary policy and of financial system supervisory and regulatory policy.  As importantly, it is out of step with approaches to governance used in the New Zealand public sector more generally.

The Reserve Bank governance model was developed, in part, to parallel reforms to core government departments that were going on at much the same time.  Those reforms themselves have since been considerably modified.  But even if that were not so, the conception of the Reserve Bank that the 1989 legislation reflected has not been borne out by reality.

The 1989 governance model might have been thought appropriate (if still unusual) for a very simple and uncontroversial most-monetary-policy agency.  Today’s Reserve Bank is a complex, multi-functional, organisation, exercising much more policy discretion in a range of areas, that are all characterised by considerable risk and uncertainty, than was envisaged in the 1980s.   Vesting all that power in a single unelected person is too risky, and is inappropriate.  It is not the way we do things in New Zealand.

In this note I will take as given both the range of functions the Reserve Bank has, and the allocation of powers between the Minister of Finance and the Bank.  Aspects of both issues should probably be revisited, but here I focus simply on the weaknesses in the governance model given the responsibilities that Parliament has assigned to the Reserve Bank.

The rest of this note outlines the key aspects of Reserve Bank governance and explains the background to the governance choices made in the 1989 Act.  It then focuses on how different things are today and why, even if it was a suitable model in 1989, it no longer is today.  I outline some alternative options and conclude by outlining my own preferred option.  Key aspects of any reforms should be (a) a move away from having policy decisions made by a single unelected official, and (b) the establishment of collective decision-making bodies which clearly distinguish among the main functions the Reserve Bank undertakes.

Compulsory enrolment in Kiwisaver

I’m puzzled.

Fresh from removing the sign-on bonus for new KiwiSaver members, Bill English is now talking about compulsorily enrolling everyone (well, all employees I assume) in KIwiSaver.  This was National Party policy to do at some stage, when the government’s books were in surplus, but it has now got cheaper to do because people could now be forced to join, at no upfront cost to the government.

It is far from clear what problem the Minister of Finance thinks he would be addressing.   Everyone who has started a new job since 2007 has already been auto-enrolled, and many others have chosen to enrol.  My guess would be that at least half of those who were in labour force in 2007 have changed job since then, and a large number have entered the labour force for the first time. All those people were auto-enrolled.   Most of those who have never joined, or have opted out, or subsequently taken a contribution holiday, have presumably made a considered choice.  Perhaps they can’t afford to be in the scheme now.  Perhaps paying off the mortgage is a higher priority.  Perhaps they are among that large group for whom NZS will already more or less maintain their pre-retirement standard of living.

I had hoped that the government might now leave KiwiSaver to wither on the vine.  After all, there is not much evidence that the scheme so far has boosted national savings, and there isn’t an elderly poverty problem.  Enhancing the retirement income of the relatively comfortable doesn’t seem like an obvious public policy priority.

The Minister did once regard New Zealand’s relatively low rate of national savings as a problem, but Google throws up no references along those lines in the last 3-4 years.  If he no longer regards national savings as a policy problem,  I happen to agree with him (I’ll get to savings as I carry on discussing the reasons behind NZ’s high interest rates).

Surely provision for retirement savings can’t be the problem either?   After all, this government has ruled out any change to the age of eligibility to NZS, and if they have not ruled out lowering the rate or means-testing they have certainly shown no appetite for doing anything.  And, as is well-known, New Zealand’s rate of poverty among the elderly is low, absolutely and by comparison with other countries.  Of course, high house prices may make that picture less rosy in a few decades’ time, but the government knows that freeing-up housing supply is the answer to that one.

And, in any case, although it is proposed to auto-enrol all employees, they could still choose to opt out.  Indeed, given that it is almost exclusively people now over 25 who have not been auto-enrolled already, one might reasonably assume that a large proportion of those who would be compulsorily enrolled if the Minister’s proposal went ahead might choose to opt out.  Yes, I know all the “nudge” literature, but recall that this experiment would not be on the population as a whole, but on a self-selected group of whom many had already deliberately chosen not to join.

And if income adequacy in retirement were really the concern, surely (a) compulsory contributory membership (not just initial enrolment), and (b) something that encompassed the whole population (business owners, welfare beneficiaries, stay-at-home parents) not just employees, would be the way to go.  But, fortunately, that doesn’t seem in prospect.

The National Party’s website says that it believes as follows:

The National Party seeks a safe, prosperous, and successful New Zealand that creates opportunities for all New Zealanders to reach their personal goals and dreams.

We believe this will be achieved by building a society based on the following values:

  • Loyalty to our country, its democratic principles, and our Sovereign as Head of State
  • National and personal security
  • Equal citizenship and equal opportunity
  • Individual freedom and choice
  • Personal responsibility
  • Competitive enterprise and reward for achievement
  • Limited government
  • Strong families and caring communities
  • Sustainable development of our environment

At least three of those values –  “individual freedom and choice”, “personal responsibility”, and “limited government” look inconsistent with auto-enrolling everyone in KiwiSaver.  Perhaps they might justify it under “personal security”, but I’d assumed that has to do with crime, and anyway, as noted already, elderly poverty just is not a major problem in New Zealand.

Compulsory enrolment of all employees in KiwiSaver smacks of something from The Treasury, and its “living standards framework”. But last time I looked, that framework put no independent value on things like individual freedom and choice, except insofar as they served some other end.

The Minister also appears to be using the dubious argument that Kiwisaver is an excellent investment.  If it were really so, you would think that after eight years most people might have got the idea.  But in fact, it is true only on very shaky assumptions.  Certainly, for the time being there is an annual government subsidy of up to about $500.    That is worth having, but it is hardly transformative.  In fact, for most people with a mortgage and contributing to Kiwisaver, it won’t even cover the tax wedge.  So the Minister’s claim is true only if the employer’s contribution to Kiwisaver would not otherwise be paid to the employee.  In the short-term, for any particular job or employee that might be true –  that (and the subsidies) was the main reason I joined Kiwisaver.  But in the medium to long-term surely the Minister of Finance does not believe that returns to labour will be materially affected by whether people take their income in the form of Kiwisaver contributions or in straight wages and salaries?

So New Zealand

  • Does not have a national savings policy problem (although the national savings rate does raise some interesting questions)
  • Has little or no evidence that KiwiSaver so far has made any material difference to national savings anyway
  • Does not have an elderly poverty problem
  • Has a government which is firmly committed to the current NZS system.
  • Has most people already in KiwiSaver, while  those in the workforce who aren’t in KiwiSaver will already mostly have made an active choice to stay outside.
  • Has a governing party that proclaims commitment to personal responsibility and individual freedom and choice.

And for most people in their middle years, Kiwisaver involves a very nasty tax wedge.

So quite why would the Minister of Finance think it was good policy to compulsorily enrol the rest of the employees in the country in KiwiSaver?