Towards a new Policy Targets Agreement

The Reserve Bank continues to obstruct, at least as far as they legally can, Official Information Act requests. Some time ago, I recounted my experience with a request I lodged for older papers I had written while at the Bank. To cut the story short, I eventually did get the handful of papers I had written in the second half of 2010, with the exception of one which they had missed going through their document management system. So I put in a specific request for that paper. It was a paper, for the Bank’s internal Monetary Policy Committee, which I had written on fiscal and monetary policy interactions in 1990/91. To be clear, this is a five year old paper, about events that are now almost 25 years old. As it happened, the paper had been prompted by a meeting Graeme Wheeler, then still a private citizen working at the World Bank, had had with the Prime Minister and the Minister of Finance, but my paper was about the historical events and interactions. It drew from public documents, my contemporary Bank files, and my personal diaries. Doing the paper was an interesting reminder of the tensions in that period, and of just how difficult the political environment was, both for reforming ministers and for the Bank. Treasury officials on occasion exerted pressure on the Bank to ease policy specifically to assist the political position of the Minister of Finance.

It was no real surprise that this week the Bank once again extended the time for dealing with my request, citing the need for consultations to occur that could not – it asserted – take place within the statutory 20 working days. About a single document that is five years old, about events quarter of a century ago.

But a couple of weeks ago I did get a response to my request for background papers to the 2012 PTA. Having been threatened with a large bill in response to my first request, I took the Bank’s suggestion as to how to narrow the request, and they did subsequently release that handful of papers. As it happened, the papers covered by the revised request proved not to be very interesting. The one paper of interest was a six page letter to the Minister of Finance on 2 May 2012 outlining the outgoing Governor’s thinking on PTA issues. This was well before Graeme Wheeler’s appointment was announced (or probably confirmed). For the record, a copy of that advice is here:
2012 PTA Papers Bollard advice

The revised OIA request captured nothing of any interactions between the Bank and the Treasury, or between Graeme Wheeler and either Bank staff (including Alan Bollard) or the Minister. Given my experience with the Bank’s document management system, it does not greatly surprise me that this material did not get into the folder for issues relating to the new PTA. I might, in time, lodge some further requests. But the original background to this request had been a point about the relative lack of transparency around many aspects of the Reserve Bank and monetary policy. A genuinely transparent Reserve Bank, or a Minister committed to open government, would have pro-actively released the papers around the new PTA at the time it was released. Had that slipped their mind, a request like mine might have prompted a fuller release now. As it is, we still know little about the considerations that were taken into account in settling on the new PTA – even though it is the major instrument governing macroeconomic stabilisation policy, for five years at a time. Was there any discussion, for example, of the possible relevance of the zero lower bound for New Zealand? What pros and cons of adding the explicit reference to the target midpoint were considered? What debates happened around so-called macro-prudential policy,  And so on.

In some respects, this material is now of mostly historical interest. The PTA is what it is. The Governor is responsible for implementing policy consistent with the PTA, and the Minister is responsible, on behalf of citizens, for holding the Governor to account for doing so. But the background papers would help provide insights on what the parties thought they were signing up to, and why. And they would also shed some light on just how satisfactory (or otherwise) the current process is – in which a nominee as Governor must agree a PTA before he or she is even appointed, or necessarily has any exposure to (for example) staff advice.

But the lack of openness around the historical documents also reminds us that, without process changes, that is how the next PTA is likely to be handled. The clock is ticking on the Governor’s term, and it is only two years now until a new Policy Targets Agreement will need to be agreed – before a Governor is appointed or reappointed. Issues and risks around the zero lower bound have not gone away. If anything they have come into sharper focus since 2012, as countries have been cutting interest rates again. In New Zealand, the prospect of the OCR falling below the previous low of 2.5 per cent, even on the macro data as they stand today, reminds us that zero interest rates are far from impossible here either, if events turn nasty at some point.

Discussions around these issues should not just be occurring behind closed doors. It would be preferable if the Minister – the initiating agent in things around the PTA – and the Treasury would commit to a more open process of consultation and debate. For example, by the middle of next year perhaps some issues papers could be released for discussion, and a consultative workshop held to discuss and debate the issues and risks, as they affect New Zealand. Perhaps there would not be support for a higher inflation target, even if nothing is done about the ZLB, but at least we should understand the costs, benefits and risks of eschewing that option. Given that 2017 is election year, it would be good to have those discussions relatively early

When the key parameters of a major arm of macroeconomic policy are set only every five years, and implementation power (and associated wide discretion) is then handed over to a single unelected official, it becomes particularly important that there are opportunities for adequate scrutiny and debate at that five year review point. I noted recently that when the Bank’s five year funding agreement is put through Parliament there is no more transparency around expenditure plans than there is for the SIS. The situation is not really much better for the PTA, which probably matters rather more. Yes, outside parties can debate and analyse the issues themselves, but none of them have the analytical and research resources that the Treasury and the Reserve Bank have.

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