A couple of months ago we learned that the new Minister of Finance had requested Treasury to have a review done of two key aspects of the governance of the Reserve Bank:
- whether something like the existing internal committee in which the Governor makes his OCR decisions should be formalised in legislation, and
- whether the Reserve Bank should remain the â€œownerâ€ of the various pieces of legislation (RB Act, as well as the insurance and non-bank legislation) it operates under.
Treasury, in turn, contracted Iain Rennie to conduct the review. Rennie was, until not long ago, State Services Commissioner. And a bit earlier in his career he had been Treasury’s Deputy Secretary for macroeconomic policy, including all matters to do with the Reserve Bank.
Learning of the review, someone lodged an Official Information Act request with The Treasury, seeking (a) the terms of reference of the review, and (b) the terms on which Rennie was engaged. Treasury’s response, dated 17 May, is here.
Somewhat strangely, the terms of reference for the review were withheld, allegedly to “maintain the constitutional conventions protecting the confidentiality of advice tendered by ministers and officials”. Which seems strange because (a) the Minister had already talked to the media (first link above) about what the review would cover, and (b) because Rennie is neither a minister nor an official, just a consultant hired to provide some analysis and advice. The terms of reference for that work hardly seem to amount to “advice”. Treasury further state that the terms of reference are withheld “to enable Minister and officials to have undisturbed consideration of advice”. I’m not clear that that is a statutory ground, and – as importantly – how knowledge of a consultant’s terms of reference would interfere with “undisturbed consideration of advice” is far from clear.
But Treasury did release Rennie’s terms of engagement, and some other interesting bits of information. We learn that
The Treasury is contracting Iain Rennie to provide a report assessing governance and decision-making at the Reserve Bank.
Is this different, I wonder, than looking at the relevant statutory provisions (the implication of the words is that the report will assess actual governance and decisionmaking, rather than the relevant laws)? Perhaps not. The wording might also be taken as implying that the review covers more than just decisionmaking for monetary policy. If so, that would be welcome.
Pleasingly, Treasury seemed not just to be pushing a single option.
The analysis should outline a few alternative, coherent reform packages, and draw out the central design trade-offs, while making clear a preferred approach.
We also learn, and this did surprise me a little, that the contract period began on 7 February. That was the day the Minister of Finance announced Grant Spencer’s appointment as acting Governor, having taken the relevant paper to Cabinet that morning. If Rennie’s contract started from 7 February, presumably the Minister’s decision to initiate this review work had been taken some time earlier – perhaps not long after he took office.
When he took the job, Rennie undertook to have his report completed by 31 March (in return for $60000 + GST). In fact, the papers confirm that Rennie took longer than expected and, by mutual agreement, the final report was delivered to Treasury on 18 April.
In undertaking this contract, Rennie and Treasury agreed that
In completing the work, the author will engage with an agreed set of domestic and international experts
This seems a strange provision. It suggests that Treasury could veto who Rennie could consult with in researching the issues and analysing the options. It would be very interesting to know who these experts are – perhaps especially the domestic ones. (I’ve written extensively on the issues and wasn’t consulted – not that I had expected to be.) I will lodge an OIA request for that information.
Having received Rennie’s report, Treasury has a further step in the process, presumably before they pass on the report, and their own advice, to the Minister of Finance.
The key deliverable is a report, which will be peer reviewed by a panel of international experts.
Again, it would be useful – and interesting to know – which “international experts” they are consulting, and perhaps a little surprising that the peer review process does not appear to include people who might be expert in New Zealand public sector governance. The Reserve Bank is, after all, one government entity among many.
It would be good if we could get some clear answers from Treasury and the Minister of Finance as to when the final report, together with comments from the peer reviewers, might be available. In his earlier comments, Steven Joyce told the Fairfax journalist that “he expected Rennie to report back some time after May’s Budget”. That was clearly somewhat misleading – the original contract had a report back from Rennie by 31 March – but even setting that aside, it is now after the Budget. As this is an issue where the political parties differ – Labour, the Greens, and (I think) New Zealand First already promising change – it would be highly desirable to have this expert report, peer-reviewed by international experts, in the public domain as soon as possible.
In digging around, I stumbled across The Treasury’s 2001 advice to the then Minister of Finance on the recommendations of the Svensson inquiry into monetary policy and the Reserve Bank. I’d seen it at the time, but long since forgotten it. The principal author of the paper was someone who is now a Treasury Deputy Secretary, but his boss – also listed on the paper – was one Iain Rennie, then deputy secretary responsible for matters macro.
Svensson had a number of sensible recommendations. Until that time, the Governor had chaired the Reserve Bank Board, even though the Board’s main job was to monitor and hold the Governor to account. That was clearly a nonsense, and Svensson recommended change. That recommendation has been adopted and the law was changed accordingly. But Svensson also recommended removing the Governor from the Board altogether – it being, at very least, anomalous to have the Governor as a member of a body whose main purpose is to review his own performance (as distinct, say, from a business in which a Managing Director might be a member of the board, but in that case the Board has all the ultimate strategic decisionaming responsibilities). The Police Commissioner, for example, isn’t involved in the governance of the IPCA. Rennie and Treasury advised against making that change, even though they explicitly recognised what the role of the Board was. Quite why is never made clear.
And then, perhaps more importantly, Svensson recommended that the law be changed to shift away from the single decisionmaker structure, in which all executive powers are vested in the Governor personally. Even then, in 2001, it was an unusual model internationally. Svensson proposed legislating to give an internal committee of senior Bank managers the formal decisionmaking powers.
Here was the response of Rennie’s wing of Treasury.
We believe the clear and strong accountability of the present structure has considerable merit. The Governor is solely and clearly responsible for monetary policy performance and may be dismissed by the Minister in the event of inadequate performance. While the Minister’s ability to dismiss a poorly performing Governor may be severely limited in practice, his ability to dismiss a poorly performing committee would be even more limited.
The formation of a decision-making committee would require extensive changes to the Reserve Bank Act. The statutory responsibility for price stability that currently rests with the Governor, and the statutory relationship between the Minister and the Governor, would need to be amended to give effect to the responsibilities of the Committee.
The issues raised above suggest that the potential benefits of forming a formal internal decision-making committee are likely to be small.
Having taken such a stance then, one can only hope that in conducting his recent review, Rennie is rather more open to change than he was in 2001. (I should add that I did not then, and do not now, think Svensson’s specific recommendation should have been adopted – but there are other feasible approaches to adopting a collective decisionmaking model). It is striking, for example, that in this Treasury advice there is no mention at all of how other government agencies in New Zealand are governed (hint: none involving policy setting involve single decisionmakers, with no rights of appeal). It is also telling of how the Bank has changed – by legislation and gubernatorial inclination – that there is no discussion at all of how the financial regulatory powers of the Bank should be governed. In many respects, the advice seems stuck in the 1980s – when the Reserve Bank structure was first designed – including with the emphasis on the ability of the Minister to sack an individual relative to a committee. That was an important consideration in the late 1980s, but it isn’t one that has led us to have other government rule-making, policymaking, agencies governed by single (unelected) decisionmakers.
It is, of course, a little unfair to hold anyone to advice they offered sixteen years ago, and I’m not seriously attempting to. Times and attitudes, and responsibilities, change. But it can be difficult at times for senior people to walk away from public stances on important issues that they have taken previously. I hope that when we finally see the Rennie report, a willingness to approach the issue with a genuinely fresh set of eyes is evident.