HYEFU thoughts

I don’t have that much to say about the HYEFU and the Budget Policy Statement released yesterday.  If governments are going to keep on with the insane and destructive (to the economic wellbeing/prosperity of New Zealanders) policy of supercharging population growth then, sooner or later, they are going to need to spend more on increasing the associated public “infrastructure” (roads, schools, hospitals etc).  One can, of course, question the quality of some of that expenditure –  baseline or projected –  but more people pretty reliably means a need for more capital.

That said, if the population is growing rapidly you’d usually expect to see all sorts of investment growing quite strongly.    As I illustrated in a post last week both government and business investment have been really rather subdued in recent years.  The Treasury doesn’t give us forecasts that separate out government and business investment, but here is a chart of their forecasts for total non-housing investment (public and private) as a share of GDP.   The first observation is an actual, the rest are forecasts.

inv hyefu 19

Note the scale.  These are not huge moves, but they are falls.  Treasury expects that non-housing investment will be a smaller share of GDP in the coming years than it has been in the recent past.    Something doesn’t seem right about the economic policy settings, at least if the governments cares about lifting average material living standards of New Zealanders.  Treasury forecasts on the basis of policy as it is, and (fiscal) policy changes the government has told them it will be making.

The picture in the forecasts also doesn’t look very good if we concentrate on trade with the rest of the world.  Here is exports as a percentage of GDP.

exports hyefu 19.png

When it first took office, the government occasionally used to talk about a more export-oriented economy and all that.   No sign that the Treasury thinks that policy settings are consistent with delivering that.  I didn’t include imports on the chart, but the fall in imports as a share of GDP over the forecast period is slightly larger than the forecast fall in exports.     Taking on the world and winning, consuming more of the best the world has to offer, it isn’t.

And it isn’t as if The Treasury is forecasting doom and gloom: they expect overall GDP growth to pick up and be running at around 2.75 per cent per annum.

You’d hope that, faced with projections like these, the Minister of Finance would be demanding from the Secretary to the Treasury –  and that the Secretary would be proactive in offering –  robust advice on what might, after all these years, begin to reverse New Zealand’s woefully poor long-term economic performance.    It doesn’t seem very likely, but the Secretary is new.  Perhaps she is genuinely shocked at how poorly New Zealand does.  Perhaps she is demanding answers, analysis, and advice from her staff.

On page 2 of the HYEFU I noticed this claim

The Treasury is in a unique position to focus on improving the way our economy can raise New Zealand living standards. Along with delivering first-rate economic and financial advice,

Treasury certainly is in a unique position.  They have a lot of staff, have had their budget increased, and have (or should have, if they are doing their job) ready access to Ministers and input across all major areas of policy.   And yet, the actual performance has been poor, and there is little visible sign of that “first-rate economic and financial advice”.  It might be bad if governments were consistently rejecting such advice, but that is their prerogative.   But there isn’t much sign that The Treasury has been offering hard-headed searching advice on the failures of overall economic performance, whether or not successive governments had been inclined to give it heed.

All that said, one can’t argue too much with the fiscal performance.    Here is a chart of the best of the debt indicators Treasury publishes forecasts for.

net core crown debt

Modern New Zealand governments manage debt and the aggregate public finances in a pretty responsible way (I’m not one of those who thinks low interest rates mean governments should take on more debt: rates are low for a reason), and government debt levels near zero seem pretty prudent given the way other government policies remove some of the need for private savings.   And while Treasury thinks we have a small positive output gap, my own inclination –  and the balance of the other estimates they quote –  is that things are a bit weaker than that.  Commodity prices are pretty high to be sure, which always flatters the public finances a bit, but overall I’m pretty comfortable if the operating balance is somewhere just either side of zero.

Successive governments have done aggregate fiscal management pretty well.  It is just a shame they’ve haven’t shown the same degree of interest, passion, commitment etc to fixing the longrunning productivity failures.  Overall fiscal management matters, but in terms of the long-term material living standards of New Zealanders, it is a bit akin to keeping the garden pretty and the fences well tended even as the house itself slowly –  ever so slowly but surely –  rots.


20 thoughts on “HYEFU thoughts

  1. Our 3 fastest growing industries are in the service industries ie Hospitality, Health care and Aged care. Robots are still far too expensive an investment to even make a dent in increasing productivity in NZ. This is even evidenced by the mega factories in China and Vietnam that manufacture our latest hi tech mobile phones. If Apple could invest in robots and keep manufacturing in the US, they would, but unfortunately it is still far more profitable to manufacture in China in Mega human factories.


    • I saw a documentary where in one part they made phones and in another they made robots that would displace those workers but as you say, not there yet and if we had community as we did in the past we wouldn’t need Vodaphone.


      • I heard Jeremy Corbyn, Labour Party plea in the UK elections. He promised to bring in more low cost migrant workers and will provide FREE health care and aged care to old people. I don’t think anyone is under any illusion that robots are going to get the job done.

        The VISA numbers show that our migrant workers visa numbers is increasing and our residency visas numbers are falling. This does indicate an adjustment towards recycling migrant workers, keeping them young and sending them home to their own countries as they age. It does present a human rights issue but I guess keeping our migrant workers young and fresh solves the problem of an increasing aging migrant worker problem when we can send them to their country of origin homes.

        Liked by 1 person

  2. In Queenstown someone buttonholed a councillor in a lift about bus parking. He was told that they didn’t want the buses in Queenstown at all but instead to have them at Frankton and use a monorail. Essentially much of our new infrastructure will be for low value services?


  3. Whenever I go home to the farm and spend time in the nearby small town where I went to school I am shocked by the state of the town. It’s slowly dying. The High Street is half empty, the housing stock is dilapidated, people driving older and older cars and dressing in worse clothing. You can just see the decay.

    This town used to be a vibrant place when I was a kid. But it relies on exports and exporters aren’t politically popular in this “woke” country.


      • A significant drop in the exchange rate making imports 25% more expensive and our foreign holidays 25% more expensive and our filipino care-givers somewhat more expensive to employ would be difficult to sell to voters at the next election.
        It might increase an already stretched tourism industry and cause even more ambitious New Zealanders to try working in Australia. If it was achieved by a savage cut in work visas causing say half our current 500,000 work visa holders to leave, the reduction in population would cause rents and house prices to drop possibly quite dramatically.
        It has taken me a couple of years reading this blog to agree with the idea.


      • Yes, any politician willing to run such a policy would need to find ways to connect with the concerns/aspirations of the wider public. Having said that, my proposal is much less savage than the example you use – population wouldn’t fall at all probably – and unless the govt frees up land use there are distinct limits to how much and for how long house prices would fall. In earlier posts, I have proposed a partial compensation scheme for new owner-occupiers who have bought in the last half dozen or so years.


      • We saw that result in 2008 – 2010 when immigration turned negative. It is called a deep dark recession. Rents were cheaper and property prices crashed. Only problem was that businesses were shutting down, jobs declined, mortgagee sales hit record levels, 61 finance companies burned, savings lost and job losses also hit record levels. Don’t it was much fun for anyone.


      • Except….that in the depths of the recession net migration was quite positive because NZers stopped going to Australia. The weakest years for net migration were a year or two later when the net outflow of NZers resumed, while foreign arrivals were still subdued.


      • Exchange rates can alter quickly – just days whereas in our democracy changes of population related to work visas would take years. Work visas are usually for at least a year so even a total stop in issuing them would take time to have any effect on population. Then many work visas would not be stopped – for example a young man who married one of my daughters – after birth of his child he went through three steps: one years tourist visa, almost two years work visa and now has started his residency visa; it is hard to imagine NZ stopping the father of a New Zealand child being an immigrant. I have read that some work visas are by inter-govt agreements – they could not be changed quickly. Hasn’t our govt promised 3 year work visas for students after graduation?
        So find some way of dropping TWI by 25%; let the public suffer but our exports will boom and productivity rise. In the long run it will be good for New Zealanders. Meanwhile the work visa issue is primarily a moral matter of corruption and rorts – maybe that can be handled by more labour inspectors.


      • Our exports are already booming due to higher global prices but we have already reached peak primary production. Any fall in NZD would only improve exporters profits but it does not produce extra quantities because we are at peak land use. Total exports is only $60 billion in a $300 billion economy. Without an FTA with US or Europe a lower NZD does not help. Do we actually want more product into China and the loss of independence with a lower NZD?

        Liked by 1 person

      • Michael, migration patterns takes years to adjust. People are not just numbers that work to a cut off. It takes time to decide to give up family and friends to shift to a new life. As we all know kiwis that go to Australia with just hopping on a plane on a Special Category Visa is treated as a 3rd class not so special seriously disadvantaged in Australia. It takes several years to get the proper Australian Residency Visa


      • GGS: any chance of getting beyond primary production? The Netherlands and Denmark process their primary production and I find their products in my supermarket. You have often mentioned manufacturing and high tech production – why do we have no Lego or Nokia equivalents? “Do we actually want more product into China …?” my answer would be less product but more profit to NZ.


      • We export 95% of our primary production and for dairy, we are the largest exporter in the world. Most countries primary production is consumed by their own domestic population.

        Major industries in Denmark include manufacturing, chemical production, oil, gas and construction. In manufacturing, nearly all of the electronics produced in Denmark are exported, including microphones, measuring instruments, computer networks, engine controls and hearing aids. The Carlsberg beer company is the largest producer of beverages in Denmark.

        We shut down our factories. They rebuilt their factories after WW2.


      • The NZD is already 35% cheaper than the USD, 45% cheaper than the Euro and 5% cheaper than the AUD. We already have a massive unfair trade exchange rate. That is why we can’t get a FTA with Europe or with the US and the Australians want us booted out of CER. How much lower do you want the NZD? Are we not already close to dumping prices in Europe or the US already?


  4. Need Youtubers like Peter Whittle and Joe Jogan.Can’t leave the Hard Stuff to TVNZ. The major free speech issue is censorship through framing and avoidance. An economics teacher would come in handy.
    Societies not facing an existential threat turn on themselves.
    Religious thinking is not confined to religion it is an overriding adoption of sacred ideas and beliefs to the point where the sacred idea becomes primary to over all well being .
    People have coalitional instincts – they don’t have to meet in Masonic halls.


    • History teaches in the long run economics out-weighs religion. It was true during the so called religious wars in Europe when Catholics and Protestants made coalitions and it is true with Bangladesh’s recent embarassingly grovelling statement about treatment of Uighurs in China despite its attendant destruction of Mosques and Uighur muslim texts. It is true in all countries that have immigration rates higher than what the concensus of citizens prefer – too much money being made by the self-interested minority who influence governments. A particularly clear example is the acceptance of slavery and serfdom for millenia despite general acceptance of a faith (Christian or Muslim) that makes it clear that God created everyone in his image. There are exceptions but for every Albert Schweitzer and Mother Theresa there is a young educated person sacrificing a comfortable career in the west to join ISIS.


      • (Without wanting to start/enter a long debate) I’m not persuaded that “in the long-run economics outweighs religion”. Seems to me it is more a case of an inescapable tension between the ideals and worldviews – often a religion – and the pressures, temptations, opportunities etc that pull people away from those. The crooked timber of humanity or in Christian terminology original sin.

        Our western world now is v different than it would have been without getting on for 2000 years of Christianity, with all its weaknesses and failures. I haven’t yet read the book, but I gather Tom Holland’s widely praised “Dominion” makes that case.

        Liked by 1 person

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