Insufficient macro policy action

Before getting into the substance of this post, let me note that for a Budget allegedly ‘all about jobs’ our official data are so grossly inadequate that our next official employment/participation/unemployment data won’t be available until early August and then it will be only quarterly.  By contrast, the US and Canada released their April (monthly) data last week.  Here, Statistics New Zealand has shown no sign of being willing to release on an experimental basis –  for the duration of the crisis – the results of each monthly set of interviews they do (of which there are thousands) and sent out a note a couple of weeks ago suggesting that even the full quarterly labour market data may be less than ideal.  It is at times like these that the gaps in New Zealand’s official macroeconomic data are most glaring –  and yet there was no sign (I heard/saw) of anything in yesterday’s Budget to remedy these failings, the combined outcome of neglect by successive governments (mainly) and by SNZ itself.   Analysts are left looking to the data for other countries, and attempting to interpret them in light of the (typically smaller) falls in GDP expected in those countries.   Looking at those Canadian and US numbers suggests pretty severe labour market excess capacity here (no matter how many people are twiddling their thumbs but not technically unemployed or out of the workforce, under the cover of the wage subsidy scheme).

What of the Budget itself?

I’m really not bothered by the fiscal bottom lines.    If one takes the government/Treasury numbers at their word then in the year to June 2024, core Crown expenses will be about the same (share of GDP) as they were in the year to June 2014, while core Crown tax revenue will be about the same share as in the year to June 2015.    I’m not entirely convinced nominal GDP by then will be as high as Treasury supposes, but the critical point here is that most what the government is spending as a response to the crisis isn’t a permanent worsening in the structural primary balance.  If so, then as the economy recovers –  and future governments restrain themselves – we get back to balance, and then debt/GDP ratios drop away steadily, even if future potential nominal GDP growth were to be as low as 2-3 per cent.   When I saw those tax/spending comparisons, it reminded me of the fairly far-left commentator I saw yesterday suggesting that the Budget might have been the sort of thing Bill English might have brought down in the circumstances (not, of course, intended as a compliment to anyone, Labour or National).   In the detail, that probably isn’t quite right, but National threw money at Kiwirail too, and did all sorts of other spending people on the right didn’t much approve of.

What of the debt itself?  I try never to pay any attention to the government’s preferred net debt measure, and to at least focus on the measure that includes all the money in the New Zealand Superannuation Fund.  For some reason, not known to me, the government is going to put lots more money in the NZSF over the next few years –  beyond what the statutory formula provides for –  as if having a flutter on the world markets, at your risk and mine, was an important part of a recovery programme.  On that measure, net debt as per cent of GDP peaks in the year to March 2023 at 37.4 per cent (up from 4.6 per cent in June 2019).  On the then Crown net debt measure, the recent peak was about 48 per cent in 1990 –  at a time when real interest rates (servicing costs) were almost breathtakingly high.   And although there is a lot of folk memory about the pressures then, they were political more than economic, and it is worth remembering that in 1990, our overall net (negative) international investment position was quite a bit larger than it is now.   As I noted in a post a couple of weeks ago, a hundred years ago we had much more government debt again (per cent of GDP).

And international context isn’t irrelevant.   For international comparisons, I reckon the best measure is the OECD’s measure of net general government financial liabilities as a share of GDP.  In 2019 the OECD estimate that New Zealand (all layers of government) had net financial assets of 3 per cent of GDP.   Add, say 36 percentage points of GDP to that – the 32.8 from core Crown and a bit more from local authorities and other total Crown entities – and we’d have net financial liabilities of 33 per cent of GDP at peak.     Round it up to 35 per cent and if we’d have that much debt last year we’d still –  then – have had about the 14th lowest net debt ratio among the OECD countries.

Do I have instinctive bias toward net government debt being close to zero?  Yes, I do, but (a) disasters and good times will alternate, and (b) even though I often make the point that interest rates are low for a reason (and can’t just be assumed to be a windfall) the drop in real interest rates is larger than the slowdown in the underlying rate of growth in the economy.  It is quite rational to be more relaxed about higher debt ratios now than we might have been 30 years ago.

None of which is to say the a cavalier approach should be taken to the spending/tax choices that get us to the higher debt level.  All such choices have opportunity costs –  the possibility that the money could, perhaps should, have been used for better initiatives, perhaps with long-term payoffs for the economy or wider society.

I’m not entirely persuaded by the particular ways the government has gone about distributing money.   The wage subsidy scheme was initially conceived in a climate in which it might, almost reasonably, have been assumed that the old pattern of the economy would be back again very soon –  as soon as the PRC got on top of the virus.  As it is, the largest of those initally-affected sector (tourism) may well be the very last to get back to anything like pre-crisis normal –  and, for now, as matter of policy we don’t even want it to (given we have travel bans in place). In a sense, yesterday’s extension of the policy only reinforces that bias –  the people who can claim 50 per cent reductions in monthly revenue (from the same period last year) by next month are likely to be mostly firms in the tourism and associated sector.  But it may be many years –  who knows how the virus will progress globally, let alone here –  before anything like the pre-crisis capacity is required from those firms, if (as individual firms) they have a place at all.    And so we will be in the weird position where firms that face reality soonest and close in the next few weeks will see their workers miss on the extended wage subsidy, while those who cling on – whether from over-optimism or just supporting their workers short-term –  will get the money.

There are other oddities.  The company tax clawback scheme –  allow companies making losses now to offset those against past income and get a refund of past tax paid now –  will act as a gift for the firms that fail (since there will never be profits again) but only a loan to those that succeed.   Given that many of the firms that do fail will be in the sectors that are likely to come back only slowly, there seems no compelling public policy interest for that approach.

Or, as I’ve pointed out previously this week, the weirdness that see the new “bank of the IRD” lending to smallish businesses at a zero interest rate, even as retail lending rates for businesses that can’t get debt funding elsewhere, while existing borrowers are stuck with real interest rates that may have made sense last year but which aren’t fit for this year.

It isn’t that I’m opposed to a pretty liberal approach.   Earlier in the crisis I argued for thinking of assistance in terms of a national pandemic insurance policy –  under which, perhaps, we might guarantee 80 per cent of last year’s income for this year (or, as some commenters suggested, even just for six months).  Part of the attraction of that model was that it wasn’t tied to trying to keep existing firms in place –  it provided a buffer, and time, but left it up to individual firms’ owners to decide about what was best for the future, and treated equally those who had no work –  whether or not they still had a formal tie to a previous firm.   People suggested that the likely cost was too high, but actually I reckon total debt would have been no higher than what the government is now proposing, and the framework for the distribution of upfront assistance would have made more coherence.

But even though the pandemic insurance approach might have helped, at the margin, in securing a recovery, recovery itself was never the prime focus –  it was always primarily about income support, and buying time.  Recovery was always going to rest more on (a) the passage of time, (b) a recovery globally, and (c) domestic monetary policy.

I suspect that, even on the government’s fiscal plans yesterday, that is still the case, but unfortunately with almost nothing from monetary policy.

The one chart that caught my eye in the BEFU document was this one of the fiscal impulse measure.

impulse measure

I’ve written previously about the impulse measure, which was first developed perhaps 20 years ago by The Treasury to help give the Reserve Bank a better sense of how much discretionary fiscal policy was adding to demand.  In my experience, it wasn’t always that good for the most recent few years –  there is quite a lot of unpicking goes on working out what is potential output etc –  but that for forecast periods it was a good indicator, and for periods well enough in the past generally quite useful too.

In this chart, there are two periods of a substantial positive fiscal impulse –  around the time of the last recession, and now.  For the previous episode the positive fiscal impulse over the two years is equal to just over 4 per cent of GDP.    OECD estimates, done independently, suggest something of that magnitude or perhaps a bit higher.  There was a lot of fiscal support in the works –  not from crisis-response measures, but from the big easing in the fiscal policy the government had put in place before it realised a serious recession was upon us.

And what does Treasury think is happening now?    The total fiscal impulse across the two June years (2020 and 2021) is around 8 per cent of GDP, most of which is happening in the year just about to end.  Beyond that –  as really must happen if the fiscal situation is to be kept in check – the fiscal impulse, on current government policy, is really quite materially negative (perhaps almost implausibly so later in the period).

The fiscal impulse is reasonably materially larger –  optimistically, perhaps double –  than it was at the time of the last recession.  Then again, the adverse economic shock is much larger –  even if one were able to look through this quarter and next.

And, to be boring and repeating a point (that nonetheless seems to keep being made):

  • there was huge amounts of effective monetary support in the last recession (substantially lower real retail and wholesale interest rates, and a sharply lower exchange rate), for which there is no parallel at all this time (notwithstanding the big and expanded bond purchase programme), even if the Bank is inching ever so reluctantly towards a possible negative OCR next year, and
  • even though the unemployment rate rose only by just over 3 percentage points at peak, it still took 10 years after 2007 to get unemployment back to a level that some –  notably the Reserve Bank –  plausibly might consider a normal (NAIRU) sustainably level.

And in the years after 2008/09 we had the fruits of a strong terms of trade and a big boost to effective demand from the Christchurch repair and rebuild process.

It simply doesn’t seem credible that there is anything like enough policy stimulus in the works now, and (perhaps especially) looking just a few months ahead (the more so when we bear in mind that there is no certainty all the big fiscal numbers will be carried through, including because the election is close).   In a sense, as I noted in yesterday’s post, the Reserve Bank’s (more recent) forecasts tell that story, with inflation forecast to be below the bottom of the target range for the next two years, while the Bank sits on its hands.

It is also worth bearing in mind just how much of that fiscal assistance is heavily frontloaded.   Partly because of very restrictive government measures, economic activity in the last couple of months has been savaged.  Plausibly, nominal GDP in the first half the year will be $25 billion less than might normally have been expected.    That means an equivalent loss of national income.

Direct payouts from the government –  mainly the wage subsidy scheme but also the corporate tax clawback scheme –  has compensated many of the losers to a considerable extent.   Wage subsidy payments have already exceeded $10 billion and there is more to come in the next month or two.  If I recall the tables right, the tax clawback scheme has refunded something like $3 billion.

But there won’t be repeat of anything on that sort of scale.  Of course, the income/output losses in future quarters are unlikely to be as large either.    But my point really is that the output gap by later this year will still, almost certainly, be materially larger than anything we say in 2008/09, and already the biggest fiscal impulse will be in the past.

With no support from monetary policy – real retail rates are barely changed, and the exchange rate isn’t down much – everything rests on either domestic fiscal policy or some surprisingly strong global economic rebound.  Neither seems like a safe bet for getting us back to full employment any time soon.

This isn’t a plea for fiscal policy to do more, but for the government to wake up to the outlook and insist –  using formal statutory directive or appointment powers if necessary – that monetary policy start making a real difference.   I don’t suppose it will happen, especially not this side of the election: the government will prefer an “everything in hand, heroic saviours” narrative, even if the outlook is far from in hand.  I take them at their word when they say they care about full employment, invoking Peter Fraser and all that.  But the current set of policies simply is not likely to be consistent with achieving those sorts of outcomes in any reasonable timeframe.

(My other worry on front is that there are people who will criticise the government for doing too much on the fiscal side, but not many of them have credible alternative approaches to getting back to full employment rapidly – few, for example, embrace calls for more aggressive monetary policy.  It sometimes looks as if they don’t care.  There is that old maxim “it is better to have tried and failed than never to have tried at all”.  It isn’t an excuse for poor policy, but history would judge poorly any figures who were, in effect, indifferent to lingeringly high unemployment.)

Meanwhile, of course, there is also nothing that is at all likely to lift our longer-term economic performance – despite various bows in the direction of productivity in the Minister’s speech –  but sadly that doesn’t mark this Budget out from any of its predecessors this century.