What the IMF has advised

Following on from yesterday’s post looking at what the IMF had advised the government on housing issues in the Concluding Statement from the recent Article IV consultation, I got curious about how that advice had evolved over the years. I could recall some bits and pieces, but I thought something a little more systematic might be in order.

I had hoped to look at the Concluding Statements going back 20 years, to encompass at least the house price surge in the 2000s, but the Concluding Statements I could find on the IMF’s website go back only as far as the (March) 2009 consultation. But at least starting from there encompasses a full economic cycle. In March 2009 all the attention was on the recession, the global crisis pressures, and so on. House prices had been falling, but not dramatically so and so got little attention.

Productivity issues are not the focus on the IMF, which is supposedly primarily about macroeconomic and financial stability issues, but I’ve had a bit of a bee in my bonnet over the years about the way the Fund often comments anyway, often without much depth, and – so it seemed to me – often just reflecting back not much more than the political priorities of the government of the day.

So I went through the 11 Concluding Statements from 2009 to 2021 (there was none in 2016 or 2020) and pulled out all the references I could find to housing (house prices, housing finance, taxation of housing, housing debt vulnerablity, housing policy) and, separately, all the comments that fit, explicitly or not, under a productivity heading. The resulting document, composed almost entirely of cut and paste paragraphs, organised by year (housing at the front, producitivity later), is here.

IMF concluding remarks on NZ housing and productivity 2009 to 2021

What impressions did I take from this exercise?

On housing, the first impression is how event-driven their advice seems to be, except perhaps around the underlying level of household debt (relative to income/GDP). There really isn’t much in the first few years, when house prices weren’t doing much but the underlying structural policy failures around housing hadn’t changed. Then as house prices rise they express concern, and as house price pressures ease so do the expressions of concern. That is the stuff of newspapers, not detached independent analysts supposedly with a long-term vulnerability-based perspective.

There is plenty of evidence in the early years of the Fund endorsing what was then the Reserve Bank’s view – that our banks were adequately capitalised, that our approach to risk weights etc was more conservative than in most places. Then came Graeme Wheeler who, in a radical departure from decades of New Zealand financial system regulation rushed into imposing LVR controls. And the Fund’s advice suddenly thinks such controls are a good and proper thing, albeit to be exercised temporarily and sparingly. Remarkably – well, perhaps not, but the vision (of Fund surveillance) is supposed to be of free and frank external advice – not once do they cast doubt on any of the numerous iterations in aspects of LVR policy (not even, for example, the politically-driven exemption for new builds, even when the Fund must know such developments tend to be riskier than existing dwellings). And then a few years ago when the Bank gets keen on DTI limits, suddenly (but not before) the Fund is very keen too.

And whereas the advice had been that – as the Reserve Bank had stated at the time – that LVRs should be used temporarily and sparingly, the IMF becomes increasingly reluctant to see any easing of such restrictions, even years on. Not coincidentally, that seemed to be the Orr position (he has increasingly talked of such restrictions being a permanent feature).

Of course, they also flipped on capital requirements – essentially the stance at the time of the Bank itself; praising the cautious conservative approach in earlier years, and then flipping to favour Orr’s aggressive planned increases in capital requirements. Never, of course, addressing their earlier view.

What about housing policy itself? There is probably some continuity in Fund advice around favouring a capital gains tax but – whatever the tax policy merits of such a regime – no suggestion in any of the mentions of countries where a capital gains tax had made a sustained material difference to house price outcomes.

For the rest, they talk up Kiwibuild when the government was….and then it quietly disappears. From time to time they mention land taxes, but typically not with any conviction. Again, there is probably an underlying theme – mostly echoing back what officials and ministers tell them – about liberalising supply and land use (but, of course, they have no expertise to evaluate specific claims).

And then this year….quite out of the blue…..we get the proposal for a stamp duty on houses – never before mentioned in New Zealand, and something the Fund has favoured (eg) the UK and Australia getting rid of.

They used to favour neutral policy instruments but by this year’s report you’ll recall that they were dead-keen – echoing the government – on singling out “investors” for much harsher treatment, tackling sypmtoms not causes. Could the Fund have imagined itself – all while still suggesting the financial system is sound – recommending a decade ago the sort of discriminatory measures they proposed in this year’s report?

Now in the Fund’s defence one could argue that housing policy itself is not really part of their mandate: macroeconomic and financial stability is their thing. But it is the Fund itself that repeatedly chooses to step beyond the narrower dimensions – how robust are the banks and the government finances – the housing policy, housing tax policy, policies on the sectoral allocation of credit (the latter I’m sure they’d have censured firmly 40 years ago).

What of productivity? Again, even though this is a longrunning New Zealand policy failure, it isn’t really that close to the IMF’s remit. One can be poor and stable, rich and stable, or – now New Zealand’s story – upper income and stable. Or unstable in all those states of income/productivity.

But again, at times the IMF chooses to offer its tuppenceworth (although in four of years I looked at they focused more narrowly and had nothing to stay on wider structural policies – some of that may be about the interests/style of individual mission leaders). But what of what they did say? A decade ago they were keen on lower income taxes. This year, there is not a mention of the government raising income tax rates. A decade ago they were keen on welfare reform with a focus on encouraging the unemployed back into work. This year, they explicitly welcome permanent increases in unemployment benefit rates. Three years ago they got brave and raised some doubts about increasing minimum wages too much – mentioning specifically downturn risks – but this year, no mention of steadily higher real minimum wages at all, even as they rightly highlight ongoing macro risks.

There is some continuity, but where it isn’t surprising or controversial (among officialdom and the main parties). They like foreign trade and preferential trade agreements – even as they have almost nothing to offer on why trade as a share of GDP remains so low in New Zealand. They are generally keen on facilitating foreign investment (which I welcome) and are reasonably consistently keen on R&D subsidies. A couple of years ago they were keen on the Provincial Growth Fund and even fees-free tertiary education but we must assume they were simply reporting and endorsing the ministerial preferences of the day. This year, of course, we have green and inclusive growth, but with no analysis, evidence or reasoning in support.

Of course, to some extent I am being a little unfair. These Concluding Statements are typically only two or three pages long, and you can’t put everything in that sort of space. I could – but won’t at present – go through the fuller Article IV reports and do a similar exercise. I’m pretty sure what I would find would be no more consistency through time (or across countries) but a bit more reasoning in support of some of the positions IMF staff happen to hold that year.

Does any of this matter? Not a great deal, at least if you start from a view that the IMF has no useful role in today’s world. But given that the institution exists, employs a lot of able people, and has access to the perspectives and experiences of a very wide range of countries (much more readily so than any one here, government or private, does) it seems a shame we don’t get something better. The IMF should be able to bring two things to the table: independence and a willingness to speak in a free and frank way into the local discussion, and the benefit of really good cross-country comparative perspectives and insights. As it is, we are mostly getting neither, mostly just getting reflected back the preferences and inclinations of the day’s ministers and officials, with perhaps a few (nearly random) asides, some marginally useful, but more often not.