Year: 2023

There was a blackball on expertise

Michael Reddell MPC, Reserve Bank Board, Treasury

(This is a long post. The Executive Summary is that there was a bar on any active or future researcher on macro or monetary issues serving on the Reserve Bank MPC when it was established. Everyone accepted that this was so, and both the Minister and the Bank had defended the bar. Recently, the Reserve Bank Board chair Neil Quigley persuaded Treasury to state publicly that it had all been a misunderstanding and there had never been such a ban. None of the extensive documentation supports Quigley’s belated claims or explains Treasury’s willingness to champion his rewrite of history.)

About six weeks ago the ban that had been placed on anyone with current or likely future research expertise or interest in macroeconomics and monetary policy serving as external members on the Monetary Policy Committee was once again in the headlines. The Reserve Bank Board had just advertised to fill the two vacancies that will arise next year (yes, you might wonder why they were advertising now when it isn’t clear who will form the next government or what their expectations for the Reserve Bank might be, but leave that for another day). In the advertisement it was pretty clear that the former ban had now been lifted. If so, that was a really welcome step forward. The proof would still be in the sort of appointments eventually made, and the strong suspicion is that the more important (but unwritten) blackball is still in place – no one seriously likely to challenge the Governor or known for thinking independently was likely to be appointed. But it was a start. And would at least mean the Board and Minister were no longer open to the charge of having the only central bank in the advanced world (or most of the rest) where relevant expertise was a formal disqualifying factor from membership of a monetary policy decision making body. The list of former leading central bank figures internationally who would have been disqualified under such a rule is very long indeed.

I idly wondered what had led to the change.

The Herald’s Jenée Tibshraeny has done sterling work in giving this issue some of the coverage it deserved (where, one often wondered, were the Opposition parties), initially at interest.co.nz and now at the Herald. She asked what had gone on and got a surprising answer from The Treasury and the Minister of Finance. It had all, we were asked to believe, been a misunderstanding, and there never was such a restriction. Tibshraeny’s 21 June story is here. I wrote about the story, documenting how improbable these revisionist claims were, here. And then I lodged an OIA request with The Treasury.

To step back for a moment, the existence of this restriction was first confirmed in a response to an OIA I lodged with the Minister of Finance after the first MPC appointments were made in March 2019. The Minister’s response is here. A short Treasury report to the Minister, dated 29 January 2019 and signed out by the Manager, Governance and Appointments contained the following paragraph on the first (of two) pages (it was a covering memo relating to getting the Minister to send a paper to Cabinet’s Appointments and Honours Committee to make the MPC appointments)

It didn’t leave much room for doubt, and came as no surprise to me because what was written there was what I had been told some months earlier by a well-qualified academic who’d expressed interest in the possibility of an MPC role. Here is how I described in a post when the papers were first released by Robertson

I couldn’t use that information when the person first told me – and had to wonder if somehow they’d got the wrong end of the stick- but it informed the framing of my OIA. The person concerned was told of this bar as it applied to people like him by both the recruitment consultants the Board was using and by the Board chair himself.

Tibshraeny gave the issue coverage. Here was her 1 August 2019 story. There were scathing comments from former Reserve Bank Governor Don Brash, critical comments from Eric Crampton (and some of my post’s critical lines), as well as some comments from former Reserve Bank Governor Alan Bollard suggesting that perhaps all that had really been meant was not having people with “market interests”. But what really mattered were comments from the Minister of Finance himself and an official “Reserve Bank spokesperson”.

Here was Robertson

which sounds defensive and unenthusiastic, but certainly not suggesting that there was not a restriction, let alone suggesting that a Treasury official had simply made a mistake in that January 2019 report.

And from the Bank’s side

To the first paragraph one goes “of course” (as in, we don’t want MPC members also selling their wares to hedge funds etc at the same time), the second para is beside the point (the issue with the blackball was about research), and as for the third……..doesn’t that first phrase (“looser criteria…..”) read almost exactly like the words of the initial Treasury report. There was no suggestion at all that some Treasury official had just got the wrong end of the stick. Rather, as was their right (and job), they defended the stance that had apparently been adopted by the Board and the Minister. And while it was an anonymous spokesperson, there is absolutely no way those lines would not have been cleared with the Governor, and probably cleared with – but certainly advised to – the chair of the Board, Neil Quigley. Had Quigley then thought the Treasury report had misrepresented him or his Board, it would have been easy to have issued a clarifying statement.

And there the issue lay for a couple of years – there were no external MPC vacancies, and Covid overran everything. But in early 2022 the first terms of two MPC members were coming to an end. And in the margins questions were getting raised as to whether the blackball restriction was still going to be in place. Tibshraeny – who had talked to at least a couple of us – was on the ball again and went and asked both the Minister and the Bank about the specific restriction. Her story appeared on 19 February 2022.

There are no quotes from either Robertson or the Bank (presumably she just got responses along the lines of “no, there has been no change” rather than anything more enlightening).

Tibshraeny went further, seeking comment from others. This time she sought comment first from John McDermott former Chief Economist and Assistant Governor at the Reserve Bank.

And he wasn’t just speculating about the nature of restrictions. He had still been Chief Economist and Assistant Governor in the second half of 2018 when these policies and restrictions were being formulated, and is an active participant in email exchanges among RB senior managers on the sort of people who might be appointed (that were contained in the Reserve Bank’s OIA release to me in 2019 around MPC appointments). He disagrees with the blackball restrictions, but doesn’t suggest anyone misunderstood, because he will have known that it did represent the agreed stance of the Board and the Minister.

She also got comment from Craig Renney

Renney also knew the restriction was for real, and never suggests – even though it might have suited his former boss if it really had been so – that it had all just been an unfortunate misunderstanding by a Treasury official.

(As it happens, in that Reserve Bank OIA there is a copy of the questions for the interviews the Board sub-committee (Quigley, Orr, and Chris Eichbaum) conducted for short-listed candidates for the MPC. It is interesting, although not conclusive on its own, that none of them invite candidates to offer any serious thoughts on monetary policy, frameworks etc. Note also that Chris Eichbaum – a VUW academic with Labour connections – used to be quite active on Twitter, and was not shy of disagreeing with comments I made about the Board or monetary policy, and never once suggested that the blackball didn’t exist, that it was all just a mistake by a Treasury official. Nor, of course, has Orr – not usually a shrinking violet when he thinks other people have the wrong end of the stick.)

Anyway, all that was the public record until 21 June when the new Tibshraeny article appeared. These were the key lines

From Robertson

and from The Treasury

I’d lodged an OIA with Treasury (maybe should have lodged one with the Minister too, but didn’t so) seeking to understand why they had said what they were quoted as saying. I got the entire 111 pages back on Friday afternoon.

Treasury OIA reply Aug 2023 re the MPC research blackball

Perhaps it amused Treasury to let me know they read my blog since the very first document released (but probably out of scope) was this advice from the manager of the macro team to colleagues in the media and governance bits of Treasury.

The Treasury comments were prompted by this request from Tibshraeny

Note that her request was cc’ed to media people in the Minister’s office and at the Reserve Bank.

I’m not entirely sure where she got the idea from that the 2019 line had been an error, although she illustrates her point by reference to Bob Buckle. I dealt with that point in my June post

Since then Buckle has finally delivered a conference paper (which I wrote about here) but that is 2023 and there seems to be no doubt that the blackball, if it once existed, does no more.

And this was the official Treasury reply

And this was not something just cooked up at a working level by junior staff. Two Treasury DCEs appear on the relevant email chains, as does the comment that the draft would be cleared by the Secretary’s office and sent to the Minister’s office before it was finally released to the Herald.

All the claims here about the 2018/19 process are simply false. Senior Treasury officials seem to have allowed themselves to be gulled into taking at face value an attempt by Neil Quigley, chair of the Reserve Bank’s Board (and Vice-Chancellor of Waikato University) to rewrite history, all the easier for them to do as it seemed to involve simply tossing under a bus the former Treasury manager (who signed out that 2019 paper) who no longer works there.

There is bit more context in the first draft response prepared by the current Manager, Governance and Appointments and the Treasury manager who was responsible for macro policy in 2019 (Renee Philip)

Later in the release we learn that in March this year Philip had had a meeting with Neil Quigley

This is a strikingly uncurious email (from an experienced manager to the Secretary to the Treasury and to the Deputy Secretary, Macro), in which it appears not to have occurred to her that the Bank and the Minister had defended the restriction in public (more than once), or that people who had been in a position to know – McDermott and Renney – while disagreeing with the policy had never once suggested it was all a misunderstanding. Or that the Bank’s defence of the restriction had used very much the same words – re future appointments – as were in the now-contested 2019 Treasury report. (And although she had apparently read my posts on the subject had not internalised the report of a qualified person who had explicitly been debarred from consideration.)

Quigley also cleared the Treasury June 2023 statement. Here is what he had to say then

(Nick McBride is the Bank’s in-house lawyer)

So we are supposed to believe that a fairly hands-on Board chair (there are lots of emails from him in various OIAs) simply wasn’t aware until this year of lines Bank spokespeople had explicitly addressed in 2019 (and again apparently in 2022) about a process he had been one of the key players in. The Tui ad springs to mind.

But none of it rings true. Perhaps no one at the Bank saw the initial Treasury report when it was written in January 2019 (although it seems not very likely given that the paper trail shows active engagement with the Bank and Quigley re MPC appointments issues in late January 2019) but it is beyond belief that Renee Philip hadn’t seen it (even though her comments suggest the macro team only really became aware of the issue after the OIA release in July 2019) as not only does the paper trail show that the request from the Minister’s office for the paper came first to the macro team but there is an extensive trail of emails from that time (Jan/Feb 2019) on MPC appointment issues which typically have both the manager, macro and the manager, governance and appointments on them. It seems very unlikely the macro team did not see the final (short) report. And there is also no sign – in the paper trail or his later comments – that the Minister or his senior staff read the Jan 2019 report and said “no, no, you’ve misunderstood, I never agreed to any bar like that”.

But, as it happens, we have contemporary lines from Quigley from the OIA the Bank released to me in 2019.

Mike Hannah was at the time the Board Secretary. He records the Board’s discussion the previous day, in a summary to be sent on to the recruitment consultants, in which the observations from the Board included “an academic researcher active in the Bank’s areas would likely be conflicted”. And Quigley welcomes the summary with no cavils or suggested amendments. It isn’t exactly the same words as turn up months later in the Treasury report but it is strikingly similar to those words (which Bank spokespeople later defended). It also aligns with the report from such an academic who had engaged with the recruitment consultants and with Quigley himself at the time.

The snippet is also interesting because it illustrates that at this stage of the process neither Buckle nor Harris were in frame, and casts further doubt on Quigley’s 2023 claim that in 2018 the Board had actively considered active macro researchers. Buckle comes into the frame a little later in this email from Hannah to Board members suggesting names proposed by Bank senior management. Note that Buckle is treated as a “former academic with an interest in policy”, not as an active (macro) researcher.

Now, 2023 Treasury officials cannot necessarily be expected to have had all this at their fingertips (although the relevant OIA was sitting on the Bank’s website, and Treasury does have a heightened monitoring role re the Bank), but what staggers me is the lack of critical assessment of the Quigley story.

Now, as it happens that is not universally true. In the latest Treasury OIA we find

Leilani Frew is the DCE responsible now for the governance and appointments function (and Stella Kotrotsos’s senior manager). Her instincts look to have been quite right…..but there is nothing else in the pack suggesting she did anything with them.

There was also this

James Beard is the Deputy Secretary, Macro. His instincts, while more limited, also seem to have been right, but again there is no sign his unease went anywhere either.

If either Frew or Beard were junior figures perhaps you might not be surprised they were ignored, but these are two of the most senior figures in the Treasury. It doesn’t reflect very well on them or on the Secretary or her office (whoever finally signed the statement out). Or, for that matter, on the managers past and present involved in responding to Tibshraeny’s request. You hope the standards they bring to their economic and financial policy advice are rather higher.

But if senior Treasury figures showed themselves gullible and too willing to go along, they weren’t the ones who perpetrated this exercise in mendacity.

I’d really prefer there to be a charitable explanation of Quigley’s comments. Perhaps if it was the June ones alone one might put it down to being caught on the hop on a busy day – he has a fulltime job and universities seem to be in some strife – but those comments are substantially similar to ones he is reported as making to a Treasury official in a scheduled meeting months earlier. It is hard to see any credible explanation other than an embarrassed attempt to rewrite history (would you want to be remembered as the academic economist who was responsible for banning active or future researchers from your country’s MPC?). In Orwell’s 1984 the bureaucrats literally rewrote the old papers. Thankfully – and for all their limitations – we have the private media and the Official Information Act.

If I was Treasury I would be fairly deeply unimpressed (as well as somewhat embarrassed myself), and if I were Tibshraeny the idea that I had simply been lied to by senior officials (directly and indirectly) wouldn’t have gone over terribly well either.

Secondary teachers’ pay and the Arbitration Panel

Michael Reddell Education

Having finished yesterday’s post I wasn’t going to give any more thought to the secondary teachers’ pay offer, but for some reason I was curious about the terms of reference the Arbitration Panel had been given, and found myself in the final report of the Panel.

The salary bits of it (the bits I read) were fairly underwhelming to say the least. I’m left assuming that by the time the two parties agreed to arbitration (not really arbitration, but a panel by that name) they both really needed a deal (grumpy parents, election looming etc), and the panel was really just a fig-leaf to enable everyone to save face. If it led to a settlement, both sides could point grumpy stakeholders (eg teachers or Treasury/PSC officials) to the panel and blame them for whatever was not to like.

(When you think of arbitration, one usually thinks of an arbitrator making a final decision. In this case however, the Ministry of Education simply agreed to recommend to Cabinet whatever the panel came up with and the PPTA agreed to recommend it to their members. The decisionmakers were still free to decide, settle, or continue in dispute. As it is, Cabinet has gone along, and the decision now rests with the PPTA members.)

The panel was, in principle, free to recommend whatever it liked. But…..there were the “guiding principles” of the two sides included in the terms of reference

Two mentions of “Te Tiriti” and none of educational excellence, and nothing at all from the government side about recruitment and retention of an able group of secondary teachers (had the government really thought the union bid was out of line with labour market conditions it would have been natural for it to have included recruitment and retention as a key consideration – ideally perhaps the key consideration).

And then there were the panel members. The chair was a retired High Court judge, but the other two were real insiders. On the one hand (presumably from the government’s side), Tracey Martin their former Cabinet colleague now chair of NZQA, and board member of NZTA. Safe for the Ministry/government side you would suppose. And then there was Craig Renney, economist for the CTU but also former economic adviser to Grant Robertson, reputed to be keen on a political career himself, and (as we saw earlier this week) active partisan player in the election campaign that was just about to get underway. He didn’t seem like someone who was going to make life at all difficult for the Ministry/government.

Both sides had to agree to the make-up of the panel, but if you were an ordinary teacher there might have been hints there that things were unlikely to go your way, no matter what the substance of the teachers’ case (which, when all is boiled down really should come down to the question of whether pay and conditions are sufficient to attract and retain the desired quality of teachers).

That wasn’t really how the panel went about things though: instead the nebulous “fairness, equity and affordability” were to the fore.

Note too those comments in para 4.3. We don’t have the submissions (presumably an OIA could eventually winkle out the Ministry’s) but what follows will suggest the submissions were probably anything but……but the parties will no doubt have been glad to read this soft-soap stuff.

The report goes on to note that the PPTA sought increases, partly backdated, sufficient to match the increase in the CPI (actual and forecast) over the proposed 3 year life of the deal (from the expiry of the old agreement in July 2022), while the government proposed something substantially less (a cut in real salaries). The union is reported to have cited the following considerations

Some of which are (much) more convincing than others, but several of which seem like very relevant considerations worth testing.

But instead, the panel reports that the Crown’s response was along these lines

Nothing at all about the relevant labour markets but, basically, “the government doesn’t want big wage settlements” (no matter how much inflation their central bank had generated).

I’m not completely averse to affordability arguments. If your business is in deep trouble and it is a question of whether or not you will even be able to stay in business lines like “I know inflation has been high and other wages are rising a lot, but I simply can’t afford it” make sense and may resonate. Rather less so when the employer is firmly committed to remaining in the business (running high schools and paying their teachers). If you are going to be in the business come what may, and care at all about offering a quality product, you simply need to match the market, and debate should centre on how best to make sense of the relevant market data, details of implementation etc.

Centralised wage-setting may be a far less than ideal model generally, but….it is what both the government and the union seem to like.

When it got to numbers, the report tells us this

I would usually have fallen off my chair when I read the Ministry’s LCI try-on, except that…..just yesterday chatting about this issue to someone I said “I don’t suppose they were dumb enough to have used the LCI as a comparator. Surely not?” And that was before I knew there was an economist on the panel.

The Labour Cost Index is a stratified measure (good) so not affected by compositional changes, but it is not a measure of wage and salary rates. It is, by design, much closer to a measure of unit labour costs (respondents are supposed to adjust their responses for things like productivity gains). Unit labour cost measure can be very useful in their own right – for insights on competitiveness – but not for benchmarking wage increases.

SNZ publish a (stratified) raw measure of wage increases, the LCI Analytical Unadjusted series, which is a stratified measure of wage rates. You can see the difference in this chart.

I’m quite sure the CTU’s economist knows all about this data (probably the Ministry does too, but they had an incentive to spin).

And if you are doubtful of my point, here is a chart of the QES measure of average ordinary time hourly earnings (which has all sorts of compositional issues and so is a lot more volatile) and the LCI analytical unadjusted series.

The LCI analytical unadjusted measure might be a mouthful of a label but it is the measure to use for purposes like this. I used the private sector component of it in yesterday’s post, because private sector wages are more responsive to market forces, less constrained by political imperatives and rhetorical stances. The panel itself is just wrong: there is no merit to using the plain LCI in exercises like this.

But nothing deterred here is the panel

Like me yesterday, they use Reserve Bank May MPS forecasts. They extend the analysis to June 2025, which is sensible as that seems to be the end of the proposed contract period. This is what the chart looks like using the LCI Analytical Unadjusted series (note that both charts use private sector wages, because that is what the Reserve Bank forecasts).

If you happen to prefer the (noisier but better known) QES measure, on RB forecasts it will have increased 27.7 per cent over this period, a bit more again. (The panel does show a chart of the QES, LCI, and CPI, but because the LCI itself undershoots inflation – see above – this seems to be an exercise in distraction, compounded by their repeated attempt to call the LCI a measure of “wage rates”, which it simply is not.

(Set aside here the absurdity of negotiating future wage increases in a climate where no one has any very robust idea what will happen to inflation in wages or prices over the next couple of years, having all gotten the last couple of years so wrong. But…..the Panel was stuck with that model.)

Anyway, the panel continues

Both are garbled messes really worth nothing. For example, few workers will have had wage increases formally indexed to the CPI (then again few workers have mass multi-year collective contracts) but as the chart above shows, over the period both sides want to look at, and using the forecasts both sides seem happy using, private sector wage rates are expected to have risen more than the CPI. The Panel pats the teachers on the head and suggests it wouldn’t be good for teachers to have their pay increased with inflation – even though future contracts will be negotiated in future years – and instead it proposes to give them even less…..

The following paragraph is made worse by the fact that the panel fails to recognise that it is using the wrong wage measure, and that it is quite normal for wages over time to rise faster than prices (that, ultimately is what productivity growth does).

Then the panel does another exercise in distraction. Eschewing the CPI they drag up the Household Living Price Index.

As it says, there are price indices by income quintile. What it doesn’t say is that the increase in the HLPI for the income quintile 5 from June 2021 to now was 15.9 per cent, while the CPI rose “only” 13.8 per cent. It isn’t clear what the last 10 years average increase in the HLPI has to do with anything and of course, there are no forecasts for the HLPI – so the Panel just plucks out of the air a number that suits the bottom line they are trying to produce.

All of this might seem tediously mechanical. What, you might be asking, did they make of recruitment and retention arguments? The short answer is that they never even tried. Here are their own words.

Remember how early on the Panel praised the submissions as “high quality and comprehensive”. But on this core issue they seem now to be saying they weren’t even in a position to know whether the submissions were of high quality. And they simply chose not to engage on the substantive issue. If there is, was, or will be a recruitment and retention issue, or it goes away when this offer is accepted, that will be all by chance because the panel had nothing even to say, and didn’t even try.

So, the bottom line of all this was:

Panel wage increase recommendation to June 2025: 14.5 per cent

CPI increase over same period: 20.7 per cent

LCI (private sector) Analytical Unadjusted increase: 25.2 per cent

QES private sector ordinary time average hourly earnings increases 27.7 per cent

Those last three use (as the panel did) Reserve Bank forecasts to June 2025.

So the Arbitration Panel proposed not only a material cut in real wages of teachers, but an even more substantial cut in real teacher pay relative to pay in rest of the economy (private sector). The logic of their position must be that there was an abundance of able teachers, easily retained, and now (real) pay rates should be cut to bring the market more into balance. But, of course, they never engaged on the substance of that issue and show no sign of having thought about it at all.

And just in case you were thinking, well maybe professional pay has increased less than that of all private sector workers in recent years, well…I checked that too

There was a bit of a dip in the second half of last decade, but the Arbitration Panel was focused on the period since mid 2021, and there is nothing of interest in that relationship over that specific period.

This Panel report was simply a shoddy piece of work, clearly much more about politics (face-saving settlement) rather than serious in-depth analysis and thought. I’m not usually a champion of teachers, and the standard of education has clearly been slipping, but on the government’s own terms – they deny the decline – it just seems extraordinary that over a period in which private sector wages are expected to have at least matched inflation, their panel proposes a material cut in teacher real wages, without a jot of evidence (or apparent thought) that recruitment and retention for (capable) secondary teachers has become materially easier than for the labour market as a whole.

Presumably the teachers will end up accepting the recommendation. Maybe at this point they should (election, new fiscal stringency etc), but it hardly seems a robust long-term basis, and we can only look forward to whole new disputes two years hence (especially if, as is far from impossible, the Reserve Bank inflation forecasts they all relied on prove to have been too optimistic (low)). What will attendance, achievement, and recruitment/retention look like by then?

(Some longer-term charts are in yesterday’s post.)

UPDATE: Saturday

I found secondary teacher salary scales back to July 2009, and had a closer look at matching the various entry and maximum salaries for different levels of qualifications. These don’t matter for the current proposal, since it lifts all rates by a common 14.5 per cent, but it does over longer period.

G3 is essentially a teacher with a general bachelor’s degree

G4 is a teacher with an honours degree or subject qualifications in two subjects

G5 is, as it says, a teacher with a masters or PhD

Maximum pay rates for all 3 levels have increased by much the same extent (49.4%) since July 2009 so I’ve shown only the common increase in maxima. Here are real wages changes for secondary teacher entry level salaries and maxima, alongside the real increase in private sector wages (all, as above, using RB May 2025 forecasts for the final two years of the proposed teacher agreement).

If only there was a supportive government

Michael Reddell Education

I picked up The Post this morning and in an article about some of the fiscal challenges governing parties may face came across this line about the latest pay offer to secondary teachers. The journalist might have been channelling the Beehive with his line that “it’s a very good offer”, “the union would be mad to turn it down”, and (most striking to an economist) “remarkably the pay hike is more than double that of the rate of inflation”.

Knowing it was a multi-year settlement, well after the expiry of another multi-year collective, that was really a bit much: apples for oranges comparisons sprang to mind. So I went and tracked down some numbers, and then some more numbers. The first round were in a Twitter thread here.

Over time one normally expects to see real (inflation-adjusted) wages rising. In New Zealand, as in most places, they were last decade. But times have been tough since. In this chart I’ve used the best (stratified) measure of private sector wages rates, deflated by the CPI.

In the last couple of years there has been a significant setback. On this measure of real wages, as at Q2 this year real wages were no higher than they had been four years earlier. There are probably several factors at play: prices (inflation) often adjust faster than wages, especially when there is an inflation shock out of blue, forecast by almost no one. But – despite the record low unemployment rate – there are also other dragging factors; notably the fact that there seems to have been very little economywide productivity growth over the last several years, and the terms of trade have also fallen quite a bit. There are no mechanical linkages from any of these influences to wage rates, but in many ways the recent poor performance of real wages might not be considered too surprising.

But even so, on average, New Zealand real wages rates last quarter were still about 7.5 per cent above where they’d been at the start of the period shown.

Why did I choose that period? Because back in the dark woebegone (or so the left and the teacher unions would have it) days of the Key government the second most recent secondary teachers’ collective employment was signed (October 2015). Backdated a few weeks, the teachers got a payrise, and an agreement to a couple more pay rises over the following couple of years. Multi-year nominal agreements make some sense (keeping down negotiating costs etc) when inflation is low and stable.

In July 2019 another three year agreement was signed, this time by the Labour government.

You can see the first column of that table is the final column of the previous table. You can also see the new top of scale step added to the table.

The latest offer by the government is for increase of 6 per cent backdated a few week to 3 July, another 4 per cent next April, and a final 3.9 per cent on 1 December next year. I’m not clear whether the proposed agreement would be for two or three years, but these are the wage increases offered. The July 2023 increase appears to represent the first salary increase since July 2021, in which period inflation has run far away that earlier negotiators will have expected. As it happens, the labour market has also been very tight in that time.

What I was curious about was how teachers were doing (a) relative to the CPI, and b) relative to private sector wages (why private sector? Because they tend to move a bit more flexibly in response to economic conditions rather than political imperatives.)

The secondary teachers’ scale now has 11 steps. For simplicity, I looked at just bottom one (T1), step 5 (T5), and the top step (was T10, now 11). Incorporating the 3 July increase teachers are being offered this is how real teacher salaries from 2015 to now compare with the movement in private sector real wages over the same period.

All three steps leave teachers right now behind the private sector as a whole, with only the effect of that new top step added in 2019 bringing that group of teachers somewhere close to the average private sector movement over those eight years.

But, of course, the offer includes two more pay increases for secondary teachers. Those are known, and if the offer is accepted, guaranteed. We don’t know what the inflation rate will be over that period (or what inflation rate either the teachers or the government had in mind) but the Reserve Bank is responsible for inflation and they publish quarterly forecasts. The most recent ones were published in the May Monetary Policy Statement, and my sense is that they may be a little low. But in the next chart I’ve used them to deflate the teacher pay rises.

We also don’t know what will happen to private wages, but again the Reserve Bank publishes forecasts (they publish forecasts for the private sector LCI, but I’ve adjusted them to a private sector LCI (analytical unadjusted) using the recent gap between the two series. The Bank expects quite a bit of growth in private sector real wages in the next 18 months.

Over 9 years, on these forecasts, private sector real wages would have risen by 11.6 per cent, but the real wage rate for starting teachers will have fallen, and that for the middle step hardly have changed at all. Even that new top step included in 2019 doesn’t bring the real increase close to that for the average private sector job.

(There is a one-off lump sum payment as part of the offer, but that is best seen as “compensation” for teachers having been caught under a multi-year agreement with hugely high unexpected inflation – the direct responsibility after all of a government agency. It doesn’t affect real wages looking ahead, or thus recruitment/retention choices/challenges.)

Of course, it is up to the teachers whether or not to accept the offer. Perhaps on average it replicates what a market process would eventually have thrown up, and recruitment and retention will no longer be a challenge for schools once this agreement is in place. Or not.

But it is a little curious to contemplate the sight of a left-wing government, of a party long quite closely aligned with teacher unions, asking teachers to agree to significant real wage cuts relative to what was envisaged when the previous agreement was signed in 2019. Critics of the declining quality of the education system might suggest that such an outcome as only fair and reasonable, but I rather doubt that is the message the former and current Labour Ministers of Education have in mind.

And in a high-performing education system you probably wouldn’t expect to see secondary teaching real wages falling, and falling behind those of the private sector as a whole.

But with only one child left in school, if the offer ends the strikes for the last 18 months of our direct exposure to the system I guess that will count as some small mercy.

PS: One slight consolation of the current outbreak of inflation is the reminder for a new generation of just why high and unpredictable inflation is a bad thing. Not only do multi-year agreements become a lottery, but there is all that money illusion that leads people to see a 14 per cent one-off increase as large or generous,

Policy costings offices in Australia

Michael Reddell Fiscal policy

After my post yesterday I remembered that I had also written a post in 2019 based around the excellent talk Jenny Wilkinson, then the Australian federal Parliamentary Budget Officer had given at Treasury in 2019. I ended that post this way

….it was a very useful presentation (I hope Treasury makes her slides available) from a technocrat’s technocrat.  I’m left sceptical on two main counts:

  • first, whether elections ever much do, or really should, turn much on precise fiscal costings. Perhaps it appeals to inside-the-Beltway technocrats to conceive of that model, but I see elections as mostly about things like competing visions, competing personalities, competing diagnoses, and competing claims to competence.  If so, why spend so much on highly-detailed and expensive state-funded costings, that the parties themselves don’t think it worth spending their own money on?
  • second, we should think harder about the whole panoply of support and information etc we provide to political parties and the public, preferably without further reinforcing the favoured position of established large parties.  Thus, it is interesting to note that written parliamentary questions are much much less used in Australia, as a way of garnering information, than is the case in New Zealand. (“In the years 2008–2014 only about 8 questions in writing were being asked each sitting day, but this number increased to 19 in 2015, and was 14 in 2016.”).   What about better resourcing select committees (to me a better use of money)?  And if we threw in a free PBO service, should we reduce existing money parliamentary parties are funded with?  If not, why not?  And would resistance to that idea suggest the costings were some epicurean nice-to-have rather than a central element of a well-functioning democracy?  And then, of course, there is the OIA.  Mightn’t it be better to require agencies to release documented costings models themselves, in ways that would allow political parties and their consultancy firms to use them to the extent they judge appropriate (and not otherwise).

And if I had the analytical resource implied by 40-45 more staff and had to deploy it somewhere in the public sector, it is far from obvious that a policy costing operation (with supporting analysis and research as the PBO) would offer the highest benefit-cost ratio.

Rereading that got me thinking again about the resource requirements for such an agency in New Zealand, that both Grant Robertson and Nicola Willis now seem keen on (despite apparently straitened fiscal circumstances). As I noted in yesterday’s post, no small advanced economy I’m aware of runs one of these costings offices (Australia, you will recall, has five times our population and rather more than that multiple of real GDP, the real resources used for this luxury product). And policy issues aren’t really less complex or less numerous just because your country is smaller (Australia has some federal/state interaction issues, but they aren’t likely to material affect the potential demand for policy costing work).

As far I can see there are three such costing offices in Australia. I will focus on the federal and Victorian versions, but the first such entity was the New South Wales one.

The NSW entity is a bit of an odd beast, and I don’t think anyone has championed anything like it in New Zealand. It is set up only for the 9 months prior to each state election (not sure if snap elections are allowed in NSW), and can be used only by the leaders of the two main parties, who in turn are required to submit all their policies to the PBO 10 days before the election, and the PBO is required to publish costings for them at least 5 days before the election. It seems to be staffed largely by temporary secondees from existing public service departments, overseen by an academic. From the report on the 2019 election, it seems to have had about 20 staff at peak

In practice, it seems that parties work with the PBO behind the scenes in advance getting their policies costed, and either modifying or dumping ones that come in too expensive etc, with only the final policies and the costings of them seeing the light of public day.

If you believe in these sorts of things, I guess one can see the logic of the NSW approach, as it tries to put the main Opposition party on something like the same footing as the governing party. It isn’t a small financial or resource commitment (about the total staff numbers of, say, our Productivity Commission), for what is after all only a state government, but it is only for 9 months every three years.

What of the federal Parliamentary Budget Office? There is quite a lot of material in that earlier post. One other extract that might be worth bringing forward is

…in answer to a question from me, Wilkinson observed that what the PBO can best do is cost programmes that represents small deviations from the status quo (they have good tools to estimate direct and immediate fiscal costs/gains) while wider economic second round effects, and the associated fiscal impacts, are likely to be small.  But, and using her own (deliberately extreme) example, if some party were to campaign on getting rid of the welfare state, her office could do the direct fiscal costs, but could offer little or nothing on the wider economic (or social) effects of such a policy, including the possibility that it might have large long-term indirect fiscal implications.    They will only offer qualitative statements about those wider effects.  Which left me thinking that the the PBO probably does very well on things that don’t matter that much, and can’t offer much on the bigger issues that elections probably should really be about (whether about the welfare state, climate change, productivity or whatever).   

They do a lot of costings

Another aspect of the presentation that surprised me was (a) the number of costings the PBO does, and (b) the extent to which demand is not concentrated just in the pre-election period.  In fairness, she noted that the latter had surprised them too.  In the most recent year (an election year) they’d done 2970 costings, while in the previous two non-election years they had averaged about 1700 costings. Only MPs can request costings, and there are 227 MPs (across House and Senate).     Those numbers don’t mean 2970 separate items of policy, as many of the costings will be, in effect, rework as members or parties iterate towards a policy that meets their ends and will be scored by the PBO as not costing too much.

but note (see above) how much less extensively written parliamentary questions are used in Australia.

At the time of that 2019 presentation, Wilkinson told us her office normally had about 45 staff, scaling up to around 55 at elections (and recall that this is a federal government, in a system where a lot of policies are state responsibilities). The table in the latest Annual Report suggests that is still about right

What of the Victorian state Parliamentary Budget Office? Here is what they say they do

All MPs have access (unlike in NSW).

This doesn’t come cheap. Their documents say that for last year’s election they peaked at 26 FTEs, and they appear to have a permanent staff of about 16.

For a system of unitary government it seems reasonable to think in terms of the combined Victoria plus federal offices (which thus cover all the policy areas that affect Victoria, whether via federal or state policy). That seems to involve a base level of 60 staff, scaling up to perhaps 80 in the run-up to elections.

Now, of course, Australia is a fairly big country. But as already noted, neither the number of policy issues nor the design complexity of those policies is really scalable with the size of the country. And it seems most unlikely that one could do a worthwhile job – across the multiplicity of areas of policy – with 12-16 staff in New Zealand. In fact, I find it difficult to see how it could be done well – and there is really no point if it is not done well – with fewer than perhaps 30-40 staff.

That would be bigger (much bigger) than either the Productivity Commission or the Parliamentary Commissioner for the Environment (21 staff). Would it be a priority use of scarce resources for taxpayers to be putting this additional financial assistance towards political parties and MPs? I continue to think that better-resourcing select committees would have a much larger payoff for citizens and good governance. There is likely to be a good reason why no other small advanced countries run state-funded policy costing offices (while parties themselves are of course free to use economics and other consultancy firms to the extent they find useful – in a political market).

Issues of scale are very real for small countries’ central government policy functions. I’ve already mentioned that the Productivity Commission has 15-20 people in total. To the extent there was an inspiration behind our Commission (as distinct from a bauble for the Key government to throw ACT’s way), it was the Australian Productivity Commission, which has over the years produced a lot of useful reports. The latest Annual Report suggests that Commission has 165 staff and 12 commissioners. The sorts of issues facing Australia are not likely to be any less numerous or complex than those facing New Zealand, and even if the staff of our Commission walked on water they simply could not match the value that could be added by the Australian Productivity Commission.

I would have thought there was no credible way we would devote 180 people to the Productivity Commission – nor do I think we should – but I guess if the Ministry for the Environment now has more than 1000 staff really who knows anymore. But with 15-20 people it was always going to be vulnerable to going the way it has, and was always going to struggle to maintain depth and critical mass.

The pool of really able people is small, and fiscal resources are limited (in a smallish underperforming economy). It just doesn’t make a lot of sense to be thinking of putting dozens of people into helping political parties cost their specific policies. On the track record of their performance, nor does having 15-20 people in a Productivity Commission that now seems, in practice, to perform a more general role in support of political parties of the left. A new government should rebuild Treasury, and if there is resource it would be better spent strengthening select committees to scrutinise actual legislation and actual government agencies, rather than (further) funding the bids of the parties competing for the keys to the Beehive.

Policy costing

Michael Reddell Fiscal policy

Yesterday one of the Labour’s surrogates – Craig Renney, economist at the CTU, but also former adviser to the Minister of Finance (and reputed to be interested in being a Labour MP himself) – came out with a short document attempting to put a fiscal frame around National’s election promises. (One might have thought that if you’d been a part of enabling an $11bn hole in the government finances – the LSAP losses – you might have been a bit more modest in your rhetorical tone, but I guess he was only a (very senior) adviser).

It is explicitly partisan political in nature, and heavy on rhetoric. The flavour is perhaps conveyed by the front cover

As anything other than partisan spin though, it was a strange document. I’m as keen as anyone to see National’s programme (with numbers), but then in a week when the PM has been going round distinguishing between Labour Party policy and government policy, the same could be said of Labour’s (as yet largely unannounced) programme.

Renney’s document is built around an attempt to show that what National has announced so far does not fit within the operating allowances for the next three Budgets set down by the Minister of Finance in this year’s Budget. I have no reason to doubt that his numbers are approximately right. But (not only is it not clear that National has yet announced all its policies) there is no obvious reason why National would regard itself as bound by the operating allowances the Labour Minister of Finance had put in his pre-election budget. After all, Labour hasn’t in the past, and is highly unlikely to do so next year were it to be re-elected. (The operating allowance framework is in any case quite badly flawed as any sort of future signal, but especially when inflation is jumping around.)

I’m not championing what we know of either side’s fiscal policy. From both sides, there seems to be a disconcerting falling away from a commitment to budget surpluses, except in that vague distant future sense of the early St Augustine (“Lord, give me continence and chastity, but not yet”).

But Labour’s own (official government) numbers already have about them a considerable air of unrealism. In this year’s Budget, the only hard numbers – those planned for 23/24 – showed a slight increase in core Crown primary spending (ie excluding finance costs) as a share of GDP, but then the vapourware numbers – the ones relying on those operating allowances – show a fall from 31.2 per cent of GDP this year to 29.7 per cent in 2026/27. Another way of looking at those same numbers is to calculate – all from Budget numbers – real per capita core Crown primary spending over those three years Renney focuses on. On Labour government numbers, real per capita expenditure is projected/planned to show no growth at all in the next three years. Does that seem like a prospect that would align with what we’ve seen of this government’s approach to spending in recent years (in an era of ageing populations, public sector wage pressures etc)? Not to me. And the last three years have seen a single party government, and on all the polls if Labour were to get back in it would be dependent on the even less fiscally disciplined, less inclined to expenditure restraint, Green and Maori parties. With a Labour leader who has already ruled out the wealth taxes those two parties favour to help pay for their fiscal ambitions.

There is also the small matter of scale. Renney’s claims are that there is a gap of $3.3-$5.2 billion over the three fiscal years in questions. Since core Crown primary spending over those years is estimated at in excess of $400 billion any such gap is 1 per cent spending (or about 0.3 per cent of GDP). Seems a slim basis for such florid headlines.

But it will be good to see National’s numbers. In a better world, they would be credibly showing a commitment to a structural fiscal surplus next year. But given that Labour’s vapourware tiny surplus the following year was looking shaky from day 1 (once Eric Crampton pointed out the tobacco excise tax losses they and Treasury had accidentally left out) I don’t suppose it is likely.

But no doubt Renney’s report achieved its political end and put National and Willis on the back foot for a news cycle. National’s response didn’t seem much better. It seemed to consist first of suggesting that the economist of the CTU shouldn’t be commenting in public, which was a bit odd to say the least. And then we had the attempt to reclaim the news cycle by suggesting that it all (what?) was down to Grant Robertson not having followed through on the earlier plan to set up a budget-costing unit. National had (rightly in my view, see below) opposed the idea of such a unit when Labour and the Greens were championing it, but apparently when Willis had become finance spokesperson she had written to Robertson to express National now being in favour. Nothing had happened in the intervening year or so.

I wrote a lot about the idea of a policy costing unit here pre-Covid when the idea was being worked up by the government and The Treasury (there was a formal consultation process at one point). My most recent post on the issue was here. I ended that post with this thought

It won’t improve policymaking, it won’t change the character of elections, but it might –  at the margin –  create a few more jobs for economists.

I remain staunchly opposed. This was an extract from a submission to the Treasury consultation

Parties have adequate incentives already to make the case for their policies, in whatever level of detail the political (voter) market demands, and… already have access to the Parliamentary Library resources, parliamentary questions, and Official Information Act requests.  A policy costing office –  not found in any small OECD country –  would be, in effect, just a backdoor route to more state funding of parties (and not necessarily an efficient route – bulk funding would be preferable if state funded was to be more extensively adopted).  It also reflects a “inside the Beltway” conceit that specific costings are highly important, and that use of a single “model” or set of analysts somehow puts everyone on equal footing  (it doesn’t –  public service analysts having their own embedded assumptions about what is important, what behaviours are sensitive to what levers etc.)   With the possible exception of the Netherlands, I’m not aware of any country where a political costings office products plays any material or sustained role in election campaigns and outcomes.

Here was the list of other reasons from that 2019 post

I’ve listed most of my objections previously, but just quickly:

  • there isn’t an obvious gap in the market.   At present, political parties produce costings (sometimes reviewed by independent experts) to the extent they judge it to be in their own interests to do so.  Voters, in turn, can judge whether the presence or absence of any costings, or any debate around them, matters much.  Existing parliamentary parties have access to considerable taxpayer resources which they can draw on to develop and test policy proposals,
  • it isn’t obvious when, if ever, a New Zealand election in at least the last fifty years has turned on the presence, absence, quality (or otherwise) of election costings.  It is a technocratic conceit to suppose otherwise: people vote for parties for all sorts of reasons (values, mood affiliation, fear/hope, being sick of the incumbent, trust (or otherwise)) which have little or nothing to do with specific policy costings,
  • the relevance of specific policy costings (and indeed overall fiscal plans) is even less under MMP than it was in years gone by.  Party promises are now little more than opening bids, as coalitions of support are put together after the election to govern (and on almost every specific piece of legislation).  We simply aren’t in a world where a few dominant ministers dominate a Cabinet which in turn has a majority (or near so) in the government caucus, which in turn has an unchallenged majority in Parliament,
  • the “fiscal hole” argument (from the 2017 campaign) remains an utter straw man in this context.   First, when Steven Joyce made his claims in 2017 lots of people, including experienced ex-Treasury officials, weighed in voluntarily, and debate ensued about whether, and in what sense, Joyce was saying something important.  The system –  open scrutiny and debate –  worked.  And, secondly, a policy costings unit –  of the sort the government apparently envisages – would not have made any useful contribution to such a debate, which was about the overall implications of Labour’s fiscal plans, not about the costs of specific proposals Labour was putting forward.     Elections are messy things –  always were and probably always will be, and that isn’t even necessarily a bad thing.
  • some of the arguments made for a policy costings unit might have more traction if, somehow, every political party and candidate could be forced to use it (say, submit all campaign promises to the costings unit at least three months prior to an election, with the costings unit issuing a report on all of them say at least one month prior to an election).  But even if you thought that might be a good model, it isn’t going to happen (and there is no credible way that such a model could be enforced).  Instead, the proposed costings unit will be used when it suits parties, and not when it doesn’t, and will probably be most heavily used by parties that are (a) small, (b) cash-strapped, and (c) like to present themselves as policy-geeky.  The Greens, for example.  One might add that the unit would most likely be used by parties that believe their own mindset is most akin to that of those staffing the unit –  likely to be a bunch of active-government instinctively centre-left public servants.  Embedded assumptions can matter a lot –  The Treasury used to generate wildly over-optimistic revenue estimates for a capital gains tax, and it was probably no coincidence that as an agency they supported such a tax. 
  • the policy costings unit seems, in effect, to largely represent more state-funding for (established) political parties.  That might appeal to some, but even if you thought more state funding was a good idea (and I don’t) it isn’t obvious why this particular form of delivery is likely to be the best or the most efficient.  Money might be better spent on research and policy development (say) rather than “scoring” at the end of the process, for detailed plans that will almost inevitable change before they are ever legislated.  And if we want to spend more on policy scrutiny, I reckon a (much) stronger case could be made for better-resourcing parliamentary select committees.
  • the interim proposal for next year’s election would enable only parties already in Parliament to utilise the facility.  Again, this has the effect of further entrenching the advantage established parties have in our system (I hope it will be re-thought when the legislation itself is considered).
  • practicalities matter: there probably won’t be much demand on a policy costings unit in the year after an election, and could be quite a bit in the year prior to one.  How then will be unit be staffed and a critical mass of expertise maintained?  If people are seconded in from government agencies, would we really have an independence (including of mindset and model) at all?  And costings skills aren’t readily substitutable with bigger-picture fiscal policy (or macro policy) analysis skills.
  • the lack of transparency around the proposed institution should be deeply concerning.  As far as I’m aware there has not yet been any indication as to whether the policy costings unit would be subject to the OIA (as the Auditor-General and Ombudsman are not, and nor is Parliament more generally).   The Minister of Finance has indicated that any costings the unit did would only be released with the consent of the political party seeking the costings.  That should be a major red flag.  In my view, any new unit should be (a) explicitly under the OIA, and (b) the enabling legislation should require that any costings done for political parties should automatically be released 20 working days after being delivered to the relevant political party (or more quickly if the costing is delivered within 20 days of an election).  A policy costings unit should not be a research resource for political parties – the only possible basis for confidentiality – but a body that at the end of the process provides estimates based on the details the relevant party has submitted. (As I understand the system in Australia, costings provided during the immediate pre-election period are automatically released, but others are not.)

The fourth bullet there – re the 2017 “fiscal hole” debates – is germane to Willis’s claims in the last 24 hours. The sort of policy costings unit that has been proposed costs specific policy proposals, but does not provide reports on the coherence or otherwise of overall fiscal strategies. The presence of such a unit would have made no obvious difference to anything about the furore around the CTU report.

From a more narrowly political perspective, one might also note that if National is really championing this new source of employment opportunities for economists, and (which is what it is) additional state funding for political parties, it isn’t a great signal of the seriousness of their commitment to fiscal restraint. Renney might, after all, have the beginnings of a point.

Incidentally, in this rather silly political debate, Grant Robertson emerges no better than anyone else. He is reported as having said that National’s change of heart on a policy costings unit had meant it was too late to have done anything for the 2023 election. Except that he himself in 2019, announcing the new policy costings unit policy Cabinet had just agreed to about a year out from the 2020 election, explicitly announced a transitional non-statutory arrangement for the 2020 election, pending full establishment in 2021. If Willis’s change of heart was a year or more back, presumably the same could have been done this year. (I’m glad he didn’t of course.)

Finally, I have seen this morning at least one commentary suggesting that independent fiscal institutions are now the way of the world, the OECD champions them etc. A policy costing unit is not really what most countries – or international agencies – have in mind in advocating such institutions, which are typically more about independent monitoring and reporting on government fiscal strategy and policy (ie macro in focus). Very few countries have state-funded policy costings units, none of them small and (by advanced country standards) relatively poor.

Inflation and monetary policy: looking across countries

Michael Reddell inflation, Monetary policy

Time moves on. This post was going to be run late last week once the last OECD inflation data for the June quarter (that for Australia) came out, but a bad cold ran through the house and not much got done. Last night, July inflation numbers were released for the euro-area (remember that NZ only recently got mid-May’s numbers), but this post is going to focus just on the numbers to June.

This is annual CPI inflation ex food and energy (the only core measure available for a wide range of countries) as at the end of June. The sample of countries is the OECD countries/regions with their own monetary policies, excluding Turkey (with off the charts crazy monetary policy and inflation) and the OECD’s poorer Latin American diversity hire countries (but note that two of those latter countries’ central banks have already started cutting policy rates). Of two other advanced countries not in the OECD, Singapore’s (headline) inflation peaked at 7.5 per cent, and Taiwan’s at 3.6 per cent.

The diversity in outcomes across countries isn’t often recognised. Politicians and central bankers have both tended to go along with lines about “everyone is experiencing much the same thing” (which is a convenient line for avoiding specific and localised accountability). But they aren’t.

Pre-Covid, inflation rates across countries were very tightly bunched (in 2016q4 for example, the lowest core inflation rate for these countries was -0.4 and the highest was 2.9 per cent, at present the range is from 1.6 per cent to 16.2 per cent)

And here is how New Zealand has gone on this metric over the same period relative to the median of these 16 countries/regions.

Pre-Covid our core inflation rate was around the median (altho perhaps showing signs of beginning to pull away) but over recent years core inflation in New Zealand has been consistently higher than in other OECD countries (and of course now miles above target). That is on the Monetary Policy Committee. Note that at least on this measure there is no sign yet that the median country’s core inflation rate is yet falling.

There are other core inflation measures, and each country or central bank often has favoured or specific ones, sometimes ones best suited to particular idiosyncrasies at the time. But a fair number of countries or central banks have and publish either trimmed mean or weighted median measures (others have and use them – seen at times in speeches etc – but don’t seem to make the data series routinely available). It would be great if there was a consistent collection of these (generally superior to crude exclusion) measures across advanced countries, but there isn’t.

I did what I could and found trimmed mean and/or weighted median data for eight of the countries above (NZ, Australia, US, UK, Canada, Switzerland, Sweden, Norway). Even then it is complicated by things like having only a chart for one country, and inconsistencies in whether there is monthly/quarterly or just annual data available, and in whether or not seasonally adjusted data is used (NZ doesn’t). Oh, and the US has fuller data for PCE inflation – the Fed’s focus – than for CPI inflation.

Here is where the annual rates of core inflation stood for these countries at the end of June (there are no weighted medians for Switzerland and the UK)

And here is the time series for the five countries with both weighted median and trimmed mean annual rates

It is a mixed picture. Core inflation in Sweden and Canada has clearly fallen, and Australia seems to have as well, although to a lesser extent. Things are still getting worse in Norway, and in New Zealand things are probably best seen as going sideways. Of the other countries, the chart of trimmed mean inflation in the UK suggests they are still very near a very recent peak, and Swiss trimmed mean inflation is now down a little from peak.

What of the US, which gets most coverage? Focusing on the PCE measures, core inflation is clearly falling

Most countries don’t provide quarterly or monthly percentages changes, but we do have that data for New Zealand and Australia (in New Zealand’s case complicated because SNZ does not – for some inexplicable reason – use seasonally adjusted data to do the calculations. There isn’t much seasonality in the resulting series, but using raw data tends to skew downwards the quarterly changes – when, eg, there are things that reprice once a year.) Here is the NZ chart

and the Australian one

For Australia, the falling rate of quarterly core inflation is now pretty clear. Both measures now paint much the same picture. But for New Zealand while the trimmed mean suggests quarterly inflation has peaked (quite some time ago), a) there is no hint of that in the weighted median, and b) in the last couple of quarters there is no sign the trimmed mean is falling further. The fact that the two series have re-converged suggests not much grounds for comfort about New Zealand core inflation (especially when put together with the simple ex food and energy measure). On balance, perhaps we could say that the worst may have passed, but none of the series are yet suggesting anything like a quick convergence back to target (recall, the MPC is required to focus on the 2 per cent annual target midpoint).

Which brings us to monetary policy.

At their last review – incredibly, scheduled deliberately a week BEFORE New Zealand’s rare and infrequent CPI data came out – the MPC declared itself thus.

It isn’t clear to me how (a) any central bank can credibly claim to be legitimately “confident” about anything much at present (if your models got inflation so wrong over 2020-2022, why would you be confident things were working just fine now, and b) how the RBNZ MPC any particular had found any reason in the data (let alone the CPI data they chose not to avail themselves of) for their particular breed of “confidence”.

I checked the RBA and Bank of Canada statements last month: they didn’t seem confident (much more, as you might expect, data-driven). Nor did the Bank of England or the FOMC. And there was no apparent confidence that they had done what needed doing in the SNB, Norges Bank or Riksbank statements either. In fact, the Swedish Riksbank’s latest statement captured nicely what might have been expected here, on the data as it stands

This from a central bank with the same target as the RBNZ, similar current core inflation, but clearer evidence core inflation has already been falling.

It leaves a distinct sense that, as so often, the RB MPC was engaged in spin, lacking in substantive analysis.

There will some important further data out before the MPC again sets the OCR later this month (notably tomorrow’s labour market suite, and also the Bank’s Survey of Expectations – the one that so far this cycle has done a less bad job than the MPC of picking future inflation), so what they should do in August is still to some extent a question for another day (although they should, if they are at all intellectually honest, take that “confident” statement off the table). But how about where things stand now? And all bearing in mind that monetary policy works with a lag (although quite how long and variable those lags really are does seem to be up for debate).

There are central banks where you really have to wonder what is going on. For example, policy rates haven’t been raised in Hungary and Poland since September last year and both now have double-digit core inflation (still rising in Hungary). Less extreme, the Norwegian central bank has core inflation still rising, and although the central bank has raised the policy rate by 100 basis points this year, it is still only 3.75 per cent (and Norway’s latest monthly unemployment rate is still very low). Iceland also has core inflation steady at around 9 per cent.

On the other hand, when one looks at the Bank of Canada’s increase in the policy rate last month (to the highest level in more than 20 years), in conjunction with the already-falling and fairly moderate core inflation you get the sense that, if they are still too sensible to say it, that they might have good grounds for being increasingly confident of being back to target before long.

It would all be a lot easier if we had robust estimates of the neutral real and nominal rates for each country. But we don’t (neither the real rates nor the implicit inflation expectations that are actually shaping behaviour of firms and households).

And there is lots of differences across countries. For the period since 1999 (when the euro started, and the NZ OCR began) here is the median policy rate in each country (differences would be a bit smaller done in real terms, but still substantial).

All countries, except Australia, now have policy rates above those medians.

I took a look at how current policy rates compare to the peaks in each country in and around 2008. The median difference across those 16 countries is under half a percentage point (eg both the US and the euro-area now have policy rates almost exactly the same as that pre-crisis peak).

But four countries stand out, with policy rates now well below that previous cycle peak. There is Iceland. Now, the pre-2008 peak was in the context of one of the most staggering and destructive credit booms in modern times. Still core inflation is 9 per cent, and the policy rate even now is only 8.75 per cent. There is Norway: as above, core inflation is high and rising and (from a distance) it is hard to be confident things are in hand.

And then there are New Zealand and Australia, both with policy rates around 3 percentage points less than the 2007/08 peaks (and there is a pretty common view about 2008 that the RBA got lucky, not having had policy rates tight enough – in the face of a mining investment and terms of trade boom – but being “saved” by the international recession. The Australian story puzzles me: rates are well below previous cyclical peaks, the unemployment is still extremely low (including far lower than just pre Covid), but……the data (see above) show that core inflation has turned down (and while there is still a way to go, Australia’s target is a bit higher than some other countries’, including New Zealand). If I wanted to be “confident” I’d done enough, one can see a good case for higher rates (perhaps later today), but there are plausible counterarguments.

Much less so for New Zealand. We don’t have core inflation falling, we don’t have unemployment rising much (and last week’s employment indicators still looked quite strong), unlike most previous policy rate cycles there is no disinflationary support from a rising exchange rate, and the OCR is miles below the 2008 peak. (One could no doubt add in points Westpac in particular has been making about a bit of rebound in confidence, but I’m not trying to review all the data.)

Were I in the Fed’s shoes or those of the Bank of Canada I might by now be feeling somewhat more secure. Were I at the Norges Bank (as far I can see) I’d be very uncomfortable. The Australian data are perplexing but there seems nothing in the New Zealand data – considered a cross country or across time – to give any central bank decisionmakers any particular reason for comfort (let alone “confidence” at all). Macro forecasting is something of a mug’s game, and it is always possible the RB MPC may have done enough, such is the uncertainty, but it is very hard to see at this point (and the Committee has provided no analysis in support of their stated “confidence”, continuing a fundamental dereliction (no speeches, no serious research, no serious analysis) that dates back at least to the creation of the MPC). Things may be just about to break, and there are a great many uncertainties here and abroad, about how this cycle is unfolding, but the sort of “confidence” the MPC is asserting risks seeming more political (eg life seems like to be easier for Orr if Labour is re-elected) than grounded in secure economic analysis.

Tweaky tools

Michael Reddell inflation, Monetary policy

For the first 20 years or so of inflation targeting in New Zealand, there was a near-constant hankering for other instruments to “help out” monetary policy. In the early days of getting inflation under control, it was little more than ritual incantations (the team I ran included them every month in our papers to the Minister) that it would help, adjustment would be easier, if only there was labour market deregulation, reduced trade protection, and tougher fiscal policy. In the Brash years, his colleagues became very familiar with the Governor’s hankering for what we (or he) called “tweaky tools”, things that at the margin might make a difference, particularly perhaps in easing the exchange rate pressures that used to be such a feature of New Zealand monetary policy tightening cycles. There was even the pesky visiting US academic in the mid-90s who used his public lecture to suggest that discretionary fiscal policy should be handed over to the Reserve Bank (we winced). It wasn’t so different in the pre-2008/09 Bollard years. At the then Minister’s urging we and Treasury ran an entire Supplementary Stabilisation Instruments projects in 2005/06, culminating a year later in a scheme for a discretionary Mortgage Interest Levy, a scheme the then Minister was tantalised by, sufficient to consult the Opposition, but eventually shut down work on only when National walked away. At about the same time, yet another invited visiting academic was openly proposing a variable GST as a supplementary stabilisation instrument. In the same vein a few years later, Labour in 2014 campaigned on giving the Reserve Bank power to vary Kiwisaver contribution rates, to assist monetary policy in the cyclical (inflation) stabilisation role Parliament has assigned it.

Of course, between mid 2007 and mid 2021, there were hardly any OCR increases, and those there were were quite small and short-lived (unnecessary in the first place as it happens). And since around 2010 New Zealand real exchange rate fluctuations have been much more muted than we had become accustomed to (over the decades from 1985, they were not only highly salient in political debate but also inside the Reserve Bank).

And if big cyclical swings in the real exchange rate still haven’t resumed, big OCR increases have.

And with it talk of spreading burdens, easing loads, and finding supplementary tools seems to be back. There was an article in the Herald a couple of weeks ago sympathising with indebted households who, it was claimed, are bearing the brunt of the belated anti-inflation fight.

(I wouldn’t usually be very sympathetic with people who took big mortgages when house prices were rocketing on the back of pandemic-policy low interest rates and didn’t lock in, say, five or seven year fixed rates, except that……..the Reserve Bank itself by buying up $50+ bn on longish-term government debt at the same time did rather tend to suggest to the borrowing public that rates weren’t likely to go up much – after all, which responsible government agency would expose its stakeholders (taxpayers) to a meaningful risk of $10+bn of financial losses.)

And that prompted Don Brash to enter the conversation, reviving a call he had first made in 2008 and suggesting that the Reserve Bank be given the power to vary the petrol excise tax as an additional counter-cyclical tool to assist monetary policy and spread the burden. This is reported and discussed in this Herald piece today, which in turn draws from one of Don’s own blog posts. Don ends his post with this claim

But it would have the huge advantage of spreading the social effects of controlling the inflation rate.

I disagree, quite strongly, with Don’s proposal, for a variety of practical and principled reasons, and would do even on a best-case model (say, legislation limited the extent of the Bank’s discretion and revenues were properly and formally ring-fenced).

(In the Herald article, ANZ chief economist Sharon Zollner is also quite sceptical, adding this tantalisingly radical observation – topic for another post another day:

She said the more salient questions we should be asking were not what tools should we use to try to steer the economy, but rather, should we try to do it at all, given the limitations of economic forecasting? Might the costs outweigh the benefits?

Don is quite right that (as we saw last year), petrol excise taxes can be adjusted very quickly and the effects are also typically seen in retail prices very quickly. He suggests that as the price elasticity of demand for petrol is quite limited, any increase in petrol taxes will quite quickly dampen households’ other spending, in turn dampening inflation pressures. There are certainly plenty of households who are quite cash-flow constrained, but whether the effect exists to a material extent in aggregate would need rather more careful and formal review (reflecting on my own behaviour, I’m also a bit sceptical).

But even if we grant that the effect is real and, whatever the effect actually is, perhaps fast-working, there are lots of other problems. These include:

  • the temporary petrol excise tax cut of 2022/23 was 25 cents a litre.  As far I can see, the direct fiscal costs of that were about $1 billion over 15 months.  Even if it was $1 billion for a year, that is about 0.25 per cent of GDP.   And although many economists, including me, pointed out that the income effect of this cut (and the associated road user charge and public transport subsidies) was inflationary, I’ve not seen anyone suggest it was a decisive factor in explaining core inflation outcomes over the last year or so.  Quadruple the effect and one might be talking more serious macroeconomic impacts, but that would require giving the Reserve Bank discretion to make much larger changes in excise taxes than any Minister or Parliament has ever made before.   Sold as an explicitly temporary effect, a cyclical stabilisation adjustment of this sort would probably result in less demand effects than, say, an excise tax increase known to be permanent.
  • Don Brash argues that petrol excise taxes are easy to change. Much less so (as we saw last year in the rushed package) are road user changes for diesel-fuelled vehicles).  The Brash scheme doesn’t seem to envisage adjusting road user charges, but to do one and not the other –  as part of a new permanent stabilisation model –  would seem simply politically untenable.  He also recognises that electric vehicles are becoming more of an issue than they were when he first dreamed up the scheme, but says “Admittedly, with the growing use of electric vehicles there may come a time when varying the excise tax on petrol would have little effect on aggregate demand. But that time is still some way away.”  It seems likely that EVs will soon, as they should, face road user charges, but again the politically tone-deaf nature of the suggestion that the unelected central bank should be able to whack on huge tax imposts on one lot of drivers but not others (the “others” often stylised as being upper income anyway) is staggering.  And if you are tantalised by a thought “oh, but we can encourage people towards EVs”, remember that any such scheme would almost certainly have to be symmetrical…….
  • As Brash acknowledges, one downside of his scheme is that increasing fuel excise taxes to fight inflation will itself, at least initially, boost CPI inflation.   From a central bank accountability perspective this itself isn’t fatal (the target could be re-expressed as one for CPI inflation ex indirect taxes, and the fuel excise effect won’t show up directly in the better analytical core inflation measures), but…….one of the things we know about survey measures of inflation expectations is that they seem to be quite heavily influenced by headline CPI developments (and you can be sure media will keep highlighting headline effects).  We don’t have a very good sense of how those expectations are then reflected in behaviour (spending, borrowing, price and wage setting) but it is unlikely to be helpful –  and especially if we were talking of $1 a litre excise tax changes)
  • It is certainly true that there are plenty of cash-flow constrained households.  For better or worse, however, many of the most cash-flow constrained households also benefit from formal inflation adjustments (welfare benefit indexation), which directly undercut the cash-flow argument Brash is relying on.   The tendency of governments to at least inflation-index the minimum wage works in the same direction (and if neither adjustment is immediate, the central bank should be focused on medium-term inflation prospects, not one quarter possible effects).
  • People are rational.  The MPC meets seven times a year.   Given the prospect that seven times a year, on pre-announced dates, the fuel excise would be up for grabs, behaviour will change, with people either queuing for petrol the morning of the MPC meeting, or holding off as much as possible until just after.     Especially if the prospective excise adjustments are large enough to be economically meaningful (and the road user side is even more challenging if it were to be included).
  • It is a long-established principle of our system of government, dating back centuries, that taxes should only be imposed and adjusted by elected Parliaments (or at very least by formulae fixed by Parliament, as with indexation).   Back when the Mortgage Interest Levy (see above) was being devised (I was the key RB deviser), I recall telling Alan Bollard that I would join the marches in the streets against any notion of taxation without representation.   Same should go for petrol excise tax levies.  It is all rather redolent of Muldoon’s proposal from the 1970s (which was firmly rejected) for the minister to be able to do modest adjustments to tax rates for cyclical stabilisation purposes.  It is the sort of argument that has technocratic appeal, but no democratic appeal.  And before anyone suggests parallels, the rate at which a central bank pays interest to a bank that chooses to deposit with it is not a tax.
  • The Brash proposal seems to have no framework within which the MPC should decide whether to use a fuel excise tool, and to what extent it should use one tool rather than another.  Perhaps overall accountability for inflation – weak as that now seems to be –  would be unchanged, but we’d be opening the door to the whims of 7 unelected people, several with very little technical expertise either, to decide whether to whack up the fuel excise tax or whack up the OCR.   There are huge distributional implications from such choices, and no framework. opening the way (among other things) to extensive lobbying from vested interests preferring one rather than the other.   That seems, to put it politely, unappealing.
  • One of the elements of the Mortgage Interest Levy proposal that exercised our minds a lot was how to ring-fence the revenue.   There wasn’t much point in an additional tax, which might dampen some forms of demand, if the prospect of that money meant governments felt free to spend more.   One can devise all sorts of clever-clogs institutional arrangements, but in the end public revenue is public revenue, net public debt is net public debt, and cost of living pressures and elections are very real.   This might not be an insuperable obstacle, but money pots will tempt politicians (government and Opposition).
  • Brash justifies his proposal on the grounds of mitigating the “social effects” of controlling inflation.  That may well be a laudable goal, but it is one for governments.  This year, however, the government has chosen to run a much bigger fiscal stimulus than it had planned even at the end of last year, on a scale swamping the plausible extent of any fuel excise tax tool, at a time when inflation is still a severe issue.    Had they been at all concerned, there were options, within current legislative and governance frameworks.  The government chose not to take them (and to a detached observer there is little concrete sign National would really have done much different).

Some of the points above matter more than others, and some will matter more to some than to others. But overall, it seems an unappealing proposal. Actually, I’d be rather surprised if the Reserve Bank itself were at all keen, at least after half an hour’s thought.

In the original Herald article a couple of weeks ago, the author ended this way

Quite.

Inflation outlooks

Michael Reddell inflation, Monetary policy, MPC

I was filling in the latest Reserve Bank Survey of Expectations form the other day. If one ever needed to be reminded that macroeconomic forecasting is a mug’s game, or wanted a lesson in humility, all one needs do is keep a file of one’s successive entries to that survey. Coming on the back of the latest annual inflation rate of 6 per cent, it was sobering to look back at the two-year ahead expectations I’d written down in 2021 (as I happened, I missed the July 2021 survey so can’t give you my exact number, but suffice to say it would have borne no relation to 6 per cent).

I wasn’t alone. This is what two-year ahead expectations were each quarter from March 2019 (done around the end of January) to September 2021 (done around the end of July). With something of a scare in the June quarter of 2020, the average respondent generally saw medium-term inflation sticking pretty comfortably in the target range the government had set for the Reserve Bank MPC.

As the Reserve Bank often likes to point out, these expectations measures haven’t historically had a great record as forecasts. In fact, here are the outcomes for the dates at which these two year ahead expectations were sought (so the Sept 2021 quarter survey asked about inflation for the year to June 2023). I’ve shown both the headline CPI and the Bank’s sectoral factor model measure of core inflation. Although the question asks about CPI inflation, in some ways core outcomes are a better comparator since no one is going to forecast out-of-the-blue changes in government charges or taxes, or oil prices, two years hence.

The average private commentator/forecaster who completed the surveys has been pretty hopeless.

Unfortunately for us, since it is the Reserve Bank MPC that not only makes monetary policy but is, notionally at least, accountable for stewardship and outcomes, the Reserve Bank was a little worse still

The Reserve Bank’s projections were consistently lower than those of the average surveyed respondents over the period relevant to the inflation outcomes of the last couple of years, and by margins that (by the standards of surveys like this) are really quite large. But the underlying story is even worse, because the Reserve Bank runs the Survey of Expectations so as to have the data available when making their own projections. Thus, the Survey of Expectations is open to respondents from late last week until Wednesday, but the August MPS is not until 17 August, with forecasts finalised perhaps on the 12th. The Reserve Bank has consistently more information than the survey respondents, including both the survey responses themselves and the full quarterly suite of labour market data (and other bits and pieces of extra data from here and abroad). All else equal, the Reserve Bank projections should be at least a bit closer to outcomes than the average respondents’ expectations, even if both lots of people were making the same misjudgements about the underlying story. Time has value.

The picture would be more stark again if I could effectively illustrate respective OCR expectations over the period. Both the Bank and survey respondents are, in principle, providing endogenous policy forecasts (ie both allow the OCR, and any other policy levers at the MPC’s disposal, to change), but the survey respondents are only asked about the OCR out to a year ahead (and, more recently, 10 years ahead, but that is less relevant here). And during the worst of the Covid period, the Bank wasn’t publishing OCR projections, but rather an “unconstrained OCR” path, which went quite deeply negative, even though the actual OCR couldn’t go that low. But it looks as though not only were the Bank’s inflation outlooks more wrong than the private survey respondents (answering several weeks earlier), but they were probably based on looser monetary conditions than private respondents were assuming.

We don’t know where annual inflation is going from here, or when and how quickly it will get back to around the 2 per cent the MPC is supposed to have been focused on. But if we add a couple more surveys and sets of MPS projections to the chart (bringing us up to numbers done in early 2022) it seems pretty likely that the Reserve Bank MPC projections will still have been more wrong than the private survey respondents were (after all two of the four quarterly numbers that will make up December 2023’s annual inflation have already been published). All this in the period of the biggest inflation outbreak, and monetary policy error, in decades.

I was on record last year as opposing the reappointment of the Governor (and, for what it is worth, the external MPC members). In a post back in November I included a list of 20+ reasons why Orr should not have been reappointed. None of them were the actual inflation outcomes.

I’ve tended to emphasise that both central banks (here and abroad), and markets and private forecasters, to a greater or lesser extent really badly misjudged inflation. And that is true. But central banks, and specifically their monetary policy committees, were charged with the job of keeping inflation near target, and given a lot of resource to do the supporting analysis and research. If they had done only as badly as the average private sector person over that critical period, perhaps there might be reason to make allowance (but these people voluntarily put themselves forward as best placed to do the price stability job, and are amply rewarded for it (financially and in terms of prestige). And in New Zealand at least, they did worse.

What is more, and this gets me closer to my list of reasons why none of the decisionmakers should have been reappointed, not once have we had from them (individually or collectively) an apology – for the massive economic dislocations and redistributions their mistakes led to (unwittingly no doubt, but they purport to be experts) – or even a serious attempt at robust self-examination and review, with signs that they now understand why they got things so wrong. Not a serious speech, not a serious research paper (or whole series), really not much at all (yes, there was their five-year self review late last year, but as I noted at the time there really wasn’t much openness there either). Not even an acknowledgement that they – the experts who took on the job – did worse than the respondents to their own surveys through an utterly critical period.

Inflation, monetary policy, and central bank spin

Michael Reddell Fiscal policy, inflation, MPC

The CPI data out yesterday were not good news.

Annual headline inflation was, more or less as expected, down, but at around 6 per cent is miles from the 2 per cent target midpoint the Reserve Bank’s MPC has been required to focus on delivering. Much more importantly, core inflation measures show little or no sign of any reduction.

Six months ago I had been intrigued by this chart

It looked as though a reasonable case could then be made that core inflation had peaked a year earlier and was now falling (albeit still far too high).

But jump forward to today and the chart now looks like this

If it still suggests a peak at the start of last year (at least on one of the measures), it is no longer a picture of (core) inflation falling now. (NB: You cannot put much weight on the absolute level of the numbers shown here because for some, unknown, reason SNZ persists in doing the calculations on not seasonally adjusted data, which can materially affect the level of quarterly estimates.)

If you look at a range of exclusion measures (CPI ex this, that or the other), the quarterly picture for Q2 looks a little more promising (but analytical measures such as those above are increasingly used for a reason).

On an annual basis, a whole bunch of measures centre on core inflation of perhaps just over 6 per cent.

Focusing on just two big individual price movements, the CPI ex petrol is up 7.1 per cent for the year, and the CPI ex international airfares is up 5.7 per cent.

The contrast between New Zealand

and Canada (where the central bank has the same target as ours) is striking

Rightly or wrongly, the Canadian central bank last week still judged it appropriate and necessary to raise its policy interest rate.

Over the period since the OCR was introduced, the New Zealand policy rate has typically been a lot higher than Canada’s (for the same inflation target since 2002): the median difference has been 1.5 percentage points. At present, the difference is unusually small even though our inflation numbers look quite a bit worse than Canada’s

If you think Canada is an obscure comparator, the story is, if anything, a bit more stark relative to the US where core inflation measures have also been falling.

And yet having chosen – and it is pure discretionary choice by the MPC – to review the OCR last week, just a few days BEFORE the infrequent New Zealand inflation data was released, the MPC then declared itself “confident” things were on track to get inflation back to target with policy rates at current levels.

Given how wrong they (and most other central banks) have been over the last three years, it is difficult to know how any bunch of monetary policymakers, with any self-knowledge and introspection at all, can declare themselves “confident” of anything about inflation outlooks. But what could possibly have led our lot to such a conclusion a week BEFORE the (quarterly only) inflation data? Once again, it isn’t looking great for them……and I guess it will be fingers crossed at the RB that the quarterly labour market data out early next month are much weaker. But the best official monthly data we have don’t seem that promising.

(As a reminder, it is not too late to apply to become a member of the Monetary Policy Committee although it is unclear that genuinely able people would be that keen to join a body led by underqualified uninterested people and where any genuine insight or challenge is unlikely, on the evidence to date, to be welcomed.)

I’ve always been reluctant to suggest that the MPC, or even Orr, were partisan. Mostly, they just seem not very good, something shown up more starkly in challenging times, and prone to questionable self-serving spin (even in front of Parliament). But since the May MPS I have started to wonder, and the nagging doubt was reinforced last week.

The Minister of Finance brought down the government’s annual Budget on Thursday 18 May. The Reserve Bank’s Monetary Policy Statement was a few days later, on Wednesday 24 May. I was travelling so most of my scattered comments were on Twitter.

On a current affairs show on 20 May, the Minister of Finance claimed that the Budget would not add to pressures on inflation or monetary policy.

This was utterly at odds with the material published by The Treasury. Treasury estimates and publishes a series for the “fiscal impulse”. This measure was designed specifically for the Reserve Bank to give a sense of how, particularly over the forecast period, fiscal policy choices were going to be affecting demand and inflation pressures.

All else equal a falling deficit or rising surplus act as a bit of a drag on inflation, and vice versa for rising deficits or falling surpluses.

This chart was from the Treasury HYEFU published last December and incorporating the government’s then fiscal plans, as formally advised to the Treasury. As you can see, for each of the forecast years, the estimated impulse was negative (the overall accounts were still expected to be in deficit for most of the period, but the projected deficit was shrinking). At the time, most monetary policy interest would have been on the (highlighted) 23/24 year – showing a moderate negative impulse – since it was the period that monetary policy choices would most affect (and anything beyond 23/24 was little more than vapourware anyway, with an election in the middle).

This is how the same chart looked in the May Budget documents (Treasury’s BEFU)

For the key year – the one for which this Budget directly related – the estimated fiscal impulse had shifted from something moderately negative to something reasonably materially positive. The difference is exactly 2.5 percentage points of GDP. That is a big shift in an important influence on the inflation outlook – which in turn should influence the monetary policy outlook – concentrated right in the policy window.

My point is not to debate the merits of the Budget (political parties will differ on that) but to highlight the macro implications of aggregate fiscal choices as estimated by The Treasury, and how utterly at odds with the Treasury’s analysis the Minister’s spin was.

Ministers – and perhaps campaigning ones – will say whatever suits them, whatever relationship (or otherwise) what suits bears to hard analysis and advice.

But one of the key reasons why societies have chosen to delegate the operation of monetary policy to autonomous central bankers is that the central bankers are thought more likely to operate without fear or favour, calling the data and events as they calmly and professionally see it. So, you’d have thought, with a Monetary Policy Statement a few days after the Budget one might have expected some serious detached analysis of the updated Budget fiscal numbers, as they affected demand and inflation. Either citing the Treasury’s estimates or perhaps presenting analysis explaining why the Bank thought the fiscal influence might be different than the Treasury did (the latter using a framework designed specifically for monetary policy purposes). After all, in their previous MPS, MPC minutes had explicitly noted that “members viewed the risks to inflation pressure from fiscal policy as skewed to the upside”.

Central bankers, including particularly at our Reserve Bank, have long avoided taking a stance on government spending and revenue choices. Mostly, they also avoid taking a stance of deficits and surpluses. Those are political choices, and particularly in modestly-indebted countries (like New Zealand) it doesn’t greatly matter to monetary policy whether the budget is in deficit or surplus. It matters way less whether one has a high spending and high taxing government or a low spending or low taxing government, and so it is rare – and appropriately so – for the Reserve Bank to be commenting on either spending or revenue choices. What matters (about fiscal policy) in updating the inflation outlook is changes in the discretionary component of the fiscal deficit/surplus (basically, what the fiscal impulse is trying to capture). This snippet (from a Bollard-years MPS) captures the general approach.

But how did the MPC treat things in the May 2023 MPS, coming just a few days after that very big increase in the expected fiscal impulse for the immediately approaching year, at a time when inflation (core and headline) was way outside the target range and the OCR had had to be raised aggressively?

The only uses of the terms “fiscal” or “fiscal policy” (“fiscal impulse” doesn’t appear at all) are in this paragraph from the minutes. Even here – even that final sentence – it is consistent minimisation.

But these are the only references. In the one page policy statement, there is no link drawn from fiscal choices to the inflation outlook, and only this rather odd (for a central bank) detached observation: “Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.” So what, one was left wondering…..unless the Governor and his colleagues had taken to playing politics, perhaps to help out a Minister and his colleagues who seem more disposed to the Governor’s way of doing/saying things than, say, the Opposition parties (who openly opposed his reappointment) might be.

Perhaps it wouldn’t even be worth highlighting if this were the only such reference. But it isn’t, by any means. Recall, there are no references in the body of the document to fiscal policy, fiscal impulses, fiscal deficits, OBEGAL, or changes in any of these. But there is a whole section devoted specifically to government spending, on top of the couple of references I’ve already quoted. And the focus there is not on the horizon relevant to May’s monetary policy choices, or the inflation outlook over the next 12-18 months but over the “medium term”, when who knows which government will be in charge and what their spending preferences and priorities will be.

It is quite right that their projections – which simply use Treasury numbers as a base – have real government consumption and investment spending (the bits they publish numbers for) flat for the next several years.

That might raise some interesting issues, including for supporters of the current government who favour lots of government spending (is it really consistent with your values that per capita spending is going to fall quite sharply?, would it prove politically sustainable? and so on).

But it is of almost no relevance to monetary policy. And omits really major bits of the fiscal story (on the spending side, all of transfers and finance costs, and all of the revenue side). Central banks should be mostly interested in shocks to the deficit/surplus outlook. But not, this year, it appears the RBNZ.

The Bank and the MPC seemed to minimise any story about the fiscal contribution to the outlook for inflation and monetary policy (you know, things like inflation still being outside the target range, even with a high OCR, for protracted periods. Those fiscal impulse charts/numbers don’t get a mention. But neither do simple stats like the fact that in December’s HYEFU, on then government plans, Treasury thought the OBEGAL deficit for 2023/24 would be 0.1% of GDP. By May’s Budget, government plans meant a forecast deficit that year of 1.8% of GDP. These are really big changes, playing down to near-invisibility by our supposedly non-partisan independent MPC.

It was all brought back to the front of mind last week when, out of the blue, this observation appeared in the OCR statement

Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP. 

If you relied on Reserve Bank commentary, you’d just never know that, in the period current monetary policy choices are directly affecting, discretionary fiscal policy choices (overall balance and all that) had added, quite considerably, to inflation pressures in this year’s Budget. It doesn’t take much to guess which line the Minister of Finance will have preferred – and it isn’t the one that actually aligns with the Bank’s own responsibilities.

I am really reluctant to believe that partisan positioning is at work, even if (if it is happening) “just” for institutional self-protection reasons. But I find it difficult to see a compelling alternative explanation for the MPC’s approach to fiscal analysis and fiscal impulses in the last couple of months.

Perhaps the Opposition parties will view the Reserve Bank more charitably. But on what has been put before us, there is no reason for them to do so.

Project Cricket (and other nonsense)

Michael Reddell Australia, Banking, Taxation

I’ve been reading the papers released the other day by Treasury (in one case written jointly with IRD) on the Minister of Finance’s hankering to tax Australian banks more heavily, retrospectively.

There seem to be three such papers, a 10 February Treasury Report, a short 17 February Treasury aide-memoire, and a 10 March joint Treasury/IRD report. Nothing appears to have been withheld from the first two, but there are several, quite lengthy, bits withheld from the 10 March paper, in many cases apparently references to legal advice officials may have received.

The 10 February paper is titled “Windfall gains in the New Zealand banking sector, and responses”, apparently part of something called “Project Cricket”. Retrospective taxes targeted at companies the Minister of Finance doesn’t like and are just considered politically ripe for the plucking are…..really not cricket. But perhaps that irony escaped both the authors and the Minister. The paper is signed by Treasury’s Manager, Tax Strategy, and as tends to be the way with Treasury, when one looks him up he seemed to have no background at all in tax (or banking), and little in New Zealand either. It wasn’t a promising start.

It is a fairly long paper (24 pages)

The Minister already had his enemies in sight but wanted a fishing expedition as well.

The Treasury paper wasn’t a very compelling piece of work. Without any serious analytical framework at all, it (slightly grudgingly, or perhaps just diplomatically) concludes “there is no clear evidence that banks made windfall profits during the recovery from COVID-19”. And instead of concluding strongly that since there is not the slightest evidence of anything that could seriously be called “windfall profits” and thus there was no serious analytical case at all for anything like a “windfall profits tax”, we just get this lame conclusion

as if otherwise it would okay.

As for those other sectors

All based on this

Quite how the agricultural sector “may have derived windfall gains” is left to the reader (and us) to guess. It all seems very loose and incoherent stuff. (Had one been interested in regulatorily-induced windfall profits, surely one place to look might have been the supermarkets that were given a monopoly position during Covid lockdowns at the expense of other food retailers, but….lets not encourage them.)

So lacking in any serious analytical framework is the discussion around “windfall profits” that Treasury apparently never thinks to point out that an unexpected burst of inflation (perhaps a 10 per cent change in the price level, engineered – albeit inadvertently – by the government’s own central bank), came closest to a true set of windfall gains and losses. Who gained – entirely unexpectedly? Why, that would be people with long-term fixed rate debt. And which party has the most long-term fixed rate debt on issue? Why, that would be the government itself. On the other hand, holders of fixed rate financial instruments were subject to fairly marked, close to genuinely “windfall”, losses.

I mentioned there windfall losses. That is more than the Treasury (or Treasury/IRD) advice ever does. Over time, true windfalls, such as they are, are pretty randomly distributed – gains, losses, sectors, individuals. But of course there was no sense here of a coherent or comprehensive approach to the issue, some systematic search for windfalls across the economy that the government might tax (or compensate). No, the MInister had his four Australian banks in target. With not the slightest evidence – even with Treasury doing what it could to try to find it for him – that there was anything that anyone other than the Green Party could seriously consider “windfall profits”.

And in this first paper, officials didn’t even think to point out that retrospective legislation of any sort – but perhaps particular one targeted at four of the king’s (or his Minister of Finance’s) enemies is generally pretty abhorrent. If anything, they seemed to quite like the idea of a retrospective tax (check the table on p15 of the release). On whatever strange definition of “coherence” these officials were using a retrospective tax aimed by four companies, when the advice said there was no serious evidence of windfall profits, also apparently raised no concerns.

(In passing, I would note that the Treasury is quite open in calling the Reserve Bank’s Funding for Lending programme a direct “subsidy” to banks. That is, perhaps unsurprisingly, not language the Reserve Bank has used. But as Treasury notes, there does seem to have been reasonable evidence that the subsidy – put in place as a conscious matter of policy – had mostly been passed on the customers.)

Somewhat surprisingly, when providing the Minister with advice on a tax that would be targeted at four specific Australian-owned companies, there is no discussion at all of the likely reaction of the companies’ owner, or of their government, or of whether and how such an arbitrary tax might raise difficulties in the trans-Tasman halls of financial regulators. Oddly, in all three papers there was not a single mention of the fact that the parents of these four wholly-owned companies also had active operating branches in New Zealand, and what (if any) implications there might be for the future mix between branch and subsidiary business.

Despite Treasury’s recommendation in that 10 February paper, the Minister of Finance must have disagreed. The 17 February aide memoire ( 2 pages only) sets out briefly options that could be done for the Budget, then only three months away. They were retrospective and prospective levies. This was what they had to say about the former

There seems to be no sense that this would be something of a constitutional outrage. Sure, they say they were checking whether there were legal risks (perhaps anything in CER?), but as they and the Minister know Parliament in New Zealand is sovereign and the government easily has 61 votes for budget legislation.

This paper was for a meeting with the Minister on 20 February. The Minister was apparently undeterred.

The final paper in this suite is joint Treasury/IRD report of 10 March (also referring to “Project Cricket”). The introduction to that paper’s Executive Summary illustrates just how far off the rails the Minister was heading.

It was bad enough that the Minister was seriously considering a retrospective tax restricted to four foreign companies he didn’t like, in the face of official advice that there was no evidence of anything seriously akin to “windfall profits”, but now he was proposing such an arbitrary tax-grab specifically to help cover a cost pressure elsewhere in his budget which had nothing whatever to do with the four companies he wanted to tax or any of their activities. One hopes that privately officials were well and truly rolling their eyes by this point.

One might acknowledge that this advice – or perhaps another captain’s call from Hipkins – finally brought this work stream to a halt, but it simply wasn’t very good advice (at least based on what the government has chosen to release). Mightn’t one, for example, have expected some serious reference to a likely Australian reaction? Mightn’t one have expected some serious discussion of the precedent such an arbitrary tax might establish (actual or perceptions)? There is some reference to it – amid a weird sentence that talks about “the favourable position of New Zealand as an investment destination” – on what metric one might ask? – but it is all very muted. There is no discussion at all of the intellectual incoherence of picking on individual profitable firms ministers don’t like and not (say) responding symmetrically when unexpected sharp falls in profits happen (perhaps officials thought it not worth dignifying this nonsense on stilts?). There is no mention of the branches, or anything serious on the possible reduction in the availability of debt finance to New Zealand households and small and medium businesses (really big businesses can finance globally). We even find abstract comments, no doubt tantalising to the Minister, that “in theory, a one-off retrospective tax will not affect behaviour”. That sort of line might be fine from a traineee analyst fresh out of a basic university course, but this was serious budget advice from responsible Treasury and IRD officials

In what they published (perhaps it was in what was withheld, though there is no obvious reason to withhold_, there is also no reference at all to the New Zealand legislation guidelines, which state

Pretty sure the Minister not liking four particular foreign companies isn’t one of those “limited circumstances” in the final bullet.

What was proposed was an abomination, but – even though they didn’t favour what the Minister was hankering for – you get little sense of that in The Treasury/IRD advice. I’ve seen people responding “ah well, didn’t matter, as he didn’t go ahead”. Donald Trump didn’t go ahead with most of his mad, bad, or evil schemes either, but that is slim consolation. We should expect better from someone who has been New Zealand’s Minister of Finance for 5.5 years.

But at this point the advice gets a whole lot worse, losing all touch with reality and descending into some spirit world of officials’ imagining. I’m including the entire section

One wonders if officials are able to opt out of this nonsense on grounds that no one should be forced to practice someone else’s religion. Do other worldviews count? I guess not, at least if this advice is to be taken seriously.

Or which of “our Treaty partners” were consulted on this highly sensitive matter of tax policy, even in a not very material way?

Or look at that footnote 87: a retrospective tax grab from four named foreign companies for purposes unrelated to anything to do with the activities of those companies would apparently “strengthen” “the human domain” (whatever that means). I suppose it would indeed have played to the “concept of power” – power in an arbitrary retrospective way, much more akin to an abusive act of attainder than anything. People would then have known the Minister (and his ministerial colleagues with him) as an unconstitutional thug.

In the end, Robertson didn’t proceed with his egregious scheme and for that small mercy we should be grateful. But we now know that ideas of such egregious grabs do play in his mind – not just an idle fancy, but weeks of work – and who knows when they might return, or which other company or individuals might then be in his sights. It wasn’t exactly Treasury at its best either.

UPDATE:

Meant to include this tweet