Okay, so the weather in Wellington is even less conducive to either being at the beach or in the garden than it was on Friday.
Tomorrow it will be 2025. Once upon a time there was a government that adopted a goal of catching up economically with Australia by 2025. I don’t suppose the Prime Minister of the day – John Key – really cared that much for the goal, although for a while he articulated the rhetoric well enough, and he’d campaigned in 2008 on the continuing exodus of New Zealanders to greener pastures – well, higher incomes anyway, on a dry continent – across the Tasman. The goal, and the associated taskforce set up to advice the government on how it might get there, was more of an ACT win.
Treasury provided the secretariat to the 2025 Taskforce, and since I was working at Treasury at the time, and as the chair was my old boss Don Brash, I ended up working extensively with the taskforce and holding the pen on most of the first report (after I went back to the Reserve Bank, Neil Quigley was contracted to write the second report, and I had less to do with that report). The first report was (very publically) binned by John Key the day before we released it. I later came to conclude that while I agreed with most of the long list of policy recommendations in the first report, they weren’t sufficient and overlooked one important issue in particular, but even if one disagreed with the specific policy recommendations – and Key clearly had no stomach for them – one might have hoped that his government (and those that followed) might be serious about the goal itself and looking for effective policy solutions. After all, as the 2025 Report pointed out in 2009 there had been a long history of politicians talking about catching up again with the best performing countries abroad (just no sustained success in bringing it about). (There is a link to both 2025 Taskforce reports here.)
Here it is worth noting that even in 2008 Australia wasn’t one of the stellar advanced economies, with average real labour productivity (in PPP terms) not much above the median OECD country. Much better than New Zealand of course, and Australia mattered for us both as a natural point of reference in our part of the world (similar disadvantages of distance, similar cultures) and as the place where almost all New Zealanders could readily move if they chose (and hundreds of thousands already had).
In this chart I’ve shown how things have actually unfolded
Over the full period we haven’t caught up with Australia, we haven’t even begun to close the gap, and instead the gap has widened a bit further again. Both series are noisy and subject to revisions (in New Zealand alone there are levels differences between the income and expenditure real GDP measures), but overall things have gone in the wrong direction. If one wanted to look on the less gloomy side, I guess one could note that whereas Australia has had no productivity growth at all since 2016, we have had a bit, but I wouldn’t put much weight on that myself (including with declining foreign trade shares, weak terms of trade). And although one could generate a bunch of other comparative graphs, it is productivity that ultimately underpins a country’s longer-run average prosperity.
What I find most depressing – and why I have, somewhat gloomily, been anticipating for some years writing this post – is the lack of any apparent sense of urgency in New Zealand about turning things round or actually finally beginning to sustainably close the gaps. And that has been true really regardless of which parties have held office – if Key binned the advice on the 2025 goal and did little or nothing useful instead, Ardern/Robertson refocused the Productivity Commission on distributing the economic pie rather than growing it, and Luxon/Willis show no better than occasional conventional rhetoric on the topic. And all this against a backdrop where Australia has again made it easier and safer for New Zealanders to move across the Tasman.
As it happens – and what reminded me to write the post – in the New Years’s Honours list released this morning, the government chose to honour one of the members of the 2025 Taskforce, the economist Bryce Wilkinson. That’s nice, but if I know Bryce I’m pretty sure he’d much prefer that governments – including this one – had gotten serious about finally reversing 70+ years of relative economic decline. That would have benefits for all of us, and for our children and grandchildren, who might be more interested in staying to build a better New Zealand.
I wasn’t envisaging writing anything more for a while, but….Welllington’s weather certainly isn’t conducive to either the beach or the garden, and the Herald managed to get an interview with Iain Rennie, the new Secretary to the Treasury (not usually the sort of stuff for 27 December either).
I’ve always been rather uneasy about heads of government departments doing interviews, on anything other than operational/internal matters for which they have specific personal responsibility. When they get onto policy it is never quite clear whether they are expressing their own views or championing those of the minister, and even if the former they are inevitably somewhat constrained by the views and tolerances of the minister. The primary responsibility, after all, of heads of policy agencies is provision of free and frank policy advice to the minister.
Rennie does a bit of self-promotion, claiming that he is the sort of “change agent” the Minister of Finance has asserted that she wanted, and that he is at his best reforming things. I guess time will tell on the former claim – although count me sceptical – but his previous years in senior positions (Deputy Secretary at Treasury, State Services Commissioner) weren’t exactly known for being a reforming era, and it wasn’t obvious that he was an exception to that. And he was responsible for the appointment and reappointment of Gabs Makhlouf, who took Treasury in more of self-indulgent direction than one driving forward hardnosed and rigorous policy advice.
He claims to be keen on The Treasury being more upfront and public about its view on possible reforms. I’m not sure that’s wise – hardly likely to strengthen effectiveness with the Minister when, as is inevitable at times, those views are very much at odds with those of the government – but I guess that is their call. Lets see, for example, what they come up with in the Long-term Insights Briefing they are required to produce next year. In any case, Rennie – creature of the 80s/90s Treasury – claims to be keen on more means-testing. Views will differ of course, but it has its own problems (especially once done across multiple programmes) and the last attempt to apply it to retirement income provisions did not end well.
He also touched on tax. There is some ambiguity about that second para, but I take it that he is advocating taxing capital income at a lower rate than labour income. If so, he’d have my full support, but championing it in public is going to buy quite a fight – even with a notionally centre-right government that has just increased business taxation and shows no inclination at all to do anything about one of the highest company tax rates in the OECD.
But the real reason for this post – and the reason why I phrased the title of this post as I did – is Rennie’s apparent complacency on fiscal policy: it could have been channelling Willis. There is, we are told, no hurry to close the structural fiscal deficit
“That’s why I’ve been very clear that fiscal consolidation will need to happen over a number of years.”
We didn’t get into a structural deficit “over a number of years” (but quickly), we’ve now been running one for more than a few years, nothing done this year reduced the deficit, and on the government’s own projections any return to fiscal balance is still several years away. And this is in a country that was running surpluses less than five years ago (the first – and mostly necessary – Covid splurge was March 2020). Core Crown operational spending this year (24/25) is almost six percentage points of GDP higher than it was in the last full pre-Covid year (18/19).
Now, it is certainly true that not all reforms can be done overnight, but that doesn’t mean that fiscal adjustment couldn’t – and shouldn’t – be done a great deal faster than either Robertson or Willis have been willing to contemplate. And there is not a sign of recognition from Rennie that the date for the return to fiscal balance has been pushed out again and again – it isn’t as if successive governments are making steady progress on a well-understood and stable forward track.
There seems to much the same sort of elite resignation around productivity issues and failures. He seems willing to acknowledge that it is a significant issue, but with no sense of urgency, and no sense of just how deep-rooted the problems have become – weak productivity growth isn’t just some phenomenon of the last few years, but something that now dates back 70+ years in New Zealand, with no sustained period since when New Zealand has made any progress in closing the gaps.
Rennie’s final comments are about comparisons with 1990/91
Again, it feels more as though he is channelling his Minister, who desperately does not want to be compared with Ruth Richardson.
A fair amount of the debate around 1990/91 is more about mythology than hard facts. Reasonable people might differ about the pros and cons of welfare benefit cuts then (as they might about the ill-judged increases in real benefit rates under the last Labour government), but….
Here is total Crown primary (ie ex interest) spending in the fiscal years through that period
Government spending was not slashed and burned.
And what of that story of 15 years of failed fiscal adjustment. Here, from Treasury’s own data, is the primary balance from that era
Very considerable progress had in fact been made in the previous few years, with large primary surpluses having been achieved (nominal interest rates at the time were very high, but much of those interest rates were simply compensation for inflation, not an additional real burden). Now, it is certainly true that in the dying days of the 1984-90 government fiscal discipline weakened – primary surpluses were smaller – but there were primary surpluses throughout.
It is also true that at the end of 1990, there had been the second (and more severe) BNZ failure/bailout, unemployment was rising, and another recession was almost upon us. There were genuine fiscal surprises for the incoming government – and the ratings agencies – but the basic position, while well short of ideal, was not dire. And if net debt – at about 50 per cent of GDP – was higher than it should have been (and higher than today), it was pretty moderate by the standards of indebted OECD countries today. And, since Rennie rightly notes ageing population pressures on spending now and in the years to come, back in 1990, not only had the outgoing Labour government already put in place a plan to raise (very gradually) the eligibility age for the state pension, but the demographics going into the next 10-15 years were particularly favourable, since the birth rates 60 or so years earlier had been so temporarily low.
Instead now we have deficits well into the future, no serious evidence (yet) of a government with a willingness to make hard adjustments, and demographic pressures that are already on us and will only intensify. It is, therefore, more than a bit disconcerting to hear such complacent noises from the Secretary to the Treasury, as if to pat us all on the head and say “don’t worry, we’ll get things sorted out eventually”. No doubt it will make for holiday reading for the public that the Minister of Finance will smile favourably upon. But one can only hope that when Rennie is alone with the Minister he is rather more urgent in his advice. If not, perhaps he really is the Secretary Willis wanted…..but the only sense in which he might then be a “change agent” is in somehow acting to help accustom us to a new grim reality in which neither main party is any longer that worried about returning to fiscal balance.
Rennie’s final line was that one about there allegedly being “confidence” our “fiscal institutions” will respond and consolidate successfully. I’m not sure who has this confidence – perhaps a few members of the government party caucuses – or what foundation any such confidence might rest on. It feels more like wishful thinking, or just spin.
I was away in Papua New Guinea last week when the HYEFU came out, and have only just gotten round to looking at the numbers. Quite possibly, what is in this post will be repeating ground others have covered, and if so the post will end up being mostly for my records (good to be able to look back and see what one said at the time).
It was this tweet from a non-partisan analyst that really caught my eye
Three sets of spending forecasts: those for Labour’s final Budget last year, those from last year’s PREFU (and available to political parties finalising their fiscal promises), and those from last week’s HYEFU. They run out only to the year to June 2027, because that is as far as the forecasts done in 2023 went.
Spending on core Crown expenses is as higher or a little higher than in Labour’s last Budget.
It isn’t because interest rates are higher (out of the government’s control); in fact, primary spending is also a touch higher over four years than was planned in last year’s Budget.
It isn’t because of the state of the business cycle: the output gap forecast now for 26/27 is almost identical to that forecast for 26/27 in last year’s Budget.
Overall, core Crown expenses are forecast to be 32.2 per cent of GDP in 26/27, up from 31.5% for 26/27 in last year’s Budget.
And net debt (excluding the – quite variable – NZSF assets) is forecast to be $42 billion higher in 26/27 than was forecast just 18 months ago.
Of course, defenders of the government will note that revenue forecasts are a lot lower. That is partly a matter of pure political choice – tax cuts – and partly a changed view on the potential rate of growth of GDP (not about the business cycle). But when the family’s income estimate are revised quite a bit lower over the medium term it would be usual to adjust future spending plans. But not, it appears, this government.
For all the pre-election rhetoric, the current coalition government seems to be keeping right on with the path adopted by the previous Labour government, which had more or less abandoned (for practical purposes) any serious interest in running budgets in which the revenue raised paid for the groceries. National wasn’t very ambitious in its election campaign fiscal plans, but its numbers now represent deep underperformance even relative to those modest electoral ambitions. Will we see a balanced budget ever under Luxon/Willis. Unless something positive just happens to turn up it seems very unlikely – and with each passing year the ageing population fiscal pressures just keep mounting. If the failure is first and foremost the responsibility of the Minister of Finance, no Prime Minister can ever escape shared responsibility for this kick-the-can down the road approach to fiscal management.
As a reminder of the broader fiscal position, here is Treasury’s chart showing the estimated cyclically-adjusted and structural deficits.
Not only is no progress at all being made at present, but the imbalances are a bit larger than those Treasury was estimating at the time of the 2023 Budget. People rightly criticised Labour’s fiscal excess, and the structural deficits they chose to incur. The coalition’s structural deficits are also pure choice – bad ones. And we can’t have much confidence in the eventual sluggish return towards balance after the next election – as for any government, forward operating allowances are no more than lines on a graph at this point, and the government has shown little inclination or ability to make and sell sustained hard fiscal choices consistent with those operating allowances.
My post this morning was based on Adrian Orr’s Q&A interview as found on TVNZ+. However, it turns out that that wasn’t the full interview which (thanks to the kind people at Q&A for pointing me to it) is now available on Q&A’s Youtube account here. The full interview is almost half an hour, and is probably worth watching if you haven’t already watched the selections on TVNZ+ – it is a more rounded presentation and chance for Orr to tell his story.
As in the previous post, there was something in this bit of the interview where I welcomed the Governor’s comments. He lamented the underinvestment in official economic statistics, that has gone on for decades now, and suggested governments really should do better. And while he noted (fairly) that there is a lot more other data than there used to be, it remains something of an open question (would be interesting to see RB analysis of it) as to whether the Bank and other forecasters have gotten any better at recognising early quite what is going on in the economy and inflation. Perhaps 2020/21 was an unfair test, but we’ve seen a lot of lurches even this year from the MPC. But if the Governor is championing full monthly CPI and HLFS data and more timely GDP data, I can only agree with him.
But if that was the positive, there were plenty of things to lament in the Governor’s comments in the extended interview.
There were, for example, outright falsehoods. Thus, he talked of his European peers having struggled with inflation in excess of 20 per cent per annum. As far I can see, the only OECD European central bank that faced an inflation rate that high was Hungary (briefly) although a couple of others were in the high teens for a while. Gas prices severely affected headline – but not core – inflation, and New Zealand (and Australia) weren’t exposed to that post-Ukraine shock. In the euro-area (most of Europe) headline inflation peaked – gas shock – at 10.6 per cent. The Governor then claimed that the UK had had 15 per cent inflation. That didn’t sound right either.
11.1 per cent isn’t even close to 15 per cent. Why does he just make these things up?
(And a reminder of the graph in this morning’s post: on core inflation (the bit central banks do much about) we were simply middle of the pack in the OECD.
I noted this morning that the LSAP hadn’t come up in that bit of the interview. It did in the fuller interview, and sure enough we get the repeated Orr make-believe blustery arguments. Not only had the Bank’s interventions saved the economy from a “deep recession” (quite how when as the Governor correctly notes the lags in monetary policy are long, and GDP here quickly rebounded after the first lockdown), but the costs (the $11bn or so of losses to the taxpayer) were “more than overwhelmed” by the “net benefits”. The net benefits have never been successfully identified, and the absurd claim needs to be read against the fact that overall Reserve Bank monetary policy calls led to the economy massively overheating, a severe outbreak of core inflation, big redistributions, and then a protracted – if not overly deep – recession to get things back to balance. Whatever the good intentions, there simply were no “net benefits” (probably few gross ones either) and large losses to the taxpayer. But Orr never engages straightforwardly on such issues. (For anyone who listens he cited some IMF work – I picked apart an earlier piece from the IMF on this issue here : the IMF had simply imagined a world (and economy) quite different from what New Zealand actually experienced.)
There were two other interesting lines from Orr.
The first was a bold statement that banks had been making “excessive profits”. Not high, but “excessive”. Quite what basis he as prudential regulator had for that claim isn’t clear, but he has long had it in for the Australian banks. He seems to consider it somehow unfair that the Australian banks are efficient low-cost operators.
And the second was the claim that we are seeing unusual (greater than previously) changes in relative prices globally. Since oil prices were one of those he mentioned, here is a long-term chart
The alleged greater volatility isn’t apparent there. Perhaps there is something to the claim more generally (would be interesting to see the analysis and data), but it seems unlikely, and perhaps particularly in the New Zealand context, where one of our most important relative prices is the exchange rate, which has displayed remarkably greater stability in the last decade or more than in the first 25 years after it was floated.
Orr also claimed that inflation itself was going to be more variable, but again it isn’t obvious. There has been a bad outbreak of inflation a few years ago, now brought back under control, but is there really any evidence (beyond the Governor’s desperate desire to talk about climate change) for the proposition, or that it would matter if it were true (headline vs core considerations again)?
Towards the end, Orr was talking up the strength of the Bank, notably the Board (signally underskilled in fact, with a chair reappointed who did/said nothing about the mistakes of recent years) and the MPC (most of whom we never or very rarely hear from, at least one of whom has no relevant qualifications at all). As for the rest of the senior management, those I have anything to do with (several) simply aren’t very impressive (in two cases “not very impressive” is to flatter). Perhaps when standards are that low Orr gets away with the sort of loose language, bluster, and Trumpian-style false claims internally (as well as the intolerance of dissent etc that he is known for). But it shouldn’t be acceptable in such a powerful figure, and if central bank Governors are never going to be some sort of single source of truth, at very least they should (a) prompt one to think, and b) not prompt one to worry that yet another claim just bore little or no relation to reality.
The Reserve Bank Governor has given an interview to TVNZ’s Katie Bradford, apparently done under the aegis of the Q&A show but too late in the year to actually be broadcast on Q&A itself or to be done by Jack Tame, Q&A’s regular and most demanding interviewer.
There is a TVNZ article reporting the interview here, and you can find the full thing (only about 13 minutes) somewhere on TVNZ+ (my son found it for me). [UPDATE: Apparently that was only half the interview and the full 26 minutes is on the Q&A Youtube account.]
What is reported in the article is pretty breathtaking, with Orr reported as standing by his (or, presumably, the MPC’s) decisions during and since Covid with no apparent regrets, and then moving on to attack the public and the media for being focused on housing and house prices. We – and he – might regret the fact that we do not have a well-functioning land supply/use policy regime, but we don’t, and haven’t done so for decades, so it should hardly be a surprise (or a cause for attack/lament) that when interest rates are cut in what proves to be an overheating economy house prices go up.
But it got a whole lot worse when I listened to the full interview itself, where Orr seemed to just play on the fact that his interviewer wasn’t a specialist (with all the facts at her finger tips) to simply run claims that he knows not to be true. It was a reprise of his form earlier in this cycle when he repeatedly and deliberately misled Parliament’s FEC (but so supine are our democratic institutions that there were no consequences for what Parliament’s website solemnly assures us is a serious offence).
Orr was asked whether the Bank had been too slow to raise rates (of course it was, as the Bank has even grudgingly acknowledged in the past). His response was to claim that the Reserve Bank of New Zealand was the 2nd or 3rd central bank to raise rates in 2021. It simply wasn’t so. Even among OECD economies – and there are only about 20 separate monetary policy areas in it (much of the OECD having just the euro) – the Reserve Bank was the 8th (equal) to move (those moving ahead of us were Iceland, Norway, South Korea, Mexico, Chile, Czech Republic, Hungary). Perhaps as importantly, the issue should never be about who went first or second, but whether a particular national authority moved sufficiently early and aggressively for the circumstances their own economy faced. On IMF estimates, New Zealand had the most overheated economy of any of the advanced country monetary areas it does the numbers for (a group which doesn’t include all those in the list above, but does include the US, UK, Canada, Australia, Japan).
Orr then went to the claim that the Bank had been “lauded internationally – although not domestically” for being one of the most responsive central banks. It is certainly true that some market commentators have run such a line, but almost all of them seem to have had in mind the big countries and the Anglo countries, not the wider group of OECD economies. The Reserve Bank certainly wasn’t the slowest to move, but then it was dealing with a really badly overheated economy and should have moved a lot earlier. Their mistakes weren’t unique – misreading economies and pandemic macroeconomics was a common mistake, among central banks and private commentators – but they voluntarily took on the power and responsibility in New Zealand, and they actually made the bad policy calls, including increasing rates too late and initially far too sluggishly. Other people can hold their central banks to account.
(And, of course, the MPC also lost $11 billion or so or taxpayers’ money punting in the bond market. TVNZ didn’t ask about that particular bad call so we were spared a repeat of Orr’s blustering attempts to defend that. Puts the cost of running an RNZN vessel straight onto a reef not realising the autopilot was still on in some perspective….)
And then Orr claimed that the Reserve Bank was one of the few central banks confidently reducing policy rates. Which was a bit odd when most advanced country central banks have been reducing policy rates in recent months (obvious exceptions being Australia and Japan). But don’t let the facts get in the way of the Governor’s spin.
He had the gall to round off that section of the interview by suggesting, rather patronisingly, to Bradford that “your potted history is kind of incorrect”. Dear, oh dear. This from a very senior and powerful public official. Is this the sort of thing the Minister of Finance expects/tolerates? (Well, on the evidence so far anything goes.)
Bradford moved on. As was accepted, had it not been for the Covid outbreak in Auckland, the Bank would have started tightening at the August 2021 MPS (they actually started at the next review). So Bradford took a look at the projections in that Monetary Policy Statement. She pointed out (correctly) that in those projections, annual inflation was expected to be back down to 2.2 per cent by the year to September 2022 (with, as it happens, very little monetary policy help at all: as everyone agrees, there are long lags, and by the end of 2021 the OCR was expected to be only 0.75 per cent). I guess her point (obviously correct) is that the Bank was still badly misreading things by that point (and of course even now annual core inflation is still somewhere between 2.5 and 3 per cent, having required an OCR at 5.5 per cent to bring that about).
But Orr wasn’t going to be bothered engaging with facts. Instead, we got the same old outrageous claims he used to try to fob Parliament off with. “Do you know what happened after that [August 2021]”, he asked. “We had the Ukraine invasion, rising food prices”, going on to add in cyclone effects and so on. He even had the gall to suggest that we had among the lowest inflation rate peaks in the OECD and that European countries had been dealing with 20 per cent inflation. It is an outrageous attempt to mislead and distract, simply breathtakingly dishonest, and especially so when set against any discussion of core inflation or the economic overheating. Take the New Zealand labour market for example: the unemployment reached its lowest level (extremely overheated) in the December quarter of 2021 (ie before the invasion), oil price pressures from the invasion never lasted long, and…..as importantly….both food and energy prices are typically “looked through” by central bank policymakers focusing on core inflation. On CPI ex food and energy measures, New Zealand’s peak was about middle of the pack among OECD countries (and the extreme headline numbers in a few countries were largely the result of the gas price shock to which New Zealand – no pipeline or LNG trade – was not exposed).
Orr then moved on to an interesting claim (that I have not heard him make before, and which has not been documented in any published papers or material in MPSs) claiming a) that to have kept core inflation in the 1-3 per cent range the OCR would have to have been raised to 7 per cent on the first day of the pandemic, and b) that even if that had been done we’d still have had 6 per cent headline inflation. Neither result seems very likely, and given Orr’s record of just making stuff up should be heavily discounted unless/until they produce some robust formal estimates. On Orr’s telling it would have taken more monetary restraint to stop inflation getting away than it actually took to bring it down again once it had gotten away. That doesn’t seem very likely, and perhaps a useful counterpoint is the experience of Japan and Switzerland which didn’t cut policy rates into the pandemic, and didn’t see a particularly severe later inflation experience. As for the 6 per cent claim, that seems simply preposterous, since there has been no time in the last few years when the gap between headline and core inflation has been anything like as large as 3 percentage points.
Later in the interview, questioning moved on to fiscal policy. Here I will give Orr credit on one point: he explicitly corrected the journalist to note that the current goverment had certainly cut spending, but that it had also cut taxes, and that the two effects were roughly even. This is exactly consistent with the estimates in Treasury’s cyclically-adjusted balance series (chart in Monday’s post), in which this year’s deficit is just a touch larger than last year’s. Of course, it would have been nice had the Bank made this point in its MPSs, instead of spending the last 18 months – both governments – avoiding the issue and focusing on largely irrelevant series of government consumption and investment spending (rather than the cylically-relevant) fiscal balance and fiscal impulse measures.
For the rest of it, Orr was back in his preferred space, playing politician and advancing personal political and ideological agendas that are simply out his bailiwick. It was, we were told, critical for governments around the world to close infrastructure deficits and New Zealand’s was “one of the worst”. He appeared to attack a focus on reducing deficits and keep government debt in check, suggesting that the government needed to spend “a lot more” on infrastructure, suggesting that New Zealand had been failing in this area since World War Two (a claim that of course went unexamined – in fairness no time – but presumably includes overbuilt hydro power capacity, sealed roads in the middle of nowhere etc). Now, in fairness, he did also talk about enabling private capital – this the same Governor who only a few months ago was bagging foreign investment – but the overwhelming tone was to welcome more public debt. Waxing eloquent he launched into Labour Party and left wing themes about how great it would be if governments were investing and delivering more “social cohesion” (around whose values Governor?), an “inclusive economy” and so on.
In any sane environment it would have been to have significantly overstepped the mark, but Orr has done that so often – and worse, with all the misrepresentations and denials – with no consequences (no rebuke from the Board or minister(s), reappointment for a final term comfortably secured, tame board chair reappointed etc) that no doubt it will again pass with little notice.
It really was a pretty disgraceful, if again revealing, performance. But then the fact that Orr still holds office, and the incoming government – that used to rail against him and his style and the corporate bloat – has been content to see things just run on as usual, is just another sad reflection of the debased state of New Zealand public life and standards. One of many to be sure, but no less acceptable for that.
Back in early October I wrote a post “Public policy just keeps on worsening”, on the then newly-announced Residential Development Underwrite scheme, under which the government will provide free downside price/liquidity insurance to big residential property developers, for a period that was said not to be forever but with no specific time limit, and instead with confident assurances from the minister (Bishop) that the government (Cabinet) would judge when to turn this subsidy off and on. It seemed like a classic example of bad policy, playing favourites at the big end of town, offering subsidies with no rigorous analysis of any sort of market failure, handing unconstrained discretion to ministers, and so on.
All this was stated to be being done with the primary objective of “maximising overall housing supply, while minimising the risk and cost to the Crown”. On which I noted in the earlier post
You minimise the cost and risk to the Crown by simply not offering free insurance, and if you must offer such insurance you should do so with a disciplined and transparent model (to, for example, estimate the economic price of the option). But there is nothing of that sort in any of the MHUD material, just a lot of mention of the (extensive) discretion afforded to officials, of whom we may be left wondering both what their expertise is and what their incentives are. Why would we back them to make better choices than financial market participants? And as for “maximising housing supply”, there seems to be no analytical framework there either, including around incentives on developers (who will, of course, prefer free insurance and can be expected to try to game the rules). Will there be any material impact on supply, will any impact be any more than timing, and how will MHUD rigorously evaluate claims put to them by developers? Oh, and isn’t developers finding themselves with overhangs of houses and land part of the way that much lower house prices actually come about?
I ended that post this way
It is a rather sad reflection of how the quality of New Zealand policymaking has fallen. Perhaps we should be grateful that exchange rate cycles aren’t what they were – and that past governments were less prone to scheme like this – or who knows what sort of free insurance the government would be dreaming up for exporters.
Who knows what the relevant government agencies thought of this scheme. I’ve lodged OIA requests and am particularly interested in any analysis and advice from The Treasury and the Ministry for Regulation.
You might have thought an arbitrary and apparently inefficient intervention like this would be grist to the mill for that new “central agency” the Ministry for Regulation, an opportunity to show any microeconomic chops they had. Instead, like true bureaucrats, they took a full 20 working days to reply to my OIA request to tell me that the new ministry had undertaken no analysis and offered no advice related to the Residential Development Underwrite scheme.
But I suppose I should be grateful they only took 20 working days (note that the law does not automatically give agencies 20 working days: the standard is “as soon as reasonably practicable). The Treasury, by contrast, took 40 days, insisting that they needed time for “consultations”.
There were only five papers. Two were from after the scheme was announced (operationalising the required ministerial delegations). The first two aide memoires were from January and February respectively in response it appears to advice from the Ministry of Housing and Urban Development, concerned about a possible “hard landing” in the housing construction market, and picking up on discussion of underwrite schemes that had been put in place as part of the ill-fated Kiwibuild scheme.
This is from the first of those aide memoires, dated 17 January
That is a pretty astonishing paragraph. Neither here, nor anywhere else in the papers, is there any attempt to justify a claim of “market failure”, and while we can all agree that government land-use restrictions have created and exacerbated many problems in the housing and urban land market they aren’t in any meaningful sense “government failures” either, but rather choices which governments could undo if they chose. And nothing in the first two sentences provides any serious or analytical support for the third sentence, apparently supporting fresh interventions. (There is of course little doubt that government interventions can affect the level of activity in particular markets, but the question is the robustness of the case for any such interventions.) That last sentence is also perhaps a bit puzzling: isn’t a subsidy to private developers going to add to private construction activity (not crowd it out?) and how are the efficiency and value-for- money tests even plausibly met when guarantees are handed out for free?
Carrying on through the papers we find this snippet
Really? Our Treasury thinks a mitigant is that bad underwrites can simply be stuck in the bottom drawer in the hope that one day something will turn up…. And here one thought a wider goal of a housing reform process was permanently lower real house prices.
And these from the 16 February aide memoire
But there is no robust analysis anywhere, including not scintilla of analysis leading us to believe that Treasury had thought hard and robustly about why judgements of officials and ministers were likely to be better than those of private financiers, including reflecting hard on the incentives facing the two groups. Perhaps this is more of an example of ‘government failure’.
But what is perhaps more surprising still is that those notes were written in January/February, and then there is nothing released (or withheld) until the next document, which is dated 3 October. The Residential Development Underwrite scheme was announced on 4 October.
There are several things interesting about this aide memoire
(rather trivially) Treasury has withheld, as out of scope, more than half of the title of the aide memoire, only to release the title in full in their letter to me
much more substantively, the paper is dated 3 October, and is described as being for a meeting with the Minister of Housing on 7 October. The paper goes on to note that, as far as Treasury understood things on 3 October, “the RDU will be announced before the end of October”. It was, of course, announced the following morning.
and perhaps most remarkably of all, the substance of the RDU section of the aide memoire is just slightly more than one page, and is really all process oriented, and answer one detail question from the Minister of Finance about scope for changing the parameters once the RDU was in place.
In other words, assuming (as we must) that the OIA has been answered honestly, there was no Treasury advice at all on the specific development of the RDU, or any of its parameters, and the scheme itself was rushed out far more quickly than The Treasury had understood just the day before the actual announcement.
It is a poor and unnecessary policy, underpinned it appears by a poor policy process, a central planners’ mentality (government knows best how many houses should be built etc) and a cast of mind from The Treasury that seems astonishingly more sympathetic to big-end-of-town corporate welfare handouts and ministerial discretion than would have seemed even remotely plausible in the heyday of The Treasury. And perhaps, as is the nature of so many of these sorts of interventions, many economists are suggesting that the residential building approvals cycle was already bottoming out even before ministers and bureaucrats rushed out their shiny new subsidy toy.
This post was prompted by watching the Prime Minister’s interview on Q&A yesterday (where I don’t think either the interviewer or the PM did particularly well). My interests here are only in the first (economic) half of the interview.
Minor things first. You had to wonder about the staff work when the PM professed to have no idea that on the IMF forecasts New Zealand’s annual real GDP growth is around the 10th worst of the 190 or so places the IMF does numbers for. It is a line Auckland professor Robert MacCulloch has been running for some time, and others have picked up and repeated his point (including me, more than a year ago). If you (or your staff) don’t read them, then Google’s AI Overview tells the same story for real per capita GDP.
That’s pretty bad (and, to be clear, it is not Luxon’s government’s fault).
Perhaps less importantly, asked which countries hadn’t had a bout of really high inflation, Luxon had no idea (Japan and Switzerland would have been reasonable answers). And he seemed to have no idea either when Jack Tame asked if he was aware of any forecasters who’d become more optimistic on New Zealand’s medium-term economic performance since the government had taken office.
At a political level, one might wonder why Luxon allowed himself to be caught up in the obscure question of whether people at the bottom had improved their relative position in the last year. I suspect most voters for the governing parties weren’t really motivated by wanting to see more redistribution to the bottom (I remain staggered at the fact that in the first pandemic handout package – in a shock that seem likely to make the whole country poorer – Labour permanently increased real welfare benefit levels).
But lets come back to inflation? Luxon (and his ministers, and predecessors) have been loudly proclaiming for some time that the reduction in inflation (headline inflation currently 2.2 per cent, core measures rather higher) and the associated reductions in the OCR have been due to the efforts of the new government sworn in on 27 November last year. It is such a preposterous claim, and yet there seems to have been very little pushback against it, whether from journalists and interviewers or from the political Opposition (the latter perhaps preferring to keep quiet, lest focus come on the fact that inflation got away on their watch and they still reappointed the culprits – notably the Reserve Bank Governor).
Why do I say that it is preposterous? The bottom line of course is that we have an operationally independent central bank and its Monetary Policy Committee. They may not be very good at their job – they let inflation get badly away, were late and slow to react even when they saw the inflation, and their communications and policy have lurched all over the place as recently as this year – but…..they control the OCR lever, they generated the recession we’ve been over last year and this, and they (belatedly) got inflation back down again. Serious economic observers know this. The Prime Minister knows this. But he just repeats what is little better than a lie.
And, as Jack Tame noted to the Prime Minister, inflation has been coming down in lot of (advanced) countries, reductions that were presumably not caused by the election of the current coalition in little old New Zealand. Central banks globally have belatedly done their jobs. If the system didn’t work fully as it was supposed to – such blowouts of core inflation were never supposed to happen again – at least the fallback worked and inflation generally now seems more or less back to around target(s).
So, at best, the Prime Minister’s claim (if it had any substance at all) must be that somehow things his government had done had meant inflation this year had come down faster than it would otherwise have done. Unfortunately, the Reserve Bank does not publish forecasts for core inflation measures (and current headline numbers get messed around by one-offs, whether oil prices changes or changes to government taxes and charges). But the Reserve Bank’s last projections done before this government took office (the Nov 2023 MPS) had headline inflation comfortably inside the target range by now, and – perhaps coincidentally – I see that the November 2023 projections for quarterly inflation in the Dec 2024 and Mar 2025 quarters are exactly the same (0.4 and 0.5 per cent respectively) as those in last week’s Monetary Policy Statement. It would be fair to note that the OCR projections/actuals are much lower, but it was always a mystery a year ago why the MPC then thought the OCR now would still be 5.7 per cent even with inflation comfortably inside the range. They were, eventually, mugged by reality.
But there are two problems with any suggestion from the Prime Minister that his government can take the credit for the inflation outcomes we’ve already seen.
The first is timing. As central bankers rarely fail to remind people, monetary policy works with lags. Changing policy today might not affect inflation very much at all in the first quarter or two, and won’t have its full effect for perhaps 18 months. That is why monetary policymakers put so much emphasis on projections. The government was sworn in on 27 November, and the September quarter CPI (the 2.2 per cent annual headline rate the government likes to talk up) was measured at mid-August. So there was basically eight months from when the government took office to when the CPI was measured. Even had fiscal policy been materially adjusted (actual money going out the door) in the first few weeks, there just wasn’t enough time to have had much of an effect on (core) inflation, or what monetary policy was required.
In principle, perhaps, the expectation of swingeing fiscal policy adjustments might just have done the trick – expectations do affect behaviour – but that wasn’t what the coalition, now in government, either promised or did. Any return to operating balance or surplus was going to be done pretty gradually, over multiple years.
And there was to be no adjustment at all in the first year. Don’t take it from me. This chart is taken from the recent speech by The Treasury’s Chief Economic Adviser and reports numbers published with this year’s Budget.
The blue line is the cyclically-adjusted balance, and you can see that the projected deficit for this (24/25) year is no smaller (in fact, a little larger) than the estimated cyclically-adjusted deficit for 23/24. Yes, there have been spending cuts (and some tax increases, notably the egregious removal of depreciation on buildings for company tax purposes), but this year they have all (and slightly more) gone to fund a range of new giveaways (tax cuts, childcare subsidies etc). It was pretty much what was promised, but it simply isn’t fiscal consolidation and it hasn’t put, and isn’t putting, downward pressure on demand or inflation. If you wanted to be particularly harsh you could contrast this year’s Budget with the 24/25 HYEFU numbers, but as they were largely on the previous government’s policy it is probably fair to set them aside as akin to vapourware.
So:
(core) inflation is coming down in a bunch of countries,
central banks have (belatedly) done their jobs,
New Zealand inflation was forecast to be well inside the target range by now, on RB projections from just prior to this government taking office,
anything but the most draconian fiscal adjustments simply wouldn’t have had time to have made a material difference to inflation by the time the Sept CPI was measured, and
in any case, there has been no aggregate fiscal consolidation yet (cyclically-adjusted deficit this year is estimated to be slightly bigger than that last year).
The rank dishonesty of the claims coming from the government hardly conduces to lift confidence and trust in governments more generally.
Oh, and if the government were really serious about much better performance on inflation, you might have thought that they’d have replaced the chair of the Reserve Bank Board (which is supposed to monitor MPC on our behalf) and not extended the term of an elderly non-executive member who has been in office right through the costly and enormously disruptive monetary policy mistakes of recent years.
What of fiscal policy itself? It doesn’t bode well when a new government does no aggregate fiscal adjustment in the first year of a three year term, having inherited – and known pre-election it would inherit – a structural deficit, in which not even the cost of the groceries was being covered by tax revenue even when the economy was fully employed. The government has already continued the drift evident in the last couple of years of Labour, with the crossover point for getting back to a balanced budget drifting relentlessly into the future.
Recent comments from The Treasury, from senior minister Chris Bishop (“we won’t be a slave to a surplus”) and the silence of the PM yesterday more or less assure us that when the HYEFU numbers come out in a few weeks, the return to balanced budget will have been delayed yet again. Pretty soon we’ll be on a track for decade of Robertson/Willis deficits, with the 14 straight years of balanced budgets or surplus under National and Labour governments in the 90s/00s just a dim memory for the economic historians. The Prime Minister seems unbothered, happy to mouth rhetoric about being ‘committed to getting to surplus” …..one day perhaps, but not now (and note that comments from Barbara Edmonds over the weekend suggest that Labour is no better). The fiscal pressures of an ageing population – especially pointed when no one will adjust the NZS age – get not a mention. Oh, and Luxon had the gall to suggest that there was a need to be “fiscal conservatives”. A balanced budget would be nice Prime Minister.
And then there is what should be the enormous elephant in the room: productivity. Luxon was happy to acknowledge it was an issue (even Labour ministers used to do that) but not much more.
Here is the path of New Zealand real GDP per hour worked since just prior to the start of the last major recession. It is a bit less bleak than one in the recent Treasury speech (I think because I’ve allowed for a 2016 break in the hours series) and I’ve added the orange line (stylised) to take account of the revisions to real GDP over the last couple of years – which will boost measured productivity – that SNZ announced the other day were coming later this month.)
If it isn’t as bleak as Dominick Stephens’ chart, it is still pretty bad. Since about 2012, productivity growth (allowing for the revisions) has averaged only about 0.5 per cent per annum, and although Covid disruptions mess up the picture there isn’t much basis for seeing things under the previous National government as much less bad than those under the recent Labour government. Now, people can fairly point out that productivity growth in recent years has been poor in a range of advanced countries (US excepted) but…..we start from so far behind many of those countries that it isn’t any sort of excuse. For 40 years, the goal of catching up with the OECD leaders has been talked about, but hardly ever has there been any progress in that direction. It would take a 60 per cent (or more) lift in average New Zealand economywide productivity – on top of whatever growth the leaders were achieving – to close those gaps. It was a shame that Tame didn’t take the opportunity to point this out (it isn’t exactly state secret data).
As for Luxon, there was brief mention of his mantra – his five point plan for productivity. The problem with his five point plan isn’t that there is necessarily much wrong with items in it, but that it simply isn’t equal to the scale of the challenge. You don’t get big game-changing results off a series of really rather small policy changes, even when they are eventually implemented (eg nothing necessarily wrong with trade agreements with the UAE, but it is pretty small beer, and successive governments have been signing such deals for years, even as the export share of our economy has been shrinking). There is no sign or sense of much urgency, or of ideas or policies equal to the task.
Tame did ask about the company tax rate, although he didn’t point out that ours is now one of the highest among OECD countries, or that the company tax rate is particularly important for foreign investors. Luxon, sadly, had no substantive response other than to briefly note that it wasn’t “a focus”. There has been money for giveaways, but not for either closing the deficit or for initiatives that might actually make some longer-term difference to the attractiveness of business investment in New Zealand.
Finally, Tame made the fairly effective point that if the government was really getting things back on track and improving economic performance, surely it should be showing through in economists’ medium-term economic forecasts. His researchers had found no evidence that any forecaster had in fact revised up their medium-term forecasts.
I’m not sure what measure he was using or how many forecasters he checked, but in that vein this table summarises the Reserve Bank’s projections for “trend productivity” growth from the Monetary Policy Statements going back to November last year (completed just before the government took office)
I wouldn’t necessarily put too much weight on those numbers. The Reserve Bank isn’t a productivity-focused agency, and these numbers probably won’t have had much, if any, MPC attention. But, equally, the Reserve Bank has no particular partisan axe to grind, and their numbers don’t seem inconsistent with the spirit of the sorts of comments coming out of The Treasury in recent months. It is all rather grim, and the Bank forecasts using government policies as put in place, not some idle wishlist of things that might – but probably won’t – be.
croaking cassandra 