And that is that

December 11, 2025December 11, 2025 Michael Reddell Uncategorized

About 15 years ago (partly thanks to a couple of years at Treasury, partly to the financial crises in the US and Europe) I started to get much more systematically interested in New Zealand’s disappointing and underwhelming economic performance, and in economic and financial history more generally. And as our kids were growing I was thinking about what to do next. The idea of writing a blog (it was still the heyday of economics blogging) appealed, focused on New Zealand economic (under)performance issues – something I obviously couldn’t do as a public servant. The kids were going to grow up fast and I wanted to be around more for them. My wife got to a position in her career where we could live fairly comfortably on one income and fortunately that coincided with Graeme Wheeler’s desire to be rid of me. And thus, with that double coincidence of wants, this blog launched on 2 April 2015.

Those who’ve followed the blog from early days may recall that for several years I was often writing twice a day, often six days a week. I had fairly voracious interests and the blog found a surprising (to me) number of readers. It also became more Reserve Bank focused than I’d ever envisaged (productivity etc matters a great deal more).

From time to time I’ve thought about how long to continue and in what form. Frequency of posts dropped off, through some combination of circumstances, including poor health for much of the last five years (weird fatigue, including post-Covid, that came and went to some extent but never seemed to go away) and other commitments. I was fortunate enough to be appointed to the board of the (central) Bank of Papua New Guinea two years ago, which has proved to be a big time commitment, and introduced something of a six-weekly cycle to posting here.

On the 10th anniversary of the blog earlier this year, I noted

Circumstances change and I’ve got busier. I have occasionally thought about shutting it down and doing other stuff – I had an outline on my desk when the BPNG appointment came through of a time-consuming project I’d still like to pursue. For now, various circumstances and considerations mean I’m going to try to discipline my public comment more narrowly. There has been an increasing range of things I’d like to have written about but it wasn’t possible/appropriate. For this blog that will mean primarily Reserve Bank things, fiscal policy, productivity and not much else, which was the original intended focus.

And now the time has come to discontinue the blog, at least as a forum for regular economic and economic policy commentary/analysis. I certainly haven’t lost interest in the issues, and the economic and institutional problems, here and elsewhere, haven’t gone away. But there have been a couple of influences. As I noted in April there has been an increasing range of things I couldn’t really comment on. Some of that was about the senior role my wife has held this year (eg largely avoiding things – many – her minister was responsible for). But longer-term my BPNG role, where I now chair the board’s financial stability and related issues committee, has also come to act as a constraint: I don’t find it as easy to comment much on things like bank capital, CBDCs, exchange rate regimes, financial market regulation, payment systems, emergency liquidity provision, failure management (or the IMF). I’ve also become increasingly uneasy about writing on central bank governance and related issues, even when specific issues are very different by country. I’d have stopped months ago if it hadn’t been for the whistleblower whose disclosures to me helped us get closer to the bottom of the Orr/Quigley stories.

So those were some constraints. But at least as importantly is the question of opportunity cost. I could have kept on writing this blog in some form or another more or less indefinitely. But time isn’t unlimited, and having given this ten years plus, I might have ten good years ahead. There are other things to do and focus on. As just one example, thinking more seriously about New Zealand’s economic and financial history, including in a cross-country context.

And, mercifully, in recent months my health seems finally to have fully recovered. I’m back to walking, fairly fast, an hour a day and getting home not exhausted. It is a very nice change to have that energy back.

I’m not going into some sort of economics purdah, but I won’t be writing regular commentary etc here at all. I will leave the website in place, and may occasionally add a post on some interesting economics book I’ve read or an aspect of economic history that takes my fancy. Perhaps also I’ll weaken very occasionally if some current issue really gets my goat, but this post is about tying myself to the mast. My intent is to stop, and to stay stopped.

And if I’m writing shorter pieces much of it may be more oriented towards my fellow Christians. I do have another blog, and I have started writing there again in the last couple of months. I intend to keep on with that, and to read more deeply in theology, biblical studies, and related societal issues.

Anyway, thank you to the everyone who has read the blog over the last 10+ years. It has, mostly, been fun, and stimulating. Writing has often clarified my own thinking and it has been great to have had an audience. I’ve enjoyed interacting with a range of people through blog comments and private correspondence. And I’m not going anywhere.

It is the church’s season of Advent. In the first few years of the blog I’d often include some explicitly Christian material to end my final post each year. So here I’ll leave you with the words of one of my favourite Advent carols.

Fiscal failure

December 10, 2025December 10, 2025 Michael Reddell Fiscal policy, Uncategorized

Back in the far flung days – well, really only just more than two years ago – the National Party went to the election with a fiscal plan under which the government’s operating deficit would have been more or less closed by now. This was the table from that plan.

And in case you are wondering, the PREFU projections that provided the economic base for National’s numbers still had a negative output gap of 0.9 per cent of GDP for the 25/26 year, so it wasn’t exactly a rosy economic scenario. But the deficit was to be more or less closed by now ($1bn for the full year is a bit under 0.25 per cent of GDP, and by the second half of that year – which we are almost in – presumably consistent with a tiny surplus).

There will be an update with the HYEFU next week, but in this year’s Budget – where the government last made overall fiscal decisions – the deficit for 2025/26 was forecast to be $15.6 billion.

Now, to be fair, going into the 2023 election National wasn’t exactly making much of the structural deficits they expected to inherit (I recall at the time noting that there were few or no references to the deficit in the fiscal plan document). And, thus, I guess they’ve been consistent. When the deficit turned out to be more embedded than they’d expected – Treasury having badly misjudged how much tax revenue the economy was generating – National chose not to be any more bothered. They simply chose, in both budgets so far, to do nothing at all about closing the deficits.

This had been apparent in Treasury’s analytical numbers. They publish estimates each year of the structural deficit – ie the bit not amenable simply to the cyclical state of the economy.

This chart was from 2024 budget documents

History is as it is (or, at least, is estimated to be). The medium-term future numbers are, under any government, just vapourware (Treasury uses the future operating allowances the then Minister advises them, which need not bear any relationship to what is actually done when the time comes). But what I’ve highlighted is the move from one year to another, for the fiscal year to which the Budget relates. Thus, in the 2024 Budget Treasury had an estimate as to how big the structural deficit had been for 23/24 and then, given the hard decisions ministers were making, and getting parliamentary approval for, a forecast as to what the structural deficit would be for 24/25. As you can see, in that Budget, the government chose – they had these numbers and associated analysis – to take steps that, taken together, slightly worsened the structural deficit.

The picture from the 2025 Budget was much the same

For a second year in succession, this government’s Budget slightly worsened the structural deficit.

Of course, all the numbers are imprecise estimates, but they were the best estimates available to ministers when they made the Budget decisions.

And recall that a structural operating deficit is akin, in a family context, to borrowing to pay for the groceries even when the family’s employment and income position is pretty normal. A bad practice….for the family, and for the Crown.

It was the Secretary to the Treasury himself who told FEC last week that there had been no fiscal consolidation under this government.

Things haven’t got radically worse in structural terms, but all this has come on the back on deficits under the previous government, and the ever-increasing ageing population fiscal pressures that Treasury has (among other people) warned about for years.

Of course, it hasn’t suited politicians on either side of the aisle to acknowledge Rennie’s point. The government has repeatedly suggested that their fiscal consolidation efforts have helped considerably in bringing about the large cuts in the OCR over the last 16 months, while the Opposition has been content to suggest that something akin to a “slash and burn” approach explains the weakness of the economy over that period. The numbers don’t back up either side – which surely their smarter people actually knew? – because there has been no fiscal consolidation. Sure, the government has cut some spending, but those savings have been (slightly) more than outweighed by new spending. Consistent with that. core Crown expenses as a share of GDP for 2025/26 were estimated at Budget time to be 32.9 per cent of GDP, up slightly on the previous year, and a full percentage point higher than the last full year for which Labour had been responsible. All those numbers are in the public domain, but….politicians……. (In the last full year pre Covid, by the way, spending was 28.0 per cent of GDP.)

Ah, you might be thinking, but what about the interest burden run up by the accumulated deficits of recent years. Surely the incoming government was pretty much stuck with that, making overall expenditure cuts more difficult? And there is something to that, so in this chart I show primary spending (ie excluding the finance costs line from the core Crown expenses table).

It doesn’t really make much difference to the picture: primary spending is still a) far above levels for the June 2019 year (last pre Covid), and b) higher than in the last full year of the previous government, both as a share of GDP.

Spending levels aren’t really my focus. If governments want to spend more then so be it, provided they raise the taxes to pay for the spending. This government simply hasn’t done that, and so the structural deficits stay large, and have been widened a bit (an active choice, not a passive outcome).

In the last couple of days there has been something of a spat between the current Minister of Finance, Nicola Willis, and her National predecessor Ruth Richardson. It seems there is to be a debate between them, after the HYEFU numbers come out next week. But if no one ever really expected Nicola Willis to take anything like a Ruth Richardson approach to public finances, her comments yesterday (as reported in The Post, still seemed extraordinary.

Can the Minister really have been serious in suggesting that any fiscal consolidation – and recall she did none – would have come only at the cost of “human misery”? Fewer film subsidies for example? Or cutting the Reserve Bank budget back a bit more? Or…… (and there is a long list of new initiatives, all choices)? Really?

I’m not overly interested in relitigating the Richardson record, particularly in 1990/91. One can mount an argument that by the time National took office in late 1990, there was already a primary surplus – itself usually sufficient over time to bring finances into order – with the high interest costs themselves somewhat exaggerated (in terms of real burden) by the persistently high inflation of the previous few years. And, as it turned out, even the return to headline surpluses took place sooner than had generally been expected after the 1990 and 1991 fiscal cuts (I was co-author of a Reserve Bank Bulletin article that attracted the ire of Michael Cullen for suggesting that surpluses might not be too far away, and even we were too pessimistic). All that said, fear of large credit rating downgrades was a major consideration at the end of 1990 and into early 1991, and the second failure of the BNZ wasn’t exactly confidence-enhancing. (Then again, the demographics were much less unfavourable back then – in fact quite favourable for the following decade or so, given low birth rates during the Great Depression.)

But whether or not the full extent of the fiscal adjustments back then were strictly necessary is beside the point now. We have much better fiscal data and analytical models, and we have substantial structural deficits on which the government has chosen to make no inroads at all, all while also doing nothing about the medium-term demographic pressures on government finances. The Minister is quoted in the Herald this morning as suggesting (in effect) that the lady’s not for turning, and that she is keeping right on with her borrow and hope strategy – hoping, no doubt genuinely, that one day something will turn up and the deficits she has chosen to run will just go away. If they don’t, we are on a path that – persisted with – takes us in the same direction as, for example, the UK, once – not that long ago – an only modestly indebted advanced economy.

Cross-country comparisons of fiscal situations aren’t made easy by the way New Zealand presents its own data (useful for some purposes, but rendering comparisons hard). But twice a year the IMF produces a Fiscal Monitor publication with a range of indicators presented on a comparable basis across countries. This chart, using data from the October issue, shows the cyclically-adjusted primary balance for New Zealand and other advanced countries (these are overall balances, not operating ones). There are countries running larger deficits, but most advanced economies are running much deficits or even primary surpluses.

When it comes to deficits, the New Zealand government is choosing to do poorly on almost metric you choose to name (history, cross-country comparisons, expectations of the Public Finance Act). And it is choosing to do nothing about it. With an election year next year, not a time known for fiscal consolidation.

I had noticed reports that the Taxpayers’ Union was launching its own campaign on these issues, and the government’s fiscal fecklessness – choosing to do nothing about fixing a problem they inherited. I don’t have anything to do with that but while I was typing this a courier turned up with the props they are distributing to journalists and commentators. I’m sure we’ll enjoy their fudge.

Is it a fiscal fudge though? More like open and outright bad, and rather irresponsible, choices. We need something better.

Geoeconomics: fragmentation & the future of globalisation

December 9, 2025December 10, 2025 Michael Reddell Trade

That was, more or less, the title of two events I attended at the University of Auckland last Thursday. With the help of generous funding from the Sir Douglas Myers Foundation (in particular), the university had been able to bring in a bunch of well-regarded overseas academics and prominent “public intellectuals” for several events focused on issues around the potential and actual disruption to economic globalisation as a result of overt political choices (notably, the tariff policies of recent US administrations). The key person driving the programme seems to have been Prasanna Gai, professor of macroeconomics at Auckland (and, of course, a member of the Reserve Bank Monetary Policy Committee, where he sets something of an example to his colleagues by actually being willing to deliver speeches and outline his thinking).

I gather there was a more technical academic-focused event on Friday, but the two events I attended were the full day workshop on “Geoeconomics and the Future of Globalisation”, and an evening public dialogue event “Geoeconomic Fragmentation: Challenges and Opportunities”.

The workshop was conducted on Chatham House rules so I can comment only on what was said and not who said it. Attendees were a mix of academics, market economists and the like, and public servants and people with official roles. I’m not quite sure why the presentations – mostly from academics – were non-attributable (several speakers drew on their published papers) but anyway, those were the rules.

The evening event featured two visitors, in dialogue (of sorts) moderated by Gai. The first was Andy Haldane, formerly of the Bank of England and now one of the great and good, whose op-eds on all sorts of interesting issues, and angles on those issues, pop up not infrequently in places like the Financial Times (one of those Brits you feel sure will end up with a knighthood or perhaps a peerage). And the second was Laura Alfaro, currently chief economist of the Inter-American Development Bank, on secondment from an academic position at Harvard Business School, and also a former minister in her native Costa Rica. I doubt I am seriously breaching the rules if I say that Haldane’s remarks at the evening event (see below) were very very similar to those at the earlier workshop.

The whole area of so-called geonomic fragmentation should be fascinating (indeed, one panellist went so far as to call it “the only topic”) After all, not only do we have Trump (and between his terms Biden, who didn’t exactly dismantle Trumpian protectionism from the first term), but issues around both the political and economic rise of China, the widespread use of unilateral US sanctions (a recent book on which I wrote about earlier in the year), and of course the intense efforts from some countries (including little old New Zealand) to use sanctions to put pressure on Russia and its ongoing war on Ukraine. In our own remote corner of the world, I presume New Zealand restricting aid to the Cook Islands over apparent geopolitical concerns won’t exactly be good for bilateral trade.

There were some interesting presentations. I particularly enjoyed a keynote address on global value chains and geonomics, and especially the way in which connections of individual firms are often more important to focus on than industries or countries per se (thus, the dependence of TSMC on single firms in Holland (ASML) and Germany (Zeiss)). We were also reminded that most firms that import buy a particular product from a single supplier, with little or no effective diversification, something extreme tariff uncertainty may change. This presenter also reminded us that up to 40 per cent of US trade now involves dual-use products where national security considerations can reasonably come into the mix. That lecture concluded with a reminder that trade policies will be shaped by whatever it is that governments want to maximise at a point in time, and there is no necessary reason why that goal should be maximisation of near-term GDP. National security considerations are to the fore much more than they were, or than was readily conceivable, in the 1990s and 2000s. But there was also a reminder that if private firms will never internalise all externalities, those same private firms will innovate quickly when the rules of the game change (thus China’s current chokehold on “rare earths” is unlikely to last long).

There were also useful reminders as to just how much the tariffs etc have changed trade between US and Chinese firms: China’s share of US imports has now dropped back to around where it was 20 years ago. And yet at the same time both Chinese exports and US imports in total have continued to grow. There was an argument made by several speakers that as yet there is little sign of overall globalisation having gone into reverse. In his evening address, Haldane was particularly strong on this claim, arguing that flows of goods, and people, and money (and even more so information) are at levels never before seen, and (more ambitiously) that the benefits of these flows were at least as large as economists like him had argued for (I was curious where he was going to find the evidence of the economic benefits of large scale immigration to his own country, it of the underperforming economy, but no one asked). Haldane argued that much of what was wrong with political tides, public mood etc, was that economists had underestimated the social and redistributive effects of globalisation. Count me rather sceptical, but Haldane – a technocratic social democrat – saw it as grounds for more and smarter government, to enable people to reskill, retrain etc. He was also openly championing industry policy – seeming to conflate legitimate national security issues with the rather more dubious of politicians and officials trying to pick winners (and wasn’t even that compelling on the national securituy side in suggesting a place for food protectionism). And if he was overall optimistic (self-described) he still saw risks of all falling apart, an unravelling of open trade, and risks around a crisis over high and rising public debt. Quite what the latter had to do with geoeconomics wasn’t clear to me.

Haldane was a funny mix. He seemed keen on international financial institutions leading the public dialogue on the benefits of globalisation (as if such agencies – IMF etc – commanded mass public trust…..), and also called on business to play a more prominent role (good luck with that). But when asked about the role of technical experts I thought he was to the point in asserting that they need to wear lightly what expertise they have, and be much more willing to own up to mistakes (“we all make them after all”). I don’t recall if he mentioned them specifically, but central banks seemed to be among those he had in mind. If you like citizen panels to deliberate on policy issues, Haldane too was keen. Quite what it had to do with the geoeconomic challenges wasn’t quite clear, although I think that he, like some other participants, were inclined to aa view that if only the public were made to see what was good for them normal service could be resumed (one speaker at the workshop was robustly, but shallowly, of that view regarding mass immigration). Quite how it took account of the activities of places like Russia and China wasn’t clear.

Of the evening speakers, I found Alfaro (from the IADB) much the more interesting, partly presenting work she’d done for a Jackson Hole paper a couple of years ago and in pushing back on some of Haldane’s enthusiasms (industry policy for example). Like many speakers she noted that the US protectionism was unlikely to dissipate quickly – that the political environment had changed, and that little about that was unique to Trump. She reported some results in which public respondents were very sceptical on trade, and retained that scepticism even when presented with apparently hard evidence of the benefits. She stressed the decoupling of trade between the US and China, but also argued that so far that had proceeded smoothly, often supported by banks to enable firms to reallocate business, and that there was little evidence of overall deglobalisation. As for whether the vaunted “rules-based-order” could re-establish itself, she placed considerable weight on the willingness, or otherwise, of the US to assume leadership in a multilateral context. I got the impression she was not optimistic.

There was quite a strong sense from speakers of hankering for a better time (perhaps 15-20 years ago). I was less convinced that this particular group of speakers had much to offer in thinking through the economics of geopolitics and associated fragmentation issues. No doubt they were experts in their own narrow fields, but perhaps those were more about “what are the effects and where do they show up” (interesting in its own right) rather than in how best, and when, to deploy economic policy instruments. China itself attracted very little attention – whether for example modern slavery issues and associated restrictions, political interference, alliance with Russia, threat to Taiwan, or whatever. Politics – geopolitics especially – just wasn’t the comfortable place for most of these presenters.

One speaker – who has a lot of published material in this area – was among those emphasising a standard result that if, say, the US imposes large tariffs on other countries they should not retaliate as doing so would only make the retaliating country poorer. On the assumptions in the model, of course that is sensible – overall, the cost of trade protection are mostly and ultimately borne by consumers in the country imposing the restrictions. But one of those assumptions – in fact a critical one – seems to be that trade policy retaliation does not then change, for the better, the behaviour of the original protectionist power. But there was no analysis of when and whether that might, or might not, hold. Alliances were mentioned a few times during the day, but never very systematically. One of the things that was striking to me back in March/April was the way countries seemed to make no effort at all to work together to push back on the rogue actor in Washington (in our part of the world, for example, Luxon and Albanese offered no vocal support to the Canadians). I have no idea whether a more concerted effort might have deflected Trump (perhaps it would have worsened things) but you might have hoped for more analysis of the issue.

It is easy for economists to simple wish that politics would stay out of the way, and derive results that assume it away. It is also easy to focus on GDP maximisation (or some less crude utility form of that), but – as above – much depends on what politicians actually want to maximise. No doubt modellers in August 1939 would have told us that retaliating against the next German aggression would only make us poorer – and of course, it did so dramatically, as massive cost of blood and treasure – but a handful of courageous countries (Britain, France, New Zealand, Australia, Canada, South Africa) concluded that it was a price worth paying for a better, but risky, outcome. No doubt when China invades Taiwan, modellers – and firms – will produce results showing that retaliation will only make the rest of us poorer. No doubt, but do we just sit by? Most of the West has chosen not to in respect of Russia even when, as in the New Zealand or Australian case, Russia poses little or no direct threat to us. In my view, we were right to do so. And then of course, which instruments work best, which risk being self-liquidating (eg concerns about US overuse of unilateral sanctions motivating innovative to reduce that exposure).

Finally, there was quite a strong sense that the workshop and dialogue were quite northern hemisphere focused. Amid all the upbeat reminders about the ongoing reach of globalisation I don’t recall anyone all day pointing out that, at least on trade in goods and services, globalisation in New Zealand has been going backwards for 20 years now, without anyone even consciously trying.

Lest I sound unduly negative, I enjoyed the day, caught up with people I hadn’t seen for a while, and appreciated the invitation. And surely the benefit of events like these is if attendees coming away thinking a bit deeper or broader themselves, even if a little orthogonally to the actual papers presented.

Productivity growth (or lack of it)

December 8, 2025 Michael Reddell New Zealand economic performance

In a post last week I included this chart of the latest annual OECD data on labour productivity, expressed in PPP terms.

It was grim, in a familiar sort of way. New Zealand’s overall economic performance has long been poor (the halcyon days when New Zealand was in the top 3 in the world relegated to the history books, and stories the older among us might have heard from grandparents etc). These days more and more of the formerly communist central and eastern European countries are passing us (Romania – highlighted – will probably do so in the next five years or so).

But it reminded me of the Prime Minister’s State of the Nation speech back in January, which was full of fine rhetoric about the need to do (much) better. He told us that “2025 will bring a relentless focus on unleashing the growth we need to lift incomes, strengthen local businesses and create opportunity”.

At the time, I welcomed the rhetoric but rather doubted that the substance would come anywhere near matching it, pointing out that although in its first year the government had made some useful reforms (with productivity in view), in other areas they had taken things backwards. And they’d made no progress at all on fiscal consolidation which, while not in itself critical to productivity prospects, was not a great signal. Together with Don Brash (who’d chaired the 2025 Taskforce 15 years previously, when an earlier government’s rhetoric had briefly talked up closing those income and productivity gaps) I wrote an op-ed for the Sunday Star Times (full text in the previous link), lamenting the decades of aspirational cheap talk on the one hand and lack of realised progress (productivity gaps as large as ever or widening further) and ending this way.

We can choose to continue to drift, with just incremental reforms, as successive governments have done for 30 years even amid the fine talk. But if we do, more and more New Zealanders are likely to conclude rationally that there are better opportunities abroad, and for those who stay aspirations to first world living standards and public services will increasingly become a pipe dream.

It is a multi-decade challenge under successive future governments, but as the old line has it the longest journey start with the first step. We hope the Prime Minister’s bold rhetoric signals the beginning of a willingness to lay things on the line, to lead the debate on serious options, to spend political capital, for the serious prospect of a much better tomorrow for our children and grandchildren.

Where do things stand almost a year on? In cyclical terms, there isn’t much to show for the year. GDP growth has been on average weak (I’m assuming next week’s September quarter number comes out respectably), the unemployment rate has crept up a bit, business investment has been weak, and so on. But, for all the rhetoric and cheap attempts to either claim credit or cast blame, governments usually have little influence over short-term real economic developments, the more so in this era of operationally independent central banks. In our case, the weak economy mostly seems to have been the lagged effect of belated Reserve Bank actions to get inflation back under control, the Bank itself having previously misjudged (in tough circumstances) and let it get away on them. That, of course, doesn’t stop ludicrous government claims that falling interest rates have resulted from government actions and choices, or equally ludicrous suggestions from the left that somehow slash and burn fiscal policy accounted for the recent economic weakness. In short, there has been no fiscal consolidation. Don’t take it from me: I just use Treasury data and charts and the Secretary to the Treasury made exactly my point to FEC last week.

Good to see Rennie stating for the record what Tsy’s low profile analytical numbers have shown for ages about the last two budgets.

And next year is election year, so what chance consolidation then. pic.twitter.com/WgrXwUSRJ1
— Michael Reddell (@MHReddell) December 5, 2025

This year’s Budget was also (slightly) expansionary, increasing the structural fiscal deficit.

I noticed the other day a post from Don Brash in which he attempted an assessment of the government’s overall performance at the end of their second year. Don was interested in a wide range of areas, but it was the economic bits that interested me. (While noting the failure on fiscal policy) he scored the government reasonably well here.

Count me rather more sceptical. Overall, it looks to have been another year of a few useful reforms, some (modest) backward steps, and a much greater focus on attempting to gee up sentiment and activity (or appear to do so) before next October than any real drive to markedly lift New Zealand’s productivity prospects and performance over the coming decade (and thus, to the extent that good things are happening in schools, any overall economic gains are almost by necessity a decade or more away).

I’m a strong believer in much (and sustainably) lower real house prices (not just achieved by people consuming less house, less land) but, as Don notes, the Prime Minister isn’t. He claims to be keen on prices just rising less rapidly than they once used to. And although house prices have generally been falling in the last couple of years it still isn’t clear how much of that is more or less cyclical (unwinding the extraordinary 2020/21 surge) and how much might be structural. Productivity performance was pretty woeful a decade ago and real house prices now are no lower than they were then. Some economists believe that much lower house prices would themselves help materially lift productivity: I’m sceptical about that in our specific circumstances, and reckon improved housing affordability and responsiveness is mainly good (very good, if taken far enough) for its own sake. Young families on moderate incomes should be able to afford a basic house in our cities. It was so before and can be so again.

The government is tomorrow launching to great fanfare (huge lockup and all) its RMA reforms – one of the items the PM promised for this year back in January. We’ll see what that package looks like. In principle, reforms should be supportive of productivity growth. My story of New Zealand’s failure emphasises the apparently limited number of profitable opportunities here open to business (local or foreign) and if costly roadblocks can be removed the expected returns to opportunities will improve. More investment should follow.

But….it is a long road ahead. Whatever is announced tomorrow is not guaranteed to be what passes Parliament in (presumably) the dying days before the election next year. If there is a change of government (coin toss territory at present?), how likely is this particular package to endure? And, as we saw with the original RMA itself, what was initially seen as liberalising and enabling legislation turned into anything but, between the courts and successive lots of central and local government.

As for the government itself, we learned this year that the Minister of Finance had gone along with bizarre new Treasury schemes under which investment and regulatory proposals being evaluated by government agencies will use discount rates that are absurdly low and bear not the slightest relationship to the cost of capital. In the private sector, the government’s flagship policy in this year’s budget wasn’t about addressing the high tax rates on business income here but on subsidising firms to buy new capital equipment, with the biggest effective subsidy going to the sector (commercial buildings) they’d imposed a new distorting tax impost on only last year. So much for the efficient allocation of scarce resources, whether in the public or private sectors. Nor has there been any sign of top-notch appointments to any of the key economic agencies in the public sector – in the MBIE case, still no chief executive appointment at all. Small as such a reform might be, in an age of Trumpian tariffs the government hasn’t even gotten round to removing the remaining tariffs New Zealand has in place (including protection for the local ambulance building industry…of all things).

Looking back over the year it is a lot easier to be persuaded that what is driving the government – perhaps the Prime Minister in particular, and his “Minister for Economic Growth” is initiatives to grab a headline for a news cycle or two, with a focus mostly on next year’s election. We’ve had new film subsidies, new gaming subsidies, the taxpayer has been helping to buy a rugby league game for Auckland, and we’ve had the (laughable if it weren’t so bad) money thrown at the Michelin company to get their guide to cover New Zealand restaurants. Whatever you think of National’s new Kiwisaver policy, it isn’t going to shift the dial on productivity (where access to capital has never been the presenting issue, even if Kiwisaver changes ended up shifting national savings rates, itself questionable – to put it mildly). Headlines, and associated chirpy social media posts, seem to be where it is at, rather than a serious sustained reform effort, grounded in hardnosed analysis and New Zealand specific insights on just what has gone wrong here. What has seen us drift behind so many other countries.

It is one of those areas where I’d love for my pessimism to be wrong. There is a risk that after decades of failure it becomes too easy to be cynical about the latest efforts. But at this point, and two years into the government’s term, there is still little or no sign of things that are really set to turn out performance around. Inevitably a post like this has to be somewhat selective, but you could also look to the financial markets. Is there any sign, for example, of our stock market outperforming as investors markedly re-rate longer-term business (and profitability) prospects here? Not that I can see. And although our bond yields have been quite high by international standards for a long time – which is something one might also see if investment prospects were improving sharply – if anything those differentials are narrower now than they used to be.

The Prime Minister ended his January speech this way

But I’m afraid he and his Minister of Finance look as if they will slot in nicely with the sequence this old cartoon (which I first ran here almost a decade ago. Yes, there will be (may already be) a cyclical upturn, but the structural failings still lie largely unaddressed (and certainly unresolved).

A few charts updated

December 1, 2025December 1, 2025 Michael Reddell New Zealand economic performance

Over the life of this blog there have been a few charts I’ve kept coming back to. There have been some of the obvious ones, for example around the persistent underperformance of the New Zealand economy on labour productivity. It takes a while for a fairly annual data to turn up on the OECD database, but here are the near-complete 2024 estimates.

Just two observations on that chart:

First, it would take a 74 per cent increase in average labour productivity in New Zealand to match the average across Denmark, Belgium, and Switzerland (3 small European countries, not heavily reliant on nature’s bounty – unlike, notably, Norway). That margin – the steep hill we have to climb – has slightly increased in the last decade.

Second, Romania isn’t in the OECD but back in 2017 I wrote a long post about Romania and suggested then that if the relative performance of productivity growth in the two countries over the previous decade continued in another 20 years they’d have caught us (the backdrop of course being the absolute mayhem left at the end of the Ceaucescu regime). On present trends now (last decade’s performance), Romania is likely to pass us in perhaps another five years.

Then there were the foreign trade charts I updated in a post last week.

In a somewhat related vein, every so often I’ve run a chart (first devised for New Zealand by the IMF) that is a rough and ready indicator of the split between the tradables and non-tradables parts of our economy (tradables here being the primary and manufacturing sector, together with exports of services).

This is the latest version

The dismal nature of the picture (and economy) is captured in that blue line. Not only has the pre-Covid level not been regained, but the per capita size of the tradables sector of our economy is way smaller than it was 20 years ago. Meanwhile, the non-tradables sector, after a Covid and overheated domestic economy interruption, seems to keep tracking upwards. It isn’t a sign of a healthy economy.

And finally in this brief update post, what about wages? Every so often I’ve included this chart.

People don’t seem to find it very intuitive, but when the lines are going up wage rates (captured by the LCI analytical unadjusted series) are rising faster than nominal GDP per hour worked. When I first did the chart, perhaps seven or eight years ago, of course what caught my eye was the (quite strong) upward trend over 15+ years from about 2000. I saw it as another way of casting light on real exchange rate or competitiveness issues, and as not inconsistent with the inward skew to the economy apparent in the previous (tradables vs non-tradables) chart. Whatever the causes, relative to the capacity of the overall economy to pay (or generate income), wage rates were holding up strongly.

The series is noisy (terms of trade fluctuate quite a bit, and the hours worked series is also a bit noisy quarter to quarter). But there is also no mistaking that the trend apparent up to the late 2010s, arguably right up to the eve of Covid, has changed since. Wages have actual fallen back relative to nominal GDP, whether on the private sector or whole economy wage measure. (And for those who insist on a partisan lens, it doesn’t appear to be a Labour vs National thing.) The fall back isn’t large, absolutely or relative to the previous rise, but equally it isn’t inconsistent with all those polls suggesting that “cost of living” is still the most front-of-mind public concern.

There is no overall intende message in this post, just that coming towards the end of another year it is worth standing back and reflecting on the more structural aspects of how the New Zealand economy is doing (there will always be cyclical swings). In summary, not well.

UPDATE:

A commenter noted that in the first chart above NZ was just ahead of Japan. On this measure, we have been much the same as Japan for getting on for 20 years now.

Scattered MPS points

November 27, 2025November 27, 2025 Michael Reddell Monetary policy, Rodger Finlay

I don’t want to say much about yesterday’s Monetary Policy Statement itself. It was the last before the MPC knocks off for their very long summer holiday and the last for the temporary Governor, the last of the old MPC who were responsible for the inflationary mess (and all those LSAP losses). A 25 basis point OCR cut seemed like it was probably the right call, but it was good to see some evidence of a range of views (in the form of one dissenting vote).

I didn’t watch the press conference yesterday (and the video of it doesn’t yet seem to be available). Someone who did watch it told me that Hawkesby had suggested that the dip in economic growth in the June quarter was mostly due to Trump and the extreme uncertainty about US tariffs policy (and, I guess, how other countries might respond). He is reported as having suggested that otherwise the recovery had been on track. Such a line would certainly be consistent with the very heavy rhetorical emphasis the MPC, and one of its members in speeches, has been putting on uncertainty in recent months, albeit the frequency of use of the term in the MPSs seems to be dropping back again.

I don’t know precisely what words Hawkesby used, so perhaps it wasn’t as stark as what was passed on to me (the MPS text itself is fairly non-specific, while correctly noting that the -0.9 per cent was almost certainly not representative of how deep the real fall had been).

[UPDATE: In fact both Hawkesby and his chief economist – the latter more expansively – ran this line, citing not a shred of evidence in support of their story.]

But I’m sceptical that the (very real) heightened uncertainty around foreign tariff policy had anything much to do with the overall performance of the New Zealand economy in the June quarter. There simply aren’t any particularly obvious channels by which there would have been such effects. We weren’t Canada (directly in Trump’s firing line for a while), we weren’t subject to unusually large proposed tariffs (and our government was fairly clear they didn’t support retaliation), we weren’t likely to be facing higher prices (if anything lower, if large scale trade diversion happened), and while uncertainty can be a killer for investment projects few/none will turn on a dime (in terms of actual real outlays) anything like that quickly. None of which is to say that Trumpian tariffs are anything but bad for the world, and us (and I’ve consistently agreed with the RB view that they are, if anything, a negative aggregate demand shock from the rest of the world to us).

And if there was a material tariffs-uncertainty effect on New Zealand in Q2, surely we’d expect to have seen such an effect across many other countries, and showing up to a greater extent in many of those countries (in April appearing to face much higher tariffs or more dependent on US markets – remember (my post yesterday) we don’t export much by advanced country standards)?

What then do the data show (bearing in mind that all recent data are prone to revisions)? The OECD has a database of quarterly real GDP growth for member countries. Here is how quarterly real GDP growth in Q2 compared with that in Q1 (I’ve left off the US itself – source of the issue – and Ireland where tax effects mean quarterly growth rates are all over the place.)

There is no consistent pattern, but actually slightly more countries saw higher growth (often only slightly) in Q2 than in Q1.

And here is another chart, this time comparing Q2 growth with the average growth rate for each countries over the previous four quarters. Still no consistent pattern (although this time slightly more countries had lower growth than higher growth).

They are the sort of charts you might have thought the MPC would think to stick in the MPS. It may be – well, it is to me – a little surprising that global economic activity has held up as well as it seems to have this year in the wake of the tariff uncertainty, but…..for now, that is where the data seem to point. Perhaps effects begin to cumulate from here, but whether that happens or not, it is just hard to see much sign of Q2 New Zealand growth having been materially adversely affected. If the departing temporary Governor agrees, so much the better.

Since I was putting together this post I will add in here, as much for ease of future reference as anything, a few charts I put on Twitter yesterday, mostly going to one of my multi-decade hobbyhorses (dating back to 1997) of doubts about the merits, and value, of central banks publishing forward interest rate forecast tracks (not many do still).

This chart shows the Reserve Bank’s OCR projections through successive MPSs since late 2020.

They really had no idea what was going to be required. To be clear, I am not here bagging the RB MPC specifically (I’m pretty sure similar charts from the other central banks that publish endogenous forward tracks would look much the same). It is an observation about the (very limited) state of knowledge any and all central banks (and outside commentators) have, especially when anything interesting is going on with inflation.

To illustrate the point with just one date, here are the MPC’s successive forecasts for the OCR in the final quarter of this year (daily average).

18 months ago they thought the OCR – which they set – would be around 5 per cent by now. Yesterday they actually set that rate at 2.25 per cent (and I could show you similar charts for various market economists, so again this is not about bagging our specific group of MPC members). Sometimes of course really nasty exogenous shocks happen: it would be unfair to look at MPC forecasts from early 2019 and compare them with what happened in 2020, since Covid was essentially unforeseeable (for central bankers in particular). But nothing very dramatic has happened in or to New Zealand in the last eighteen months. The Bank simply misread how much pressure would be needed to get core inflation near target.

You can also see that with this chart, showing the Bank’s successive estimates of how much excess capacity was going to be needed at peak to get inflation down. In the scheme of things – data uncertainty, revisions etc etc – those estimates have really been quite stable.

But – see the earlier charts – they had no real idea what monetary policy settings would be required to deliver.

As I noted in my post last week on the new Governor, she has talked about improving transparency, and if the Bank follows through then that would be a good thing. But there is distinction between things you can be transparent about – the views, arguments, votes etc in any particular meeting – and things where you can certainly publish numbers but really there isn’t much value at all. Now, to be clear, market economists pay attention to those future tracks because the MPC produces them, and – if things are anything like what they were in my day – large amounts of time and effort goes into producing them (precisely because the MPC will know markets look at the track because the RB publishes it). But there is no substantive value at all – the MPC just does not have any decent idea what will be required 12-24 months ahead. Often enough – as we’ve seen this year again – they often don’t have a reliable or consistent view on the next quarter. Much better to focus energies on this quarter and next, recognising that almost all the information new to the Committee each time it meets is about the (quite uncertain enough) recent past with just a few pointers to the very near-future. You need mental models to think about medium-term implications etc, and perhaps formal ones for research purposes, policy scenarios etc but….forecasting really is a mug’s game, and in a central bank context the medium-term forecasts, notably for the OCR, add very little value.

And I can’t face writing anything much about this morning’s dismal announcement from the Minister of Finance. When expectations are low, she still undershoots.

Trade: NZ vs Australia

November 26, 2025 Michael Reddell Australia, New Zealand economic performance, Trade

For years now it has been recognised that New Zealand’s foreign trade (share of GDP) is small compared to what one would expect to see in a small country. Small countries generally sell to and buy from firms abroad to a greater extent (relative to the total size of the economy) than larger ones. There is nothing surprising about that: there are simply fewer domestic opportunities in a small country than there are in a large one. The United States, for example (and well before Trump), has exports of around 11 per cent of GDP. But New Zealand’s foreign trade share is small by the standards of small countries, and actually not many large countries now have a smaller trade (exports or imports) share than New Zealand. I’ve done various posts on variations of this issue over the years.

But time passes and I hadn’t noticed that exports from Australia – a country with a population more than five times ours – are now about as large a share of GDP as those from New Zealand. I put this chart on Twitter yesterday, with the observation that Australia itself is hardly a stellar success story.

Even back in the bad old protectionist days, when New Zealand tended to have higher trade barriers than Australia did, the value of exports as a share of GDP was higher in New Zealand than in Australia.

The imports chart is not as stark, but the gap has been narrowing (Australia now has a current account surplus after some decades of having run substantial deficits like New Zealand).

And, of course, from a New Zealand perspective don’t lose sight of the fact that as a share of GDDP both exports and imports are now well below the peaks, themselves well in the past. It isn’t exactly a marker of a successful economy. I’ve made this point numerous times before but I’ll say it again anyway: it isn’t that exports are special, simply that in successful economies it is usual for domestically-operating firms to find more and more opportunities to sell successfully in the rest of the world. You’d certainly expect to see it in any economy that was successfully closing the gaps to the rest of the world. Which New Zealand isn’t.

Export revenues result from the mix of price and volume. By wider advanced country standards our terms of trade have been pretty good in the last couple of decades. But Australia’s terms of trade (export prices relative to import prices) have been much more favourable – although also more variable. In the near-term, terms of trade for commodity exporting countries are largely outside their control, but over the longer-run firms presumably invest in anticipation of a particular view of future average selling prices.

What about export volumes? Using the constant price exports series for each country, here is how the volume of exports per capita has unfolded in the two countries this century.

The two lines don’t materially diverge until the last decade or so,

as the massive Australian mining investment boom translated into materially higher export volumes (and revenues). New Zealand simply had nothing similar.

One sobering snippet I took from that export volumes chart is that New Zealand export volumes per capita are no higher now than they were in 2012, 13 years ago now. As a share of GDP total export revenues are now at a level first reached in 1977.

But the other sobering snippet from that volumes chart is Australian export volumes per capita haven’t grown now for almost a decade (and so the gap between the New Zealand and Australian lines isn’t widening further). But then, as I noted already, Australia isn’t a stellar economic success story – and productivity growth there in the last decade has been next to non-existent – just richer and more successful than New Zealand, and the easy exit option for our people.

Both the New Zealand and Australian economies are very heavily reliant on natural resources for their exports to the rest of the world, and that shows little or no sign of changing. If, as the Australian economy did, firms can bring newly to market a huge swathe of natural resource exports things tend to go better for you, as a very remote economy, than if you can’t or don’t.

Treasury on tax

November 25, 2025November 25, 2025 Michael Reddell Taxation, Treasury

I’ve never really been persuaded that it is a good idea for public servants to be giving speeches, unless perhaps they are simply and explicitly explaining or articulating government policy. If they are, instead, purporting to run their own views or those of their agency it is almost inevitable that we will be getting less than the unvarnished picture and more than a few convenient omissions. Public servants still have to work with current ministers after all.

The thought came to mind again when I read a speech given last week by Struan Little, now a “chief strategist” at the Treasury but until recently a senior Deputy Secretary (and actually Acting Secretary for a time last year). The speech was to some accountants’ tax conference, under the heading “The role of the tax system in addressing New Zealand’s intertwined fiscal and economic challenges”. All else equal, you might suppose that lower taxes would be more likely to be part of dealing with the productivity failings and perhaps higher taxes might have some role to play in closing the gaping fiscal gaps. It isn’t clear that Treasury necessarily sees it that way. They seem quite keen on raising taxes generally, especially on returns to capital.

(To be clear, I’ve been on record for some time picking that whoever is in government over the next few years the GST rate will rise, but that is prediction not prescription – and I’m not a senior official. Somewhat oddly, in his speech Little claims that “there are no simple options to raise substantial merit over the shorter term” when, whatever the merits of such a policy, raising GST is certainly simple.)

Now, I guess it was a tax conference, but it was slightly odd that not even once was it mentioned how much spending has increased in the last few years. Core Crown operating expenses were 28 per cent of GDP in the last full pre-Covid year (to June 2019) and in this budget were projected to be 32.9 per cent of GDP this year (25/26), slightly UP on last year. The current structural deficit, from the same budget documents, was projected to be about 2 per cent of GDP. I guess officials always need to have tools to hand if politicians want to go the higher tax route but it isn’t obvious that the scope of expenditure savings has been exhausted (or even much begun perhaps outside core departmental operating costs, which generally isn’t where the big money is).

Remarkably also, there is no mention at all in the speech that New Zealand’s company tax rate is among the highest in OECD countries. In the literature, the real economic costs of company taxes are generally found to far exceed those of other main types of tax. There is no mention either that New Zealand has long taken one of the highest shares of GDP in corporate tax revenue.

That chart is a few years old now but the OECD data are very dated and the most recent I could find on a quick search was for 2020 (when, unsurprisingly, we would still have been well to the right on this chart).

Instead what we got is a straw man discussion, claiming that life (and literature) have moved on and that now everyone agrees the tax rate on returns to capital should be positive. In practice no one has seriously argued in the New Zealand debate that capital income should generally be taxed at zero, notwithstanding some literature suggesting that on certain assumptions a zero rate might be optimal. Where there is debate is a) how high that rate should be, and b) what should count as taxable (capital) income.

Now, to be fair, on a couple of occasions Little suggests that we need to cut taxation on returns to inward foreign investment (because of our imputation system the company tax rate falls most directly on foreign investors), but then never addresses the issue as to whether or why our income tax regime should treat foreign investors more favourably than domestic investors and what the implications of that might be.

Treasury has, of course, long been keen on the idea of a capital gains tax. Little repeats an estimate from the Tax Working Group some years ago suggesting that such a tax might raise 1.2 per cent of GDP per annum but then never bothers engaging with the fact that the largest source of (real) capital gains in recent decades has been in housing, and that the reform programme of the current government is supposed, at least according to the Minister responsible (if not to his boss) to be lowering house prices, and (presumably) making sustained and systematic real capital gains on housing/land a thing of the past.

Little champions the somewhat-strange Investment Boost subsidy introduced in this year’s Budget, and yet (of course) never notes that the biggest returns (by a considerable margin) to that subsidy are for investment in new commercial buildings. The very same sector that the government (perhaps over Treasury objections) increased taxes on last year, when it barred tax depreciation on commercial buildings. Where is the coherence in that? Or in the fact that Investment Boost offers a subsidy to rest home operators but not to providers of rental accommodation? But I guess Treasury wouldn’t really want to comment in public on any of that. The Minister would certainly not have been keen on them doing so. He never offers any thoughts either on why subsidising a specific input – as if capital goods are some sort of merit good – is preferable to lowering the tax rate on returns to whatever combination of inputs firms find most profit-maximising.

We also get the same (now decades-old) line about housing being tax-favoured while never noting either a) that the story of New Zealand in recent decades has been too little housing (& urban land) not too much, or b) that the largest tax advantage by far in respect of housing is to the owner-occupiers with no debt. Perhaps Treasury favours taxing imputed rents (with suitable deductions including for mortgage interest) but if so there is no hint of it in the speech (something for which the Minister would no doubt be grateful).

And there are tantalising but concerning lines suggesting Treasury might favour rather arbitrary distinctions between returns to different types of capital. Thus, there is mention late in the speech of possibly in future reducing tax on “productive capital investment” (which then does Treasury regard as “unproductive” ex ante), there is a reference at one point to taxation on “physical capital”, without being clear as to why physical capital returns should be treated differently than returns on intangible capital. And perhaps potentially most concerningly there was this line: “a coherent approach would not necessarily mean taxing all capital [returns to capital?] at the same rate, since not all capital is the same”. What, one wonders, does Treasury have in mind there? After all, not all human capital is the same either (you are different than me) but our tax system treats all financial returns to it much the same anyway (or so it seems to me; perhaps I’m missing something).

There are some fair points in the speech. Little notes that our system “penalises certain types of saving when inflation is high”, which is true but understates the point: even 2 per cent inflation results in such distortions, and they apply to borrowing (when interest is deductible, which it generally is for business) and depreciation, not just to returns on fixed interest assets. These distortions have been known for many decades, and yet there seems to be no momentum – political or bureaucratic – to address them, whether by changes to the tax system or to the inflation target.

And there was a paragraph late in the speech that I very much welcomed.

I’ve long been keen on a Nordic approach and it was an option noted by the 2025 Taskforce back in 2009. But what chance is there that the bureaucrats might support such a change? When I was involved in tax debates IRD was quite resistant to any cuts to business tax rates arguing (with little or no evidence) that many taxable profits were rents – returns above the cost of capital – and that taxing them came at little or no cost. And if by some chance a new generation of officials has emerged, what chance ministers (whichever main party is in government) being that bold. Another growth-supportive option that might have warranted mention in that paragraph would have been work on the possibility of a progressive consumption tax.

As I noted at the start of the post, I’m not sure senior officials really should be making speeches other than to represent the policy of the government of the day. They simply can’t add much, or any sort of unconstrained perspective. The free and frank advice has to be for ministers. That said, perhaps at some point it would be useful for Treasury to publish some research/analysis outlining what sort of tax structure would, in its view, be most conducive to supporting a much faster rate of productivity growth in New Zealand. It is unlikely that tax system changes could ever represent any sort of panacea but insights into the mental models of the government’s premier economic advisers could still be useful. Since it isn’t impossible that the answer might be much lower taxes (and thus spending) than at present, you could even put some constraints around the exercise: if you (or your political master) needed to raise 27 per cent of GDP in tax, which mix of taxes and tax rates would be most consistent with helping enable a materially faster rate of productivity growth.

The new Governor….and those responsible for her

November 21, 2025November 29, 2025 Michael Reddell Reserve Bank Board

A couple of months ago the Minister of Finance announced that Anna Breman had been appointed as the next Governor of the Reserve Bank. Breman takes office on 1 December, conveniently (and sensibly) just after next week’s final Monetary Policy Statement for the year. Given the very long summer holiday the MPC gives itself, it does give her plenty of time to get her feet under the desk, get to know staff, get a bit familiar with the New Zealand data and issues before she gets to chair her first MPC and deliver the first Monetary Policy Statement on her watch. (Quite where the bank capital review is getting to isn’t clear: there was talk of publishing decisions before the end of the year, which could mean either before 1 December (in which case she has no formal say) or afterwards in which case she and rest of the Board will be making important decisions within weeks of taking up the role, in a field in which she doesn’t seem to have any particular background.)

Just a few days after the position became vacant in March I noted

Having noted that there seemed to be no ideal or compelling candidate in any of the lists of domestic names that had started to emerge, that remained pretty much my view in the abstract through the many months it took for an appointment to be made.

When Breman’s appointment was announced I was overseas on holiday. A few media outlets asked me for initial comments, including Radio New Zealand’s Morning Report who I tried to put off but eventually agreed (“live from Ravenna” – former capital of the western Roman empire – had a certain wry appeal to me). The comment I’d made to them that it was 43 years since an internal person had been appointed Governor appeared to have piqued their interest. The interview and associated report is here.

I noted that while on this occasion it was clearly necessary to go for an outsider, it was a poor reflection on the Bank, its board and senior management, over decades that it had been so long since the last internal appointment (Dick Wilks in 1982 who was then pushed into an early retirement by Muldoon), and that one dimension of successful organisations (anywhere) tended to be the development of talent and succession planning such that most (not all by any means) top appointments came from within. Among central banks, the Reserve Bank of Australia is a striking contrast. I also noted that, for example, two successive foreign appointees as Secretary to the Treasury (very unusual appointments in themselves) had not exactly proved to be stellar success stories.

There were reasons for each outside appointment as Governor – and I’m not debating the merits of any of them individually here – but the accumulated track record should be concerning. (And one of the challenges for Breman and the Bank’s board over the next few years will be building a strong second tier such that in five years time there is at least one, ideally more, credible internal candidates if Breman decided, whether for professional or family reasons, it was time to return to Europe.)

But if that backdrop is a concerning structural issue, my more immediate issue picked up the same concern I’d raised in abstract back in March: going offshore for a Governor who has no background or familiarity with New Zealand was a risky call. And if I’d contemplated a possible foreign Governor back in March I guess I’d probably have mainly thought in terms of someone from culturally and politically similar countries (Australia, Canada, UK), and Sweden is at an additional remove.

In terms of the technical side of monetary policy that isn’t an issue – Sweden has been a longstanding inflation targeter (I still have and use the nice glass plate a visiting Swedish parliamentary delegation gave me when they came to learn about the way we, who pioneered formal inflation targeting, did things decades ago) and the independent review of monetary policy done almost 25 years ago was conducted by Lars Svensson, a leading Swedish academic and later a member of Riksbank’s Executive Board (who made himself unpopular by openly expressing minority monetary policy views, which were – in my assessment – largely right). But monetary policy doesn’t operate in a vacuum – there is the context of the specific economy, of the specific political system, and of the place and record of the central bank itself. Perhaps as importantly, these days monetary policy is only one limb of what the Bank does. Much of its staff resources are now devoted to financial regulation and supervision, and that doesn’t appear to be a field in which Breman has any particular experience (for example, the Riksbank is not responsible for those functions).

So from day one it seems quite a risky appointment. I might be less worried if (a) the Reserve Bank were a high performing stable institution, b) there was a strong and respected second tier in place (who for some reason didn’t want to be Governor or who weren’t quite ready, and/or c) the appointee was a star.

As has become increasingly clear as this year has gone on, neither a) nor b) held, and (for all his faults and limitations) the departure of Christian Hawkesby only highlights how weak the top tier Breman is inheriting will be. There are two key second tier policy roles – Hawkesby’s day job (financial stability) is filled by a low profile acting person, and the macro/monetary policy side which is overseen by Karen Silk, who has such a limited background it is almost inconceivable she could have held such a role in any other modern advanced country central bank.

But nor is there any sign at all that the incoming Governor is a star. She sounds as though she probably has the temperament for the job (a person who knows her spoke quite highly of her on that score) but beyond that it isn’t clear that she is much more than a boilerplate MPC-member economist, without (it appears) that much executive management/leadership experience (let alone change management and institutional transformation). And, of course, there is no background in financial stability or regulation. She seems to have had a perfectly respectable career in the Swedish Ministry of Finance, a few years running the economics group of a Swedish bank, and then six years on the Executive Board, all against an academic background that, again while perfectly respectable, wasn’t focused on macroeconomics, financial markets, financial stability and regulation etc. She didn’t seem to have had particularly high visibility in international central banking or monetary policy circles.

One of the great things about the Riksbank is how transparent they are about monetary policy – materially more so than the Reserve Bank of New Zealand MPC, and arguably a touch beyond the optimum. Not only do Executive Board members seem to give a fair number of on-the-record speeches but all their contributions to the formal monetary policy deliberations are published verbatim. So when I got back from holiday I took some time to read pretty much all I could find from Breman. Since I didn’t previously know much more about her than her name I was genuinely curious. Some top-notch people, with distinctive perspectives, have served on the Executive Board over the years (with people brought in for full-time roles, such that it is more feasible to have mid-career people appointed than to our part-time non-executive MPC roles).

I was particularly interested in how she had contributed to monetary policy deliberations through the Covid and post-Covid inflation periods. It was a real test for central bankers, and frankly most did not show up well (which is why most – but not all – advanced economies ended up with the worst outbreak of core inflation in decades). As regular readers will know I have also long championed accountability for central bankers – real accountability with consequences, the quid pro quo for the considerable delegated power MPCs (and similar entities like the Riksbank Executive Board) wield. Other people got things wrong too, but central bankers took the job (and attendant pay and prestige) to stop outbreaks of inflation happening. If things go really badly – and they did – there should be, at very least, a strong presumption against reappointment. In fact, things went worse in Sweden than they did here – with core inflation peaking in excess of 9 per cent

And what were Breman’s contributions during this period? They were solid workman-like pieces (& her speeches were probably better than the – very few – Reserve Bank ones) but there were no interesting insights or angles, and no material (let alone votes) suggesting that her instincts or mental models were better than average – in a central bank that delivered a core inflation record worse than the average advanced country central bank. (And it doesn’t even look as though they got out the other side any better than we did – the Riksbank’s latest negative output gap estimate is very similar to the Reserve Bank’s for New Zealand.)

And so, at least on the monetary policy side, it looks like a case of a boilerplate central banker failing upwards – not at home, but promoted to the top job in an underperforming remote area of the world. Is it like being banished to the colonies in days gone by? Perhaps she’ll do just fine as MPC member and chair, but nothing in that record back home suggests we are getting, for example, a policy leader or distinctive thought leader. And is there really no price for failing so long as you are in good company?

Aside from being an outsider, it really isn’t clear what strengths she brings to the position. Perhaps under the previous government her evident enthusiasm for central banks wading into climate change issues might have been a selling point (she was last year a member of the steering committee of that central bank talk shop the Network for the Greening of the Financial System). The Riksbank apparently even puts restrictions on holding Australian state government bonds in its reserves portfolio on climate change grounds. But one had hoped that under this government they’d have been looking for a strong focus on the core statutory functions of the Bank.

One point of hope might be her expressed commitment to transparency. At the press conference she held with Nicola Willis – which featured some odd lines, including Willis claiming “we are opening a new chapter in New Zealand’s history” – there was the superficially encouraging line about how she (Breman) intended that “transparency, accountability, and clear communication will guide all the work we do”. On the monetary policy side we might look for some serious moves towards greater transparency. It isn’t her call alone, but she will over time control the appointments of the executive members of the MPC – and an earlier test will be what she does there – and it is clear that at least one non-executive member, Prasanna Gai, favours greater transparency. The Swedish experience, which she spoke positively about in a speech earlier this year, should be one of those considered seriously.

Her instincts then may be broadly sound, but a) there is no sign that she is a star, b) the culture of defensive non-transparency (transparent when it suits, obstructive when it doesn’t – I’m still engaged with the Ombudsman over charges the RB made for releasing information several years ago that should have been released – was in scope – in 2019) appears to have become quite deeply entrenched in the organisation over the last couple of decades. And much about the Reserve Bank is controlled not by the Governor but by the board – which never used to matter much but has been in the driving seat since the new legislation came into effect in 2022.

Which brings me back to the title of this post. One might have more basis for initial confidence in a little-known outsider if that person was selected/nominated and appointed by people who themselves commanded respect and had developed a track record of building (or requiring) a high-performing, lean, open, transparent, and accountable institution. But this appointment was made by Willis who had displayed spectacularly bad judgement in reappointing Neil Quigley as board chair last year, who did nothing about the board’s very bad budget calls last year (she and her officials seem not to have been aware for months), and who stood by for months while the board obstructed any clear sense of the circumstances surrounding the resignation of the previous governor. How much confidence can anyone have in a person nominated by the Quigley-led board, selected when the board was at is embattled and defensive worst, and when that board has shown no sign of having regretted anything about the way they’ve done things? The same board that really really cannot stand critical scrutiny – who instead of engaging or replying were responsible for management’s insistence to an overseas magazine that published an article critical of the Board’s record that the magazine should withdraw it and apologise for having published it. Whose acting chair – of a public agency, allegedly committed to transparency and accountability – celebrated (in writing) when the article was taken down. We are supposed to believe that these people share the incoming Governor’s stated commitments on those scores? Or to have confidence in the Minister who has sacked none of the board members, and has still not replaced Quigley as chair? They are albatrosses around Breman’s neck, no matter how good she might actually and eventually prove to be.

Way back in those RNZ remarks in September I noted “She could prove to be an excellent call. Time will tell.” We must all hope she is. The rebuilding of the Reserve Bank matters and we deserve better than we have had. Senior Reserve Bank officials have gone on record as (belatedly) recognising that confidence and trust in the Bank has taken a hit – a pretty severe one in my view. But rebuilding is going to be a tall order, the more so with such a discredited board – and would be so even for someone with excellent credentials and connections. How much more so for Breman.

An MPC member speaking

November 17, 2025November 17, 2025 Michael Reddell MPC, Transparency

For the first six years of the newly-created statutory Monetary Policy Committee the external members were conspicuous by their silence. While their charter (agreed with the Minister of Finance) allowed them to speak openly we heard almost nothing from any of the three of them (and of course no disclosure of views or thinking in the minutes of the MPC either). The contrast with models like the central banks in the United States, Sweden, and the UK was stark.

This year there has been some sign of progress, albeit only from one of the members (whose approach may not be terribly popular with his MPC colleagues or – though they have very limited say – the Reserve Bank Board). The member in question is Prasanna Gai, a professor of macroeconomics at the University of Auckland and someone who spent the early part of his career at the Bank of England (and has had various other central banking involvements since). On paper he appears by far the strongest of the externals (and probably more so that at least of the internals), even if there is something less than ideal about having someone serving at the same time as an MPC member and on the board of the Financial Markets Authority. We also know nothing directly about his view on the state of the economy or much about his thinking about policy reaction functions etc, although we can deduce from his two recent speeches that he is probably the key player in the rather heavy (over)emphasis on uncertainty from the MPC in the last six months.

I wrote a few months ago about Gai’s published views (to be clear, from before he became an MPC member) on how Monetary Policy Committees should be functioned and governed. That post was shortly after his first speech

But in the last few weeks there have been two more sets of (fairly brief) remarks, and things have improved somewhat. In their email notification of upcoming speaking engagements, Bank management has noted that the two events were coming up, and the texts of the two sets of remarks are on the website (although you get the impression the Bank might be unenthused because they have not emailed out links, leaving people to remember to go and look for them, or otherwise to stumble over them).

The first of those sets of remarks was about uncertainty (mostly in the light of the US tariff situation), delivered to (it appears) an academic audience in Melbourne a few weeks ago. In those remarks, which were expressed reasonably abstractly, Gai could most reasonably be read as suggesting that the trade policy uncertainty was having a material macroeconomic effect on New Zealand and that fairly bold monetary policy responses were appropriate. I put some comments about those remarks on Twitter, which are in a single document here

tweet thread on Prasanna Gai’s uncertainty remarks

While welcoming the fact of the speech, I was a bit sceptical of the argument. But then the good thing about policymakers laying out their thinking is so we can scrutinise, challenge, and engage with those arguments.

Gai’s most recent set of remarks was to some forum run by the Ministry for Ethnic Communities (one of those entities whose continued existence casts severe doubts on government rhetoric about cost-savings and lean efficient bureaucracy – but that isn’t Gai’s fault). There is more about uncertainty (in fact the remarks carry the title “Navigating the Fog – A Tryst with Economic Uncertainty”) although he takes the issue rather wider than the US tariffs stuff. I still wasn’t entirely persuaded, especially by the sentence I’ve highlighted.

Faced with the unknown, and already in the midst of a downturn, economic actors hesitate, delay investments, and reduce engagement. We see this in NZ surveys like the QSBO. Paradoxically, this cautious behaviour, while individually sensible, creates a self-fulfilling cycle. Caution reduces economic activity, which deepens uncertainty, leading to even more caution. Economists call this the “uncertainty trap.” It locks the economy into stagnation. By avoiding risk, we inadvertently create the very uncertainty we seek to avoid. This cycle of inaction feeds into a broader macroeconomic malaise, where growth stagnates, prices become sticky, opportunities are missed, and innovation slows. When everyone waits, nothing moves.

No doubt we can all agree in wishing away a fair amount of avoidable uncertainty (probably most people in New Zealand would count the US tariff uncertainty – regime uncertainty from day to day – in that category) but uncertainty is a part of life and always been. Perhaps it is greater in the short to medium term in democracies and market economies (absolute dictators can, although perhaps rarely do, provide greater certainty about some things over those horizons) so it seems a bit odd to suggest that people dealing with uncertainty is somehow problematic, or even creates uncertainty itself. There is more stuff along these lines in the remarks.

But my main interest in this set of remarks was the section headed “What Can Policymakers Do?”. He seems to think they can and should do a lot. I suspect he is far too ambitious (including on fiscal policy where he observes “At the same time, fiscal policy must step into its own strategic role — by investing through uncertainty and setting the stage for deep microeconomic reform. Where private actors
hesitate, public action creates space — catalysing investment in innovation, skills,
infrastructure, and housing8. And, like monetary institutions, fiscal policy must be guided
by intellectual clarity, coherence, and long-term commitment.”)

But again, my main interest is monetary policy. He writes

In other words, central banks must set the tone for the economic conversation. Their words, emphasis, and structure condition how millions of decisions unfold. They must illuminate the path ahead, not merely comment on the prosaic.

Transparency – describing the macro-landscape by publishing monetary policy statements and modelling scenarios – is helpful, but not enough. What really matters is the capacity to guide expectations. This requires intellectual rigour, deep technical expertise, and the agility to challenge conventional thinking. How we think, rather than who said what, is the essence of credibility when uncertainty is high.

It is important to remember that central bankers wield unelected power7. Direct engagement—through public speeches and testimony before Parliament—brings clarity to uncertainty. Speaking directly about how we think, and what would change our minds, provides analytical accountability that complements procedural channels that chronicle debate – such as meeting records and monetary policy statements. When we open the doors of our policy reasoning to scrutiny, the fog clears and trust builds.

There is good stuff there (and in that footnote 7, which I’ve not reproduced, he refers readers back to the paper he wrote pre-appointment (see above), observing “some of those lessons are relevant for New Zealand”).

He is clearly laying down a marker here advocating for a materially greater degree of transparency from the New Zealand Monetary Policy Committee. The incoming Governor – about whom I will probably write later this week – went on record at her appointment announcement as favouring greater monetary policy transparency (unsurprisingly given that the Swedish central bank has substantively the most transparent monetary policy decision-making etc model anywhere). But you have to suspect it is going to be an uphill battle in an institution with a deeply rooted culture (not specific to any particular Governor) of favouring transparency only when it suits, whereas real transparency and accountability are about openness even when it hurts).

I’m all in favour of much greater transparency (and the new Bank of England MPC model looks as though it could provide a good model). But there is an important distinction between transparency that makes a difference to macroeconomic outcomes and that which largely supports heightened accountability. Perhaps the two should overlap but they rarely do. It isn’t obvious, for example, that the central banks that are much more open, including about differences of views and models among members, or whose MPCs had deeper stores of technical expertise among their membership, did any better at all – in terms of inflation outcomes – through the dreadful inflation resurgence of the early 2020s than, say, the Reserve Bank of New Zealand’s MPC did. But in those countries with greater transparency we know a lot more about the views of individual members and their thought processes and are thus better positioned to assess whether perhaps some are less guilty than others. Individual accountability is, thus, a serious possibility.

My impression is that Gai is much more optimistic about the scope for enhanced transparency to make a macro difference. In a sentence before the block of text I quoted he says “when uncertainty is high and the channels of transmission are weak, communication takes on greater importance”.

Well, perhaps, but only if the central bank has something meaningful to say, otherwise it just ends up as cheap talk. No doubt we can all agree that central banks should always and everywhere indicate that if (core) inflation looks like going off course they will respond accordingly. That is a (much) better place than we (advanced world fairly generally) were in 50 years ago, but it isn’t really much help in grappling the high levels of uncertainty firms and households actually face at times, most of which isn’t about monetary policy. Central banks can’t add much of any use on where US trade policy may go, let alone how other countries might or might not respond. Or whether (let alone when) the AI stock market surge will prove to be a bubble that will burst nastily. Or whether China will invade Taiwan. Or, to be more pointed and winding the clock back five years, what would happen to policy regimes around Covid (lockdowns, border closures etc) – surely the most extreme, perhaps inescapable, example of policy uncertainty in recent times. Central banks generally couldn’t get the macroeconomics right even when the policy uncertainty began to diminish (see inflation outcomes and generally very sluggish interest rate responses). The ability to “illuminate the path ahead, not merely comment on the prosaic” seems very limited in practice in most circumstances. (I think back, for example, to the early days of inflation targeting in New Zealand: we aimed then to be very transparent, and had a Governor who was a strong retail communicator, and yet if we consistently held out a vision – sustained low inflation and a fully-employed economy – we had no certainty to offer as to what it would take or when the payoff would be seen. Bigger central banks that went through similar dramatic disinflations generally found themselves in the same boat.)

But to conclude, it is great to have an MPC member putting his thinking on record (even in this case it is still mostly about processes/structures than the specifics of how the economy and inflation might unfold). Perhaps some journalists might ask him about the speech and seek to tease out his ideas. We all benefit when those wielding power – unelected power in this case as he rightly notes – put their ideas out for information, scrutiny, and debate. Perhaps some other MPC members might think of taking up speaking opportunities that come. Perhaps Gai, who has dipped his toe in the water with a couple of brief sets of published remarks, might consider a fuller version at some point?

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Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Year: 2025