In my post yesterday, I documented a whole series of ways in which Neil Quigley, Reserve Bank board chair (appointed by the Minister of Finance) appeared to have actively misled the public (and overseen the misleading of Reserve Bank staff) on the day Adrian Orr’s resignation was announced. Some of that material is here
Since writing that post, I’ve seen the excellent brief piece by Dan Brunskill of interest.co.nz who had taken the initiative to ring up Quigley and ask about what appear to have been deliberate and active misleading.
Just breathtakingly awful. From the chair of a powerful public sector board: the public had no right to know, and he wasn’t going to be questioned by a journalist doing his job (“like a lawyer” apparently).
In this morning’s Post their political columnist Luke Malpass has a particularly trenchant take on another angle of the whole debacle (which is probably too kind a word, as all of this was done consciously and deliberately by very highly paid people supposedly working in the public interest). This was the attempt to sell us all on the story that the resignation was just a “personal decision”, with no deeper meaning or significance. The headline is “Orr omnishambles redux: the “Personal decision” that wasn’t.” and this is just a sample
Or “the worst sort of media management bends or has little regard for the truth, treating the public or customers like morons. After the past few years of inflation and hip-pocket hurt, the last thing the Bank should have done was not to be honest with both its staff and the public….”
You might find this surprising after my commentary in recent years but I’ve always been reluctant to believe the worst of Quigley (we used to have quite a bit to do with each other) but we are now at the point where, after yesterday’s disclosures, it is impossible to take at face value a single word he says, at least on Reserve Bank matters (for which he is earning a cool $200000 per annum for a part-time job).
You might be wondering why the board, and particularly its chair (Quigley) are still in office after this shambles (which started from the blowing the previous Funding Agreement spending limit so badly this time last year).
It isn’t easy to dismiss members of the Board. One can debate the merits of that (relative to other government boards) but this is what the law says about grounds
One could mount a case that that standard has now been met, but as a purely legal matter it might be arguable and (more messily) contested.
The same standard does not apply to the Board chair, who can be removed pretty much at will by the Minister
(Having been removed the former chair would still be a board member)
So it is quite clear that the Minister can remove the Board chair for any reason whatever (although needs to consult him first), and probable that she could not formally dismiss board members.
However, in the face of this “omnishambles” and active deceit of the public, how plausible is it that if the Minister were to communicate to the Board and chair that the government no longer had confidence in their stewardship (not on grounds of policy differences – where it is important to respect operational independence – but on basic stewardship and obligations of integrity, accountability, and dealing with staff in good faith) that any half-decent board member would refuse to resign. And if they were to refuse to resign, the government would be in a very strong position to call out and shame them in public for the conduct for which they’ve been responsible. This stuff matters, both because of the disgraceful stuff that has already happened – and that barefaced refusal of scrutiny yesterday by Quigley – but because of the key gatekeeper role the Board plays in selecting which name goes forward to the Minister as nominee to be next Governor. Can anyone have confidence in them to do that sort of selection after all this?
Of course, it has long been a mystery why Willis reappointed Quigley last year. But a whole new series of questions need to be asked now. I hope, for example, Brunskill took that dismissive answer from Quigley to Willis and asked her if she considered that was acceptable behaviour in the chair of the board of a powerful public entity.
And, of course, there is that other utterly supine and useless body, supposed to be holding public agencies and their boards/managements to account, Parliament’s Finance and Expenditure Committee. But they weren’t even bothered when Orr repeatedly lied to them, so I suppose we shouldn’t expect them to care when Quigley and the rest of the Board actively misled the public, seemed (in Quigley’s) case to be proud of it, and then refused to even take questions.
Months after various OIAs had been lodged on the question of Adrian Orr’s sudden departure on 5 March, we finally got a partial dump of documents this morning.
(Sufficiently mishandled that at 10:04 this morning they’d send an email to OIA requesters saying they’d email out the response at 10:45 and then have it on their public website at 11 (it being usual to give requesters at least some advance notice)). Then it seems they changed their minds because the emails didn’t come until after 11. And then it turned out – they emailed us again – that they’d sent only a near-final version of the Summary Statement they were releasing, not the final version that is on the website. There are material differences between the two – see below.)
I noted above that this was a partial release. Why do I say that? Because what is released today contains:
nothing of advice to or communication with either The Treasury or the Minister (or her office),
nothing of any discussions between the non-executive members of the board and Orr, including reactions/responses when he first intimated his intention to resign,
no records or summaries of any meetings or conversations among non-executive directors
And those are just the omissions that I reckon were covered by my OIA on this matter (mine was only one of a number they claim to have responded to with their omnibus release this morning).
But, to the substance:
Strangely, and after months of speculation, these comments from my post the morning after the resignation ended up looking closer to accurate than I had recently supposed.
We have known for some time now that they had actually bid for a big increase in Funding Agreement resources over the levels allowed them by Grant Robertson just prior to the last election (and their statutory roles hadn’t changed since then), justifying this on the – simply extraordinary – grounds that it was in fact a modest cut relative to their own 2024/25 Budget; the one in which they had set out to spend far far in excess of the amount Robertson had allowed them for the last year of the previous Funding Agreement.
Both that 2024/25 Budget and the $1 billion funding agreement bid had been unanimously adopted by the Board last year (Orr himself was a board member). Details of all that are in this post.
Here is the text from the Summary Statement released (in error it appears) to OIA requesters this morning
For a start, this description seems odd. First, the Governor works for and to the Board not vice versa, so why the talk about Board members negotiating with Treasury “under the direction of the Governor”? But, second, all this paragraph talks about the Governor having a view as to what future budget resources were needed, but never mentions that the Bank’s bid had been adopted by the Board itself (the Funding Agreement is an agreement between the board – as the Bank’s governance body – and the Minister). Maybe Orr led the non-executives by the nose when the Funding Agreement bid was signed off last year, but in the end it wasn’t his call.
Then the Board seems to get blamed for bowing to reality. Too little has yet emerged of the Funding Agreement process documentation, but it seems likely that Treasury and the Minister had made pretty clear that a Funding Agreement that involved a large increase in funding relative to what Grant Robertson had approved just wasn’t going to be acceptable in these straitened fiscal times. It isn’t clear when the Minister or Treasury finally pushed back, but eventually they did, and the Board – recognising that ultimately choices about acceptable resources levels were for the Minister – had adjusted to that reality. Orr, by contrast, didn’t.
Here is the version of the Summary Statement that is now on the website (where there have been changes)
Note the attempt to shift the emphasis away from that meeting with the Minister of Finance on 24 February (the one that has already had quite a bit of coverage, with the Minister’s press secretary having to advise her to avoid answering a question about whether the Governor had ever shouted at the Minister).
Either way, what we are left with is a hotheaded Governor who finally came face to face with reality….and could not cope. And a Board which seems to have been as worse-than-useless as had been widely supposed since most of them were appointed in 2022, but who – in the end – could actually face reality.
Look at those descriptions about “The matter was distressing for Mr Orr” (or “This caused distress to Mr Orr”). It is a bit like a bloodless description of a moody teenager having lashed out in the playground.
Fiscal restraint has, in fact, been the order of the day for (most) central government agencies since the change of government. Many chief executives probably had had grand visions for how much additional growth their agencies needed, and even perhaps a belief that in some sense the national interest demanded it. But almost all of them – perhaps MFAT aside, which wasn’t asked to – faced reality, and got on and implemented the budget cuts that were demanded of them. Not one seems to have thrown his or her toys out of the cot and stormed off with no notice. They acted like adults, people who’d developed the resilience we like to help shape in our children as they grow. But not Orr.
And that is why I don’t think it is at all correct to characterise his departure as just a dispute over budgets. Plenty of people have conflicting views on budgets, and it wasn’t as if – even when the final Funding Agreement decisions were made – the Bank was being asked to operate with very material cuts at all relative to the last spending level approved by a Minister of Finance (a big-spending one at that). He just wasn’t going to get to grow his empire even bigger (you may recall from earlier posts that the Bank had grown staff numbers from about 600 on 30 June last year to about 660 on 30 January this year, and in the documents there is a note from Orr dated 5 Feb talking of having wanted to get up to 742 FTEs.)
It really looks to have been a toxic combination of headstrong volatile chief executive (who’d been lying to Parliament again just days prior to that critical meeting with the Minister), weak or non-existent accountability from his Board, and an utter lack of resilience or perspective which you’d only really expect to see from someone at the end of his tether. That is reinforced by that line in the final official version about how “the impasse risked damaging necessary working relationships”. Not among decent disciplined people – the Funding Agreement was a matter for the Board and the Minister (primarily the latter) and the Governor’s job as employee and chief executive was primarily to implement the agreement and manage within approved resources, and to do so in an effective not petulant way. After all, the reduced budget wouldn’t even come into effect until 1 July (so perhaps a resignation effective 30 June?)
Let’s grant (charitably) that Orr really really believed that the Bank’s statutory functions could only be performed with the $1 billion budget (and 40 or so senior managers). In those circumstances, perhaps the best thing to do was to move aside and let someone else take his place. But normal people – normal chief executives (see, eg the Vice-Chancellor of Auckland University today) – give notice, and work out that notice, enabling the governing body to do a thorough careful search for a permanent replacement. They don’t storm off with no notice, having engaged senior lawyers to negotiate an exit (presumably there were conventional resignation provisions in Orr’s contract already), offering no explanation whatever, despite holding one of the most powerful public sector positions in New Zealand.
If Orr emerges really badly from this Statement and document dump, he isn’t the only one.
Take the Board (Quigley and the other non-executives) for example.
It remains beyond belief how they (a) signed off on a budget last year so far in excess of the Robertson-approved levels, and b) how they ever imagined that it was appropriate to treat that unauthorised level as some new-normal base against which they could then offer up tiny cuts. Did any of them ever push back against management and insist that the Governor stress-test for them a range of alternative budget scenarios? (If so, there is no sign in the published minutes).
And where was the Board in controlling the process at the end? Why did they let the Governor simply leave office the day of the announcement, rather than insisting on him working out notice? Why did they grant him (presumably paid) “special leave” for the period 5 March to 31 March (rather than, say, making him take annual leave if his resignation was going to be legally effective until 31 March). And why did they allow such a pig’s breakfast of a communications debacle to (a) occur, and b) persist for months?
To be sure, both the Board and the Minister were put in a difficult position by the Governor’s petulant walk-off. They hadn’t, as at 5 March, finalised the Funding Agreement (indeed, the Minister’s later releases on that subject suggest some continuing back and forth over the coming weeks), so they probably couldn’t release the whole picture.
But as it was they actively misled both their own staff and the wider public.
On staff, this is from a set of internal Q&As given to managers the day after Orr’s resignation to use with staff.
When in fact, on their telling now, it was all about looming significant budget cuts (relative to the Bank’s own budget, if not relative to the previous Funding Agreement) the Board had, perhaps reluctantly, accepted and the Governor has refused to (and petulantly stormed off).
As for the wider public, Neil Quigley – the Board chair, with an unfortunate reputation now for not being straight on RB things, but somehow succeeding to keep getting reappointed – held a short press conference late on the afternoon of the resignation.
In it, he told us that he (he avoiding answering for the Board) had still had confidence in Orr? How is that possible when your chief executive stormed out the door apparently because he couldn’t live with not getting a further inflated Funding Agreement and reckoned he couldn’t work effectively with the Board and/or Minister?
Then he was asked whether Funding Agreement issues played a part. Accordingly to the transcript I was kindly sent his response was
“we are working through some views about the funding of the bank, the board is in the process of finalizing its submission to the Minister about our next funding agreement. So that conversation about funding has involved the normal challenge that you would expect, and has been constructive. So the board is managing that process”
Which is just utterly at odds with what we have learned today.
(The very next question Quigley was asked was what about the big conference the next day, and the thought that the resignation might overshadow it. He responded “with the decision that Adrian had made, he decided actually that it was better not to be in front of the conference, having made that decision himself”. Which is weird – if not overly important – as in today’s document dump there is an email from Orr, at lunchtime on 5 March, less than an hour before the resignation went out, talking about how he’d be proudly opening the conference the following day, “there to discuss today’s news”….)
The press conference went on
Q: Reserve Bank governors don’t just up and resign? What has been the precipitating factor to what you call this personal decision
A: I think you have to remember that the job of the Reserve Bank Governor is one where you face unrelenting critique of your actions. You know, no matter what you do, there are near alternatives that other people say that they would have taken. And so there is a time when you think having achieved what you wanted to achieve, that’s enough.
And I guess that isn’t inconsistent with an emotional end-of-his-tether story, but….it is rather at odds with today’s revelation that the Board had accepted budgetary reality and the Governor had simply refused to.
And finally
Q, Had the government, had the government communicated to you or Adrian any issues that triggered him coming to you in the last few days?
A. No, there’s no, been no direct communication officially from the government on anything that I could think of in that.
Except that that is just evidently not true, given a) the meeting with MoF on 24 February and b) the now official statement that by the Board meeting of the 27th it was clear that the Board and Minister were willing to agree a number the Governor could not accept. The initiative for cuts was not, it is pretty clear, coming from the Board but the government.
We were actively misled (some would use stronger words). If you weren’t willing to give honest answers, why would a decent person hold a press conference at all? No one compelled him to.
And, a final question for the Board, why did not insist that straight answers be given weeks ago? If it was difficult to do so on 5 March, there can have been no possible excuse once the Funding Agreement itself had been agreed between the Board and Minister (published 16 April, almost two months ago now). The public was owed straight answers as soon as reasonably practicable (which also happens to be the OIA legal standard). The Board, and/or the acting/temporary Governor, seems to have been unbothered. But accountability is about things that are awkward or uncomfortable for you, not just the things you want the public to know.
Incidentally, the Minister of Finance also seem to have abetted keeping the public in the dark (if, perhaps, less directly responsible than the Board). This came out in an earlier Herald OIA, reported here
She must have been advised – assuming what the Bank today told us is true – that actually funding agreement issues were at the heart of the departure.
To wrap up, neither Orr nor the Board emerge with much credit from this affair – Orr none at all, having led the drive to the bloat and loss of focus, failed to read the (fiscal times), and then with so little self-discipline and without the sort of maturity one should be able to take for granted in someone holding high office as Governor, and the Board only a modicum for having very belatedly bowed to reality and accepted that the funding agreements weren’t going to go on rising forever.
Orr has gone, and you might think (hope) that after such an astonishing display he would struggle ever again to get a top-tier job.
But the Board – hardly changed at all over the last year – remains, and in particular Neil Quigley continues (reappointed by this government) as chair for another year. In that role, he drives the selection process for a nominee for the new Governor. This is the person with a track record of actively misleading the public on RB matters even before this last blow-up (remember his assertions, contradicted by both documents and his colleagues, that experts had not been blackballed from the first MPC), but who, more importantly, was responsible for driving the reappointment of a Governor so out of control and personally undisciplined that he couldn’t live with some budgetary restraint (recall that the final level MoF imposed represents pretty minor savings relative to Robertson’s last approved levels) and couldn’t even manage a disciplined and tidy no-drama exit. To add to which, Quigley was Board chair when that egregious 24/25 Bank budget was set. Every day he remains in office diminishes our central bank, and it is astonishing that the Minister of Finance has done nothing to force the issue, to make clear that the government no longer has confidence in Quigley to chair the Board, particularly given the vital role the Board has in the selection. We simply cannot afford another appointee – from Quigley and his board – even half as bad as Orr.
(There is more material in the documents released – including a 14 Feb email from Quigley to Orr suggesting that a deal was likely to be done with Treasury in the following few days – but that is enough for now.)
UPDATE: A response to this OIA should also be due shortly
I hadn’t had a look for a while at the OECD labour productivity (real GDP per hour worked) data, but the release of the latest OECD EconomicOutlook the other day prompted me to spend some time in the (less user-friendly than it was) OECD database.
It takes a while for all the data to come together, and it is only annual, so the most recent near-complete data set is for 2023. On the OECD’s estimates – using national data, but converted at (estimated) PPP exchange rates – New Zealand stood 29th out of the 38 OECD countries (remembering that the OECD now has four Latin American “diversity hires” – all much poorer and less productive than the rest of the “club”).
Treasury highlighted a few years ago that the absolute level of reported New Zealand labour productivity may be understated (because of technical issues around how hours worked numbers are calculated/used, relative to the approach used for a number of other countries). The difference isn’t small but, as they noted, what is involved is largely a level-shift, and doesn’t affect materially comparisons of growth rates (of productivity) over time. Nor, of course, does it make any difference whatever to actual wages or living standards.
It is now quite well-recognised that productivity growth has been quite poor in many countries over the last decade or so (and the contrast between the US and some of bigger European economies has been remarked on often). Productivity growth in the typical high productivity OECD country has not been great – for example, for the eight years from 2015 to 2023, the median total growth in labour productivity for the top 10 countries [excluding Ireland and Luxembourg, for international tax reasons] was 4.9 per cent.
But much as we might like to catch up again with these high productivity countries, perhaps the most relevant comparators for us are the countries either side of us on the league tables, well behind the global productivity frontiers. In 2015, the start of our period, these were the countries with real GDP per hour worked already within 20 per cent either side of New Zealand’s. There are big gaps both above Slovenia and below Latvia (and, thus, even if the hours issue is fixed up, and there are no changes for any of these other countries, we wouldn’t even come close to the next country above Slovenia),
How has our labour productivity growth compared against these countries over 2015 to 2023?
The median productivity growth rate for this group of middle-to-lower (levels) countries was 17 per cent. New Zealand, by contrast, managed 3.5 per cent growth, not even managing to keep up with the median growth rate of the group of highest productivity countries (see above).
It really is a woeful record. And in case you are wondering if perhaps 2024 might have made all the difference, on national data (GDP per HLFS hours worked) average productivity in 2024 was about half a per cent higher than the average for 2023, so no, not really. Just possibly SNZ data revisions might lift our past productivity growth a bit, but (a) these 2023 estimates should already include last year’s SNZ updates, and b) even at the most hopeful, it is doubtful any revision would lift our past productivity growth even to Japanese rates. It seems pretty likely that we were in fact better only than Greece among this mid to lower productivity group of countries.
People tend to push back and say “yes, but so many of those other countries are in Europe”, and sure, about two-thirds are. But it isn’t as if being next to the US has done much for Canada’s recent productivity growth (productivity growth over this period was a touch worse than New Zealand’s, and the level of Canadian productivity is far below that of the United States), and quite a few of these countries border either Russia or Ukraine (Estonia appears to have taken quite a hit), and Israel has been fighting a war (there is 2024 data for them, no higher than the 2022 numbers). And to the extent geography matters, and it almost certainly does, it is a binding constraint we have to live with, not an excuse for perpetual underperformance (we were, after all, even in my lifetime – just – still in upper tier of advanced countries). It is a reflection of a series of poor policy choices, and the evident growing indifference of our politicians (and bureaucrats?).
And worse, there is no sense of urgency, about outcomes that shape the lives and options of this generation and the next. The glib “oh, they can always go to Australia” – itself not a stellar performer – is no decent basis on which to build a country.
Last Friday I noticed in a story on interest.co.nz this chart taken from a recent BNZ commentary.
I stuck it on Twitter and then to illustrate more starkly something about the contrast with the pandemic period followed up with this
In 2020 there was (inevitably) extreme uncertainty about the outlook for Covid, for any possible vaccine, for border restrictions, and (you might have thought) for what it all meant for inflation. By mid 2021 the conditions that gave rise to the worst outburst of core inflation in many decades were all in train, and yet the MPC seemed not to feel (or, at least, state) any particular uncertainty at all.
Quite what, if anything, it meant wasn’t really clear. Perhaps they really were pretty complacent back in 2020 and 2021 (as the time series chart shows despite the apparent magnitude of the shock, and the lack of precedents, “uncertain” was not being used a lot more than usual). Or perhaps this year’s heavy use of the term is some sort of reaction to past mistakes, or Trump just makes an easy target? Perhaps, having suddenly lost a Governor (who’d overseen all the other MPSs used in this chart), things went a little wild in the latest statement with the new and inexperienced guy in charge?
So I wondered what a similar chart looked like for other central banks. I had a look at the Reserve Bank of Australia, the Bank of England, and the Bank of Canada, all of whom publish similar documents on a quarterly cycle (Canada in Jan, Apr, July, the others in Feb, May and August).
Three things caught my eye:
First, how similar the RBA and RBNZ usage frequency has been through these episodes. Not identical but quite close
Second, how much more commonly the Bank of England was referring to uncertainty through the pandemic period. The most recent statement still has a lot more references than back then, but the contrast is much less stark. For the pandemic period I’d say that is to their credit.
Third, the Bank of Canada had the fewest uses of “uncertain” in all five periods, including – and most strikingly, given Canada’s vulnerability to US tariffs etc – in the most recent set of reports (the Canadian one came out on 16 April, the period of peak “Liberation Day” tariff concern globally).
I also had a look at the final Monetary Policy Statement/Report for 2019 for each central bank (wholly pre-Covid). As it happened, the Bank of England had used “uncertain” 214 times in their November 2019 document, mostly as regards Brexit.
I don’t want to draw any strong conclusions from any of this. And I don’t even particularly disagree with the MPC’s on-balance assessment of where the US tariff risks lie (mainly in a disinflationary direction for New Zealand), but you do have to wonder about just how they went so far over the top in last week’s document with the number of references to “uncertainty”. The Trump stuff matters – both the uncertainty about the policies themselves (and retaliation) and uncertainty about the economic impact – but it isn’t clear that the degree of uncertainty we (or the MPC) face is anything like that during the early months of the pandemic or (though they did not recognise it at the time) the big policy mistakes leading to outburst of core inflation that we are still living with the aftermath of.
And how does uncertainty compare now to that at the height of the financial crisis in 2008/09? I’d have thought that, particularly for monetary policy purposes, the financial crisis offered at least as much uncertainty for the global macro outlook (as it affected New Zealand) than the current tariff chaos. But judging by MPS uses of uncertainty, the Reserve Bank appears not to have thought so.
All a bit puzzling really. I wouldn’t make too much of it, but the data are perhaps something for the MPC to reflect on.
(Incidentally, in case anyone is wondering about the Fed, they don’t do a six-monthly statement. On the couple of occasions when the dates aligned, including February 2025, they used “uncertain” less often than the central banks I looked at here.)
If you want to be Reserve Bank Governor, think you have what it takes, (and haven’t yet been approached by the Board’s recruitment company) you will need to get moving. Applications close on Friday.
As a reminder, much of the process (unusually by international standards) is controlled by the Bank’s Board, most of whom were appointed to their positions by the previous government. The Minister of Finance (and Cabinet) will finally make the choice, but they can only appoint someone the Board nominates. The Minister can reject a nominee – either before or after the (now required) consultation with other political parties represented in Parliament – but cannot impose her own candidate. I’m not aware that a recommended nominee has ever been rejected [UPDATE: I’m reminded that Michael Cullen rejected the Board’s nomination of Rod Carr], although in 2002 after Don Brash resigned it was understood that Helen Clark had made clear that she was not going to have a “Brash clone” appointed (hard luck for the acting Governor Rod Carr, who in those days had not really begun his migration to the left).
In practice, things can be less mechanical than the statutory model sounds (and, I believe, was intended to be). There is nothing to stop a Minister of Finance engaging with the Board before they advertise and making clear what sort of person s/he (the Minister) would or would not be looking for in an acceptable appointee. To me, that sort of engagement seems entirely proper. Much more questionably, there isn’t anything to stop the Board offering the Minister a menu of candidates and inviting her to pick one (this happened when the first external members were appointed, where the same statutory appointment process applies). How receptive the Board might be to such influence will, no doubt, depend. Stubborn Boards, with a strong sense of their own legitimacy, might be inclined to play by the letter of the law. Boards largely appointed by a previous government and having presided over things at the Bank going less than well, perhaps less so. It would be interesting to know what, if any, consultation there was with the Minister of Finance on the job description used to support the advert for the vacant Governor position.
(My own preferred model – a much more internationally conventional one – is that the Minister (and Cabinet) should be able to appoint her own person as Governor, taking advice no doubt from the Board and from her principal economic advisers at The Treasury. The government cannot escape responsibility for the Bank, and the powerful impact of its (good or bad) choices, and should be free to choose, not constrained by any Board, let alone one (a) appointed largely by the previous government, and b) with such a demonstrably poor record.)
These are key competencies etc they claim to be looking for
Might we guess that that third item, in particular that reference to “drivers of competition” might have come from – or been included to anticipate – the Minister? It is an odd one otherwise, given that promoting (or otherwise) competition isn’t really a part of the Bank’s responsibilities (think monetary policy, prudential regulation, and monopoly issue of notes and coins). But if they want someone to encourage the reintroduction of banknote competition it would be obscure, but I’m all for it.
I guess we should be encouraged that subject expertise seem to rank high on the list of required competencies, even if “strong understanding” may be weaker than it sounds, especially when contrasted with the “detailed knowledge” required on the subjects in the third bullet.
But the items that really caught my eye were further down the page.
First, there was that experience criterion “preferably at CEO level”. Since the Reserve Bank was given operational autonomy, three of the four Governors had had previous CEO experience (Wheeler was the exception). Internationally, I think it is less common (over the same period I think one of four of each of Bank of England and RBA Governors had previous CEO experience, and perhaps 2 of 6 at the Bank of Canada). Highly successful organisations tend to build the capacity to promote from within, which militates against past CEO experience while favouring actual subject expertise, but the last internal appointee to the Reserve Bank Governor role left in May 1984.
Second, there was this: “Have the personal resilience to cope with adverse and stressful circumstances and to withstand both justified and unjustified criticism.” It could hardly have been more pointed in its contrast to Orr, and I suppose it speaks to the credit of the Board that they (apparently belatedly) recognised behaviours they had tolerated. I guess they could have added explicitly “the integrity not to actively mislead, or worse, Parliament, or to abet such behaviours from a superior”.
Third, there is that odd requirement (odd to make it so explicit) about reviews, with the explicit expectation that the appointee “respond in an open-minded manner to any recommendations received”. Pretty basic stuff you’d have thought, but…..not from Orr.
And then there is the woke stuff. Of course, it might be a trick question – the Treaty of Waitangi is not mentioned in the Reserve Bank Act at all and perhaps not all applicants would have done their homework sufficiently to know, but it is probably just a continuation of the whims and preferences of Orr/Quigley and the former Labour government. Among other things, it might be thought to discourage really able overseas applicants (even if in the end it is unlikely to be make or break for the Board in coming to nominee to send to the Minister).
I also took a look at what the Board had advertised for in 2017 (post here), bearing in mind that Neil Quigley was chair of the Board then too. Arguably the 2017 advert was a little more ambitious in the quality of the person being sought, although as I quibbled then with some of the points they’ve now taken out I wouldn’t make much of it. Perhaps the only point worth making is that instead of someone with “outstanding intellectual ability” and “gravitas” they gave us Orr. The 2025 advert is broadly enough framed that really almost anyone could end up chosen. And neither advert put any sort of emphasis on change management or a vision for a different and better-performing Bank.
I note here just briefly again how extraordinary it is that Neil Quigley is still driving this process. When you were responsible for the nomination and reappointment of the previous Governor who did so poorly on multiple fronts and then walked off with no notice, when you were responsible for the Bank (a) setting budgets last year far in excess even of what Grant Robertson had allowed them, and b) bid for that to be new baseline, despite a climate of wider spending restraint on most agencies, you really shouldn’t be driving the selection of the next Governor. Oh, and when you were responsible – with the previous Governor – for keeping experts off the first MPC, and then later actively misled Treasury and the public about that blackball. It remains beyond comprehension why Willis reappointed him last year – although only for two years, clearly not envisaging that he would drive the performance of the next Governor – or why she has not prevailed on him more recently to step aside. The government has been advertising for two new Board members, but it seems unlikely they will even be in place before much of the winnowing process – including the guidance to the search firm – has already happened.
But who might emerge?
We haven’t seen much media commentary for a couple of months now. I haven’t seen any new names for quite some time (well, apart from the smart person who has tried a couple of times to convince me that Bill English will end up as next Governor). In one of my earlier posts, shortly after Orr resigned, I had these names from various newspaper columns and my own speculations:
(I think I also saw Karen Silk’s name in one article, surely only because someone was uneasy that there were no other women on any of the lists).
If you search this blog you can probably find posts with thoughts on McDermott, Archer, and Bascand. I won’t repeat that here.
All have had some background at the Reserve Bank, and quite a few at overseas central banks or central banking related institutions (IMF, BIS). Four (Grimes, Bascand, McDermott, Hansen) have some chief executive experience.
I don’t think any of these people would be ideal for the role now, but a lot depends on what the Minister really wants, and how much she cares about a better performing Bank. And several of these people may have no interest whatever in the role – whether from age, or inclination (better things to do with your life than 70 hours a week, endless meetings and bureaucracy, lot of travel etc). Archer – who would probably be very much the sort of candidate of bold and far-reaching change, backed by intellectual rigour etc – has lived abroad for more than 20 years now (we share the dubious responsibility of being trustees of the ill-governed Reserve Bank superannuation scheme). In key public sector appointments to date, the government has more often tended to recycle established figures.
Several of those names might count as, or risk being, establishment or status quo candidates. One could think of Bascand, probably not interested, or Gai (appointed to the FMA Board by the previous government, appointed to the MPC by this government, and while undoubtedly able has never once expressed even a jot of public concern through the Orr years, despite all that “critic and conscience” role of academics). And Hawkesby.
Hawkesby is, at present, the temporary Governor (six month stint while the permanent appointment is made). The last long-term acting Governor (Rod Carr) never made it to Governor, and left the Bank within a year of missing out. Hawkesby’s day job is Deputy Governor and head of the Bank’s burgeoning financial stability and regulatory functions. He has some things in his favour. First, the Board knows him (and will have seen at least a couple of months as acting Governor, including having wielded the knife to shrink the badly-bloated top management group). Second, he is a decent person, and it is very unlikely that he would be found repeatedly actively misleading FEC or the media (last week’s appearances, after Orr, were a breath of fresh air). And, third, he has an interesting range of relevant background (Reserve Bank in two stints, Bank of England, Harbour Asset Management – was that 3rd bullet put there for him?) And, fourth, he is closer to the age one might ideally be looking for in a longer-term Governor (I think appointees in their late 60s would be less than ideal).
All that said, I think it would be a bad appointment, for multiple other reasons. First, there is little or no sign of any real intellectual or policy depth (check out the various speeches he has given since rejoining the Bank in 2019). We have little or no insight on how, or what, he thinks (if anything) beyond the wholly conventional. Second, he has served on the MPC for its entire six year term so far, and was Assistant Governor responsible for monetary policy, markets, and macro during the height of the pandemic period, when the huge policy misjudgments (LSAP and the length of the period when the OCR was left well below neutral, even as inflation was blowing out) were made. Third, he was Orr’s handpicked deputy (the vacancy was never advertised when Geoff Bascand announced his resignation), through a much wider range of mistakes and misjudgements (down to and including last year’s budget and the last gasp big expansion in staff numbers). Fourth is a related point: no one survives in Orr world if they challenge him or disagree materially with him. Hawkesby survived, presumably by (at best) just keeping his head down, or at worst going along with it all (inappropriate jokes – per Paul Conway – and all). He sat alongside Orr on various occasions when his boss actively misled FEC, and never said a word of correction or clarification. Hawkesby has ability, but my view has consistently been that he was appointed and served at one level above his actual capability at the time (thus, when Orr headhunted him to be the Assistant Governor for monetary policy and markets, he might have been a very good appointment as Head of Financial Markets). He may be appointed Governor, but if it happens it will be a mark that neither the Minister nor the Board really care much about a world class central bank. But, as I say, he probably wouldn’t lie to FEC. A low bar, but we have to start somewhere.
What of other people? I rule out the Bill English suggestion (yes, former Ministers of Finance have become central bank Governors elsewhere, but usually when they’ve previously been well-regarded economists, and it would be highly desirable to have an appointee the political parties in Parliament were broadly comfortable with and confident in). But there must be people out there with stronger private sector experience, and yet some of the skills/experience one might normally look for in a central bank head. Craig Stobo, for example, is currently the chair of the Financial Markets Authority and is thoughtful on economics and markets issues (even if weirdly running commentary on The Platform on all manner of other policy and economic topics, including last week’s MPS). Or Andrew Bascand (Hawkesby’s former boss at Harbour, and ex RBNZ and BOE)? Or…..or…..or? (Just not Orr or Orr-like, please…….)
Remember, applications close on Friday. In several months’ time we’ll know who has got the nod.
I’ve put the full advert and job description text below for future reference (since the link at the start of the post will no doubt be taken down in the coming weeks).
Recruitment process for new Governor of the Reserve Bank of New Zealand
The Board of the Reserve Bank of New Zealand Te Pūtea Matua has started the search and recruitment process to identify a new Governor.
Published:
23 May 2025
Recruitment process
The Board’s statutory responsibility is to nominate a candidate to the Minister of Finance, who then makes a recommendation to the Governor General for appointment.
The Board has engaged the executive search firm Heidrick and Struggles to help with the search and recruitment process.
The advertising and search activity will run throughout May and June, with interviews and assessments in July and August, followed by a nomination to the Minister of Finance. The Minister will then consult with political parties and make a recommendation to the Governor General for appointment. See Reserve Bank of New Zealand Act 2021.
Position Description for the Governor of the Reserve Bank of New Zealand
Key functions and responsibilities The Governor performs the role outlined in the Reserve Bank of New Zealand Act 2021 (the Act). In particular, the Governor is the: a. Chief Executive of the Reserve Bank b. a member of the Board of the Reserve Bank c. Chair of the Monetary Policy Committee (MPC). The Governor is responsible for performing and exercising functions and powers delegated by the Board.
Chief Executive role
The extent of the Board’s delegation to the Bank is outlined in the Board’s current Delegation Policy; however, it is anticipated for the purposes of this job description that the Board:
Will delegate the management authority to the Governor for the day to day running of the Bank.
Will delegate regulatory statutory powers to the Governor.
The delegation of day-to-day management authority will exclude any matters the Board reserves to itself for decision making.
The delegation of regulatory statutory powers will be subject to a framework laid out in the Delegation Policy for the referral of particular matters to the Board for either decision or guidance.
The carrying out by the Governor of any powers, functions, duties, authorities or discretions (or the carrying out by preapproved people he or she sub delegates to) must all times be consistent with policy and frameworks set by the board and any applicable Bank policies. The Governor is responsible for ensuring that relevant and sufficient information flows to the board and to support the board and its individual members in fulfilling their collective and individual duties outlined in Part 2, Subpart 4 of the Act. The Governor will be a key spokesperson and representative for the Bank in its external relations and carries significant responsibility for effective communication by, and the image and standing of, the Bank.
Board member role The Governor is a Board member of equal standing to other Board members and shares the collective authority and responsibility of members as outlined in section 24 of the Act.
Chair of MPC The Governor is the Chair of MPC with the responsibilities outlined in the Act, Charter and Code of Conduct. These responsibilities include convening chairing meetings of the MPC and being the official spokesperson for the MPC.
Criteria for appointment / key competencies The Governor will:
Have a strong understanding of monetary economics and monetary policy.
Have a strong awareness and understanding of financial policy and regulatory frameworks.
Have a detailed knowledge of domestic and international financial markets and drivers of competition.
Be familiar and up to date with best practice risk management frameworks applicable to the Reserve Bank.
Have advanced relationship management, influencing and communication skills, sufficient to successfully manage relationships with the Minister of Finance and other senior government ministers, opposition political parties, media, leaders in supranational financial institutions and peer central banks and regulators, regulated entities, other public agency CEOs, Iwi leaders and all members of the community.
Have a sound understanding of public policy decision making processes.
Have the ability to lead the effective deployment of the Reserve Bank’s resources and demonstrate performance achievements in a public sector environment.
Have a successful record of setting and leading a strategic path for a complex, multi faceted organisation. Have in-depth management experience of a substantial entity, preferably at CEO level.
Have the personal resilience to cope with adverse and stressful circumstances and to withstand both justified and unjustified criticism.
Have the capability to periodically commence external reviews of aspects of the Reserve Bank’s functions (including monetary policy), responding in an open-minded manner to any recommendation received and implement change processes as appropriate.
Highly developed cultural capability, particularly concerning Te Ao Māori, and awareness of the role of Te Tiriti O Waitangi
Demonstrate exemplary leadership skills: o Undoubted integrity. o Empathy and emotional intelligence. o Sound judgement and decision making. o Openness to new ideas. o Highly developed inter-personal skills. o Ability to develop human capital of an organisation.
In both The Post and the Herald this morning there are reports of interviews with executive members of the Reserve Bank’s Monetary Policy Committee: the Bank’s chief economist Paul Conway in The Post and his boss, and the deputy chief executive responsible for monetary policy and macroeconomics, Karen Silk in the Herald. In a high-performing central bank the holders of these two positions should be the people we look to for the most depth and authoritative background comment on monetary policy and economic developments. But in New Zealand we are dealing with the legacy of the Orr/Quigley years where we struggle to get straightforwardness, let alone depth and insight.
Now, to bend over backwards to be fair, interview responses will depend, at least in part, on what the journalist concerned chooses to ask. But then standard media training advice is to answer the question you wish they’d ask, not (necessarily or only just) the one they did. An interview with a powerful decisionmaker is a platform for the decisionmaker.
The Conway interview appears somewhat meandering and not very focused. I wanted to touch on three sets of comments in it.
First, asked about the transition after Adrian Orr’s sudden (and unexplained) departure, he says it is business as usual and it has been “a very smooth transition”.
“I think this institution is bigger than even Adrian Orr [it was certainly bigger – much bigger – as a result of Adrian Orr]……There’s a real sense of the ‘show must go on’ and it really has. We miss Adrian. It is a bit less fun around the place, less jokes going on – probably more appropriate jokes”, he smiles again.
So in addition to Orr being a bully, an empire builder, and someone well known for freezing out challenge and dissent, he also created an uncomfortable and inappropriate working environment? Or at least that is what Conway appears to be saying about the man who recruited him.
But you also wonder about just how straight Conway is being (and why the journalist didn’t ask more). After all, the Bank itself tells us there are big changes afoot (presumably consequent on the new Funding Agreement, prospect and actual). In the just over two months since Orr resigned, the top tier of management has been brutally slimmed down (credit to Hawkesby). At the start of March there was the Governor and an Executive Leadership Team of seven Assistant/Deputy Governors and one “Strategic Adviser”. Since then, Kate Kolich, Greg Smith, Sarah Owen, Simone Robbers and Nigel Prince have all either left already or we’ve been advised they will soon be doing so (none with an announced job to go to). Governor plus eight has been reduced to Governor plus four. And
That first group is Conway’s own level (though presumably the Bank will continue to need a chief economist). And then on down to the staff (and much of this is because Orr/Quigley massively blew the budget limit Grant Robertson had set for them and went on one last hiring spree last year). You somehow suspect that all is not exactly sweetness, light, and engagement at the Reserve Bank.
And then there was this
Conway is on record as a bigger-government sort of guy (we had his extra-curricular stuff last year, as an example) but what possessed him, interviewed as an MPC member and senior central banker, to suggest that more state interventions and bigger government might be “worth thinking about”? It simply isn’t in his bailiwick, and he shouldn’t have allowed himself to be dragged into responding to a hypothetical, especially about one outside the Bank’s responsibilities.
And finally, we got the meandering thought that “it’s possible that we get to a point where people just adjust their behaviours and ‘uncertainty’ becomes the new normal and we just get on with it. I’ve got no ’empirics’ to base that on – it’s just, I think, a very interesting thought-stream.”
Really? A “very interesting thought-stream” that people do in fact adapt to the world as it is? Startling and insightful (not).
Then, of course, there is his boss, Silk. Most serious observers regard her as fundamentally unqualified for her job, and not the sort of person who would be likely to be on an MPC anywhere else in the world, let alone as the deputy primarily responsible for monetary policy. She can be counted on to safely deliver speeches on operational topics that others have written for her, and to answer purely factual questions at MPS press conferences and FEC about what has happened to swap yields and mortgage rates. And that is about all.
She also seems to have a mindset in which rates being paid on existing mortgages are what matter rather than the rates facing marginal borrowers and purchasers. Perhaps it is what comes from a non-economics background in a bank? Thus, in the Herald interview we are told that she claimed that “the effects of the 225 basis points of OCR cuts the committee had delivered in less than a year were yet to be widely felt”. The journalist added some RB data on average actual mortgage rates which might appear to back that up. Of course, expected cash flows matter as well as actual ones – if your fixed rate mortgage is going to roll over in a couple of months onto a much lower rate that will almost certainly be affecting your comfort, confidence, and willingness to spend now. But more to the point, marginal rates for people looking at buying a property or otherwise taking on new debt have come down a long way, and were already down a long way months ago. This chart is from the Bank’s own website, showing short-term fixed mortgage rates.
As at yesterday, rates were a few basis points lower again than the end-April rates shown here. 200 basis points plus down from the peak, and that not just yesterday. And falling wholesale rates, which underpin these falls in retail rates, also affect the exchange rate, another important part of the transmission mechanism. (And, of course, with all Silk’s focus on the cash flows of existing borrowers, she never ever mentions the offsetting changes in the cash flows for existing depositors – I’m of an age to know!)
So far, so predictable (at least from Silk). But then there was this (charitably I’ll assume the word “fulsome” was not hers)
Reasonable people might differ over the inflation outlook and the required future path for the OCR, except that we were told in the MPS that there was unanimous agreement from the MPC to the forecast path for interest rates. And that is a path that is lower from here than the path published (again unanimously) in the February MPS (the deviation begins after the May MPS, not at it). In other words, not only did the February path show some further easing from (where they expected to be, and were, by) May onwards, but the May path shows even more easing from here forward.
And yet Silk talks of a “much stronger easing signal” sent in February.
Frankly, they seem all over the place. If the Committee (as it did) unanimously agrees to publish a (somewhat) steeper downward track than the one you had before then either you have an easing bias – always contingent on the data of course – or you made a mistake in adopting the track you did. And if you are comfortable with the track, it feels like a mis-step for the temporary fill-in Governor to announce that there was no bias. I guess Silk might have got stuck having to cover for her fill-in boss, but it is a pretty poor look all round. Surely (surely?) they must have rehearsed lines about biases before the press conference? Surely, if so, someone pointed out the disconnect between the proposed words and the chart above?
And finally from Silk we learn that “price stability is one of the conditions you need for growth”. It simply isn’t – and the economists on the committee are usually much more careful, with the standard central banker line being that price stability, or low and stable inflation, is the best contribution monetary policy can make (many muttering under their breath that that contribution isn’t necessarily very large). Not to labour the point but the economy was still growing, reaching its most overheated point in late 2022, when core inflation was around its worst.
All in all, not a great effort at communications from the MPC this week. As I noted in my post on Thursday, there was none of the prickly frostiness of Orr, and no sign of deliberately or conscious setting out to mislead Parliament, but it simply wasn’t a very good performance. And while Hawkesby is new to the role, chairing MPC and acting as its prime spokesperson on the day, Conway and Silk have no such excuse. Someone flippantly suggested that perhaps there is something about May and the MPC – last May was when the MPC went a bit wild talking of raising rates further (the OCR was still going to be above 5 per cent by now), and then Conway tried to blame his tools, rather than the judgements of him and his colleagues, for the associated forecasts.
If the government is at all serious about a much better, world class, Reserve Bank, they need to work with the Board to find a Governor who will lift the game and the Governor/refreshed Board will need to work with the Minister to produce a stronger MPC. It would seem unlikely that in such an improved Bank/MPC there would be a natural place for either Conway or Silk, pleasant enough people as they may be.
Procrastinating this morning, I asked Grok to write a post in my style on yesterday’s Monetary Policy Statement. Suffice to say, I think I’ll stick to thinking and writing for myself for the time being. Among the many oddities of Grok’s product was the conviction that Adrian Orr was still Governor. Mercifully that is not so, even if – despite all the questioning yesterday – we are still no closer to getting straight answers on the explanation for the sudden, no-notice, accelerated departure of the previous Governor. Perhaps responses to OIAs will eventually help, but some basic straightforwardness from all involved – but especially Quigley and Orr himself – would seem the least that the public is owed, especially after all the damage wreaked on Orr’s watch.
Yesterday’s Monetary Policy Statement certainly made for a pleasant change of tone. Stuff’s Luke Malpass captured it nicely: “A lack of journalists being upbraided at times for not reading the materials in the hour allowed, or for asking the wrong question, was a change from previous management”. I watched about half of the Bank’s appearance at FEC this morning, and it was as if it was a whole different Bank. Not necessarily any deeper or more excellent on substance, but pleasant, respectful, engaged people accounting to Parliament, as they should. And, setting the standards low here, there wasn’t any sign of attempts to actively mislead or lie to the committee (Orr, just three months ago in only the most recent example).
I don’t have any particular quibbles with yesterday’s OCR decision. It was probably the right thing to do with the hard information to hand, but we won’t know for quite some time whether it really was the call that was needed. The NZIER runs a Shadow Board exercise before each OCR decision where they ask various people (mostly, but not all, economists) where they think the OCR should be at this review and in 12 months time, and invites them to provide a probability distribution. I’m not part of that exercise but I put my rough distributions on Twitter earlier in the week (in truth the blue bars should probably have been distributed in a flatter distribution – we really do not know)
The Bank’s projection for the OCR troughs early next year at 2.85 per cent and, as the scenarios they present reinforce again, there is a great deal of uncertainty about just what will be required (and not just because of the Trump tariff madness and associated uncertainty).
One of the interesting aspects of yesterday was that for only the second time in the six year run of the MPC that there was a vote (5:1 for a 25 point cut rather than no change). But, of course, being the non-transparent RBNZ we do not know which member favoured no change, so cannot ask him or her to explain their position, let hold them to account or credit them when time reveals whether or not it was a good call. As it happens, despite the vote the MPC reached consensus on a forecast track for the OCR and since that track embodies a rate below 3.5 per cent as the average for the June quarter and yesterday’s was the final decision of the June quarter, I’m not sure what to make of what must really have been quite a small difference. The bigger issue remains that there is (almost always) huge uncertainty about what monetary policy will be required over the following three years (the standard RB forecast horizon) and yet never once has any MPC member dissented from the consensus track. Groupthink still appears to be very strong. And notwithstanding the Governor’s claim that there is “no bias” one way or the other for the next move or the next meeting, the track – which all the MPC agreed on – clearly implies an easing bias (even if not necessarily a large one for July rather than August).
Hawkesby, unprompted, was yesterday championing the standard approach under the agreement with the Minister which enjoins the committee to seek consensus and only vote as a last resort. He acknowledged it is now an unusual model internationally, but claims it was preferable because it means – he claims – that everyone enters the room with a completely open mind about what should be done, whereas in a voting model people tend to enter the room with a preconceived view. Perhaps it sounds good to them, but it simply doesn’t ring true (and there is no evidence their model – which, among other things, saw them lose the taxpayer $11bn – produces better results in exchange for the reduction in transparency and accountability.)
It rang about as false as yesterday’s claim from the chief economist that the uneventful (in markets) transition when Orr resigned was evidence for the desirability of the decisionmaking committee. I’m all in favour of a committee (although a better, and better designed committee) but my memory suggested (and the numbers seem to confirm) that there were also no market ructions when Don Brash resigned, in the days of the single decisionmaker model.
There were a few things worth noting in the numbers. First, the Reserve Bank expects much weaker GDP growth than the Treasury numbers released with the Budget last week (Treasury numbers finalised in early April)
and as a result, significant excess capacity persists for materially longer than in the Bank’s February forecasts
And I’m still not sure where the rebound (above trend growth reabsorbing all the excess capacity) is really supposed to come from, on their telling, given that the OCR is still above their longer-term estimate of neutral, and never drops below it in the projection period. Reasonable people can differ on where neutral is likely to be (when the OCR was last at this level, less than three years ago, the Bank thought neutral was nearer 2%, now they estimate close to 3%), but it is the internal consistency (or lack of it) that troubles me.
I had only two more points to make, one fairly trivial, but the other not.
The trivial one first. In the minutes there was this paragraph about the world economy.
I don’t have any trouble with the (“weak world”) bottom line, but two specific comments puzzled me. The first was that difference in tone in the commentary on fiscal policy in China and the US: one might use “sizeable fiscal stimulus” (with no negative connotations) and of the other (and much more negatively) “fiscal policy could place strains on the sustainability of its public debt”. It wasn’t at all clear that the MPC realises that China’s government debt is almost as large as the US’s, and as a share of GDP has been increasing (and is expect to increase) much more rapidly than that of the US.
In a similar vein, this chart from the recent IMF Fiscal Monitor suggests that on IMF estimates China is already in a deeper fiscal hole, needing more fiscal adjustment (% of GDP) than the US to stabilise government debt.
Of course, the rest of the world is much more entangled with US government debt instruments than with Chinese ones, but it was a puzzling line nonetheless.
I’m also at a loss to know quite what the MPC was getting at with the line about ‘the decline in the quality of macroeconomic institutional arrangements [was] likely to result in precautionary behaviour by firms and households’. Not only is it not clear what decline they are talking about – are the Fed and the ECB not still independent, and the PBOC still far from it, and fiscal policy seems to have been on its current track for some years (in multiple countries). Is Congress bad in the US? For sure, but it has been so for a long time. I guess it might have been the relaxation of the German debt brake they had in mind, but….probably not. I was also a bit unsure how all this was supposed to play out. If, for example, there was an increased perceived risk of government debt being inflated away, wouldn’t the rational reaction be to increase purchases of goods and services on the one hand, and real assets on the other to get in before the inflation? Private indebtedness tends to rise when interest rates are modest and inflation fears are rising. In the end, who knows what they meant. Which isn’t ideal. They should tell us.
The more important issue is the Reserve Bank’s treatment of fiscal policy, where the bad old ways of Orr were again on display yesterday, in ways that really should undermine confidence in the Bank’s analytical grasp (and, frankly, its willingness to make itself unpopular by speaking truth in the face of power).
In his press conference yesterday the temporary Governor was asked about the impact of the Budget on the projections and policy decisions. He noted that they were glad to have all the information but that really it hadn’t made much difference, noting that any stimulus from the Investment Boost policy was offset by the impact of spending cuts. This is made a little more specific in the projections section of the document (a small increase in business investment, and on the other hand “on net, lower government spending reduces inflationary pressure”).
Readers with longer memories may recall that this issue first came to light a couple of years ago. Until then, for many years, the Bank had presented the impact of fiscal policy on demand primarily through the lens of the Treasury’s fiscal impulse measure, which had originally been developed for exactly that (RB) purpose. The Treasury has made some changes to that measure a few years ago which, in my view, reduce its usefulness to some extent, but certainly doesn’t eliminate it. Treasury continues to present the numbers with each Economic and Forecast Update. The basic idea is that increased taxes reduce aggregate demand and increased spending increases demand, but (for example) some spending is primarily offshore and thus doesn’t directly affect domestic demand. It is a best approximation of the overall effects on domestic demand of changes in fiscal policy. You can have a positive impulse while running a surplus (typically, if the surplus is getting smaller) or a negative one with a deficit (typically, if the deficit is getting smaller). It is straightforward standard stuff.
And yet two years ago the Bank simply stopped talking about this approach and replaced it with an exclusive focus on government consumption and investment spending (ie excluding all transfers – a huge component of spending – and the entire revenue side). This sort of chart has appeared ever since
and, probably not coincidentally, projections of (real) government consumption and investment have been trending downwards over that entire period. (This was the same vapourware I referred to in Monday’s fiscal post, where both Grant Robertson and Nicola Willis have repeatedly told us – and Treasury – that future spending will be cut.).
Back when this started, I OIAed the Bank for any research or analysis backing this change of approach. Had there been any of course they would already have highlighted it. There was none. But the switch had allowed the Governor to wax eloquent about how helpful fiscal policy was being, even as by standard reckonings (Treasury, IMF, anyone really) that year’s Budget had been really quite expansionary, complicating the anti-inflation drive.
The temporary Governor – who is presumed to be seeking the permanent job – seems, whether consciously or not, to be engaged in the same sort of half-baked analysis that avoids saying anything that might upset the government. Yes, on the Treasury projections government consumption and investment spending are projected to fall. But what does the Treasury fiscal impulse measure show?
At the time of the HYEFU last December, the sum of the fiscal impulses for 24/25 and 25/26 fiscal years was estimated to be -0.47 per cent of GDP (with a significant negative impulse for 25/26, thus acting as a drag on demand). By the time of last week’s Budget, not only was the impulse for 25/26 forecast to be slightly positive (this is consistent with, but not the same as, the structural deficit increasing) but the sum of the impulses for the two year was now 0.7 per cent of GDP positive. Fiscal policy, in aggregate is adding to demand (and by materially more than estimated at the last update). And the incentive effect of Investment Boost on private behaviour is on top of that.
Absent some serious supporting analysis from the Bank or its temporary Governor for its chosen approach (focus on just one bit of the fiscal accounts), it looks a lot like an institution (management and MPC) that now prefers to avoid ever suggesting that the fiscal policy effects might ever be unhelpful. After all, all else equal a positive fiscal impulse reduces the need and scope for OCR cuts – and we all know (we see their press releases) how ministers love to claim credit for OCR cuts.
If there is a better explanation, they really owe it to us. If they aren’t any longer happy with Treasury’s particular impulse estimate, they have the resources to come up with their own. But there is no decent case for simply ignoring developments in the bulk of the fiscal accounts. Wanting the quiet life simply isn’t a legitimate goal for a central banker, and if Hawkesby continues with the dodgy Orr approach – and he has been part of MPC all along – it does call into question his fitness for the permanent job. It isn’t the Reserve Bank’s job, except perhaps in extremis, to be making calls on the merits or otherwise of the fiscal choices of governments, but they are supposed to be straight with us (and, by default, with governments) on the demand and activity implications of those choices. They aren’t at present.
After the discussion in my post yesterday on the Investment Boost subsidy scheme announced in the Budget I thought a bit more about who was likely to benefit the most from it.
The general answer of course is the purchasers of the longest-lived assets.
Why? Because if you have an asset which IRD estimates to have a useful life of 100 years, your straight line depreciation deduction normally would be 1% per annum for each of those 100 years. But under investment boost, you get to do almost the first 21 years of deductions in the first year (the 20% Investment Boost deduction plus your 0.8% normal depreciation), and then the annual deduction each year thereafter is reduced by a little. But money today is very valuable relative to money given up (ie higher taxable income because of reduced future annual deductions) decades hence.
If on the other hand, you have an investment asset that has an estimated life of only 5 years (and there are many of them) it would normally be depreciated (straight line) at 20% per annum. Under Investment Boost, you get to deduct 36 per cent in year 1, but that additional depreciation upfront is clawed back over only the following four years. The Investment Boost additional upfront deduction has a positive present value, but it is fairly modest for such short-lived assets.
And what are the longest-lived assets? They will mostly be buildings. And, as we know, last year the government (with Labour’s support) moved to abolish tax depreciation altogether on commercial buildings (with an estimated useful life in excess of 50 years).
And that hugely magnifies the advantage of the Investment Boost policy for purchasers of new commercial buildings. Not only are they very long-lived assets but because there is no general tax depreciation on these assets, there is no depreciation clawback. The 20 per cent Investment Boost deduction is just pure gift (recall that the actual value to companies of all these deductions is 28 per cent of the value of the deduction itself – the company tax rate).
I did a little illustrative exercise in the table below, comparing the present value of the Investment Boost deduction for three different types of assets: commercial buildings, a winch (which IRD estimates has a 10 year useful life), and a printer (IRD estimates a five year useful life). Under the policy, in year 1 you get to deduct 20 per cent of the value of the asset plus normal depreciation calculated on the remaining 80 per cent. I’ve evaluated each option using a discount rate of 5 per cent (choice of discount rate won’t change the relative story across assets).
On plausible scenarios, Investment Boost is much much more beneficial to purchasers of commercial buildings than it is to most other assets (eight times as much for the same capital outlay on an asset with a life of five years[but see update at end of post]). There are, of course, other business assets with longer useful lives than 10 years (my winch example) but if you skim through the IRD schedule not that many more than 15.5 years.
And this a sector that just a year ago the government thought should get no tax depreciation at all…..
And a reminder, per yesterday’s post, that the IRD Fact Sheet on this policy says that (new or extended) rest homes will get to benefit from this (substantial) deduction, but that rental accommodation built afresh for any demographics to live in will not.
I challenge you to find the intellectual coherence in that.
Of course, you wouldn’t have got from anything announced on Budget day the sense that new commercial building purchasers were going to be by far the biggest winners. The Minister’s press release on the policy talks of how
To achieve that growth, New Zealand needs businesses to invest in productive assets – like machinery, tools, equipment, vehicles and technology.
But not a mention of commercial buildings. And perhaps more strangely, there is no discussion at all in the IRD/Treasury RIS of which sectors will benefit most, let alone the consistency with last year’s policy initiative on tax deprecation for commercial buildings, or of the rather anomalous situation where some new commercial residential accommodation (rest homes) gets the subsidy, while most of that market doesn’t. Quite extraordinary really.
It needn’t have worked out that way. Had the policy been set up to allow (say) double the normal rate of depreciation, until the asset was fully depreciated – rather than a flat 20 per cent in the first year – then there’d have been no benefit for commercial buildings at all (and whatever the merits of that at least it would have been consistent from one year to the next). Doing it in combination with restoring tax depreciation for commercial buildings might have involved initial backtracking but would at least have the merit of some consistency and coherence now.
UPDATE: A commenter notes that I really should compare scenarios with replacement at the end of the asset’s useful life. That is right. It will matter for the absolute comparison between 5 and 10 year assets (reduces the PV margin of a 10 year asset to 15% or so), and for the absolute scale of advantage of commercial buildings, but – since there is no clawback at all in respect of commercial buildings – it does not change the point that Investment Boost most strongly favours commercial building investment. Moreover, and all else equal, an investor with even a mild degree of risk aversion would favour cash in hand (20% immediate deduction on a 100 year life asset) over the uncertainty of the deduction regime at each replacement of shorter-lived assets.
On two separate themes; aggregate fiscal policy, and the Investment Boost initiative.
Aggregate fiscal policy
Over the weekend for some reason I was prompted to look up the Budget Responsibility Rules that Labour and the Greens committed to in early 2017 (my commentary on them here). At the time, the intention seemed to be to fix in the public mind a sense that these two parties of the left would nonetheless be responsible and prudent fiscal managers (as I recall a fair bit of the more left wing parts of the bases of the two parties lamented the agreement for giving much too much ground to what might have been thought of as orthodoxy).
And what were they promising?
The debt measure they were using at time had been 24.6 per cent of GDP in June 2016.
To which one can only say, those were the days:
the last time there was an OBEGAL surplus was the year to June 2019, and neither government nor opposition now seem bothered by the forecast of another 3.4 per cent of GDP deficit in 25/26 (just the same as the latest estimate for 24/25). Under the current government, the preferred deficit measure has been changed, against Treasury advice, to make things seem less bad. The current government’s long-term fiscal objectives (in the Fiscal Strategy Report) still include maintaining on average “over a reasonable period of time” a zero operating deficit, but there is little practical sign it means anything to them (or that Labour now would be less bad)
core Crown expenses are projected to be 32.9 per cent of GDP in 25/26, up slightly from 32.7 per cent in 24/25, and down only a touch on the 33 per cent actual for 23/24. Back when Labour and the Greens made those 2017 commitments core Crown expenses were a touch under 30 per cent.
debt measures have chopped and changed (and the current government was stuck with the additional debt their predecessors took on, although have not hesitated to take on much more since). These days, net core Crown debt is about 42 per cent of GDP. The government’s long-term fiscal goal is stated to be getting into, and keeping that measure in, a range of 20-40 per cent of GDP, but even on their rose-tinted fiscal forecasts that measure is projected to be 45.5 per cent of GDP by June 2029 (NB, that will be seven years on from the end of Covid as a big budgetary item). Meanwhile, Labour seems uncertain whether they’d attempt to even keep this debt measure below 50 per cent of GDP.
A political party today that seriously pledged to do what Labour and the Greens promised in 2017 to do (and by 2019, net core Crown debt was below 20 per cent, OBEGAL was in surplus, and core Crown expenses were below 30 per cent of GDP) would almost certainly be slammed as dangerous, extremist, unrealistic etc. So far have things fallen, under Labour and under National.
Meanwhile, too many journalists still seem to accord some degree of seriousness to fiscal projections for the end of the forecast horizon (four years out, so currently the year to June 2029). When the date for the crossover point from deficit to surplus keeps getting pushed out (and more recently, the Minister’s definition changes to make things easier), people should eventually realise that there is little or no substance to these numbers. They might be generated by The Treasury, but they aren’t some sort of best unconditional forecast, but rather the best forecast conditional on whatever successive ministers tell Treasury will be their policy for several years ahead (the end of the forecast period always, by construction) being well beyond the following election). The problem is that even if ministers honestly believe what they tell Treasury at any point in time (and probably they mostly do), it isn’t then anything more than a statement of good intention, perhaps even wishful thinking.
As an illustration of the point, consider this chart which shows projected core Crown expenses for 2025/26 as a share of GDP in successive Treasury economic and fiscal updates, going back to the end of 2021. The biggest further increases happened under Labour, but the line has continued to trend up under the current government.
Now, sure, further out the projections show core Crown expenses falling as a share of GDP, but that is sort of my point. Such projections are just vapourware. Exactly the same trend showed in the projections Treasury did under Labour (HYEFU21 to PREFU23 in this chart). It is easy, and perhaps appealing, to show such downward trends in future. It is quite another thing – politically rather than technically – to actually deliver. In both of the last two Budgets there has been plenty of hullabaloo (from politicians left and right) about expenditure cuts. But whatever the merits of those cuts, the bottom line remains that most of the proceeds have been used to increase other spending (some tax cuts last year)….and thus core Crown spending as a share of GDP is not actually falling.
Journalists, in particular (since politicians will politick), would be well-advised to ignore pretty much everything in the Treasury fiscal forecasts beyond the financial year to which the Budget actually relates (25/26 in this case), the year for which Parliament is actually being asked to make specific concrete appropriations. Most of the rest is vapourware.
In a similar vein, here is a little table I stuck on Twitter on Saturday. The peak in net debt remains consistently two years ahead of whichever of five years’ Budgets one is looking at.
The government’s fiscal strategy seems to be not very different from that of the last couple of years of the previous government – do nothing about the long-term and in the short-term spend just as much as you possibly can without scaring the horses by blowing out the fiscal projections for net debt peaks and deficit crossovers too much in any one go.
Treasury are somewhat caught in the middle in all this. They have to forecast on the basis of fiscal policy as communicated by the Minister. That might be inescapable, but as I’ve argued previously in a PREFU context, maybe it would make sense to require Treasury to do a parallel set of forecasts showing the main fiscal variables on (a) unchanged tax rates (as at present), and b) maintaining the real per capita level of central government purchases (health, education, defence, Police etc) and the current programmes of transfers and income support. Those latter shouldn’t of course be treated as set in stone – efficiencies can be made, and different governments can have different priorities – but the expected cost if none of the expected deliverables are changed is still useful information, both for ministers (who may well already get something similar) and those seeking to hold them to account.
Investment Boost
Having been promised, by the Minister of Finance herself, “bold steps” in the Budget to address economic growth and productivity underperformance, in the end it all came down to a single measure, the so-called Investment Boost. In my quick post last Thursday I was mostly focused on the fact of the single measure and the rather underwhelming forecast change to our longer-term growth prospects (the level of GDP lifts by 1 per cent, not getting there fully for more than 20 years). [Note that this is quite similar to the then-estimated long-run effect of the 2010 tax-switch reform, which involved a switch from personal income to consumption tax and a slight increase in the corporate tax burden.] Considered against the size of gap between New Zealand average productivity and that of OECD leaders (60 per cent or more), it would represent little more than rounding error, even if the case for the new policy measure itself was strong.
I don’t envy IRD and Treasury having to come up with estimates of the economywide long-term impact of an intervention like this investment incentive. Their Regulatory Impact Statement is here, and it reports that while there have been various experiments with such policy interventions in other countries in fact there doesn’t seem to be much in the way of robust evaluations (and often these investment incentives have either been time-limited and/or applying to a materially more restricted range of assets than Investment Boost).
This is the bit of the RIS where they describe the economywide results
Note that in the new steady state (many years hence) GDP is 1 per cent higher than otherwise, and the capital stock is 1.6 per cent higher. Since it is stated (and both IRD and the Minister have confirmed) that the results include an increase in jobs/hours (increase in total use of labour), it is a bit difficult to see how there is likely to be any material increase in total factor productivity at all. Among the other oddities is that if total wages are rising by more than GDP, and yet the capital stock in increasing even more, the model must be generating quite a reduction in rates of return to capital. Why that is, and how plausible it is, I’ll leave to the specialists.
But perhaps more worthy of attention is that last line in the table. NNI is net national income (ie net of depreciation, and national= benefits to New Zealand residents, as distinct from “domestic” which is things generated in New Zealand, whether by New Zealand residents or foreign investors), and by far the best measure of the economic gains (or otherwise) to New Zealand. Note that NNI in New Zealand is currently about 80 per cent GDP, so – on this particular model – only 25 per cent of the lift in GDP flows through to economic benefits to New Zealand residents ((0.3/1)*0.8). Most of the GDP gains accrue to foreign investors (something IRD is certainly not hiding, but obviously wasn’t being advertised by the government). Now, to be clear, I am all in favour of facilating foreign investment, but as with almost any policy intervention the test is whether whatever benefits foreigners may pick up result in sufficient gains to New Zealanders. For interventions that cost NZ taxpayers’ lots of money (as this one does), gains to foreigners are not themselves a benefit. The question is whether they enable greater benefits for New Zealanders.
(Note that IRD makes the point that “the magnitude of these [absolute] estimates has a low degree of certainty”. But their best estimates are, presumably, what ministers had available to them.)
How large is the direct fiscal cost?
This is from the Summary of Initiatives document
Note that the cost in the early years is considerably higher than that by 2028/29. I presume that is reflecting the fact that for most investment the Investment Boost deduction is “just” changing the timing of the deduction (you get to write off 20 per cent of the cost in the first year, but then subsequent depreciation deductions over the remaining life of the asset are correspondingly reduced: for shorter-lived assets those reduced future deductions is significant once you are beyond the purchase year). In the RIS it is stated that that 2028/29 number is also the one they assume for the out-years (although presumably adjusting for inflation, and with a trend increase in the level of business investment – population growth etc).
And how much is $1278m per annum relative to net national income? Net national income, based on Treasury’s GDP forecasts, for 2028/29 is likely to be around $420 billion (80% of forecast GDP of $524bn), so the direct annual fiscal cost to New Zealand residents of this policy, once we get through the more expensive introductory phase, looks to be about 0.3 per cent of NNI. And that cost is being incurred every year, even though the NNI income gains don’t get up to 0.3 per cent for 20 years or more. Apply a discount rate of 8 per cent (as surely Treasury should insist on for what is a commercially-focused policy) and things could quickly look not overly attractive if a proper cost-benefit analysis had been done (it wasn’t). I guess there will be additional tax revenue on the additional GDP (tax/GDP is about 28 per cent), but again you don’t earn the tax until the real GDP benefits gradually flow through, while the fiscal cost is frontloaded. Time costs.
So perhaps the policy is net beneficial to New Zealanders (even if the scale is small). But is it an appropriate policy?
Reflecting on it further over the weekend, I’m not sure it is really either appropriate or particularly intellectually coherent. (I could add that I’m not greatly bothered by it being uncapped – so, for example, is the unemployment benefit which costs what it costs depending how many people end up unemployed, or interest deductibility etc. Government champions will no doubt add that since the point is to increase investment, if there is even more new investment than IRD/Treasury forecasts that is likely to be a good thing, not a bad thing. In some commentary I wondered if people realised that it is not a 20% grant, but rather a reduction in first year tax of 5.6 per cent of the purchase price (0.28*20).)
To me, there is little serious doubt that New Zealand has overtaxed business income. IRD show some of the cross-country comparisons, and they could have added this one (which is a few years old but was in the background documents for the Tax Working Group).
They could also have cited the Tax Foundation’s recent piece on capital cost recovery, depreciation etc. This was the bottom (worst) bit of their table for OECD countries showing the net present value of total write-offs over the life of an asset
Very few countries, for example, do as they should and inflation-adjust the value of assets to allow full real economic depreciation over the life of an asset.
But I’m still left uneasy about this particular Investment Boost initiative.
You hear a lot these days about “capital intensity” (lack thereof). For years, Treasury has talked up this rather mechanical growth accounting decomposition – business investment has been quite modest for decades, and so capital stock per worker has tended to lag – and this year ministers have taken to championing the line. And sure enough, from the RIS
There aren’t (in the views of ministers) enough capital assets, so we’ll offer an incentive (quite an expensive one) to encourage firms to have more capital assets.
The problem with this mentality – whether it is officials or ministers talking – is that it too easily fixates on symptoms rather than underlying economic causes. It never asks the question as to what is is about the New Zealand economy or its policy settings that means either New Zealand firms or foreign ones don’t seem to find that many profitable (after tax) opportunities available here (let alone look at what might be the best, or most cost-effective ways of addressing any issues thus identified.)
[Perhaps I should add here I’m old enough – as is Nicola Willis – to have been around when, a mere 15 years ago, New Zealand’s accelerated depreciation regime was scrapped – something signed off by the government (for which Willis worked at the time) and enthusiastically welcomed by Treasury (where I was working).]
Instead, there seems to have been a lurch to subsidise (one group of) inputs, even though outputs and outcomes are the things we should care about (much) more. Are more and more- highly-successful companies likely to also be engaging in more capital investment? Of course, but that is a different framing than one of “if we subsidise more capital goods will we see more highly successful companies?”
There are reasons to be ambivalent at best. For example, the goal of the policy appears to be more new investment (rather than higher GDP or NNI themselves), and thus you can get the subsidy for buying a new asset (or a used one from abroad), but not for buying an existing asset which some other might no longer need, or not be using as efficiently as your firm perhaps might. A whole new wedge is inserted, actively discouraging more efficient use of existing resources (TFP) in favour of subsidising more resources. Is that effect likely to be small enough not to worry about? Hard to tell, but (for example) very long-lived assets like factories and office buildings are caught in the net, and it is quite likely that a building won’t have the same best owner for its entire life. And what about vehicles? Some tradesman’s business fails and there is a vehicle to be sold – there is less likely to be a good recovery when a new or expanding business can get a subsidy on a new asset, but not on picking up an under-utilised existing one. And if, for small businesses in particular, there is an element of personal consumption in some business assets (be it the fancy ute or the higher-end-than-strictly-necessary laptop), lower rates of tax on business income would seem more likely to generate efficient outcomes than subsidising the purchase of capital assets. Again, perhaps small in the scheme of things, but not self-evidently an efficient approach.
Then, of course, there is the question of the intellectual coherence of the government’s approach to the taxation of business.
Last year, it was important (or so both government and Opposition believed) to remove tax depreciation from commercial buildings (otherwise the 2024 Budget numbers wouldn’t have added up), but this year new commercial buildings (including, according to the fact sheet, work already underway last Thursday) gets a 20 per cent deduction in the first year of purchase (absolutely huge upfront compared to the usual depreciation rates for buildings) – and since there is no clawback in reduced depreciation in later years, by far the biggest winners from this policy will be those adding new commercial buildings. So was tax policy last year correct – when it went one way on commercial buildings – or is correct this year, when it went quite the opposite direction? (And what was the net NNI effect of those two contradictory policy changes?)
Last year, the government also moved to reinstate interest deductibility in respect of residential rental property. The argument – which I supported totally – was that interest was and is a normal cost of doing business and as it was deductible for every other sort of company there were no good grounds for disallowing interest deductions on residential rentals. Firms need office, people need places to live, and in both cases owner-occupation will suit some but not others. So last year, residential rentals were a business like others, but this year……”residential buildings and most buildings used to provide accommodation are not eligible for Investment Boost – though there are explicit exceptions for some buildings such as hotels, hospitals, and rest homes”. Rest homes – you mean places where people live and are not owner-occupiers? I guess Rymans and the others will be happy, but where is the intellectual coherence? (And it is not as if the fact that depreciation is not allowed on residential rentals – itself a flawed policy- is a decent justification; after all, see above in respect of commercial buildings.)
Here is the main IRD/Treasury justification for excluding residential investment
As if the ultimate point was not improved household wellbeing, whether that arose via higher wages or lower real rental prices. And not a mention of last year’s policy stance, just officials and ministers again picking preferred types of capital assets.
I’m left rather ambivalent at best. There have been, and no doubt will be again (from whoever is in government) worse policies but this is simply a not very good one (despite the Minister touting apparent Treasury advice that there was something “optimal” about the 20 per cent). Had the government wanted to do something economically rational and rigorous around depreciation – see table above – it might have been better to have reinstated depreciation on buildings (residential and non) and inflation-indexed the depreciable values. But if it was coherent, it would have been a lot less catchy, since lots of machinery and software etc depreciates quickly and things like the inflation distortion matters less.
Finally, from a purely cyclical perspective, it isn’t impossible that there could be a larger short-term boost to demand and activity than implied by those long-term numbers.
Working back from the IRD cost estimate for 2025/26 ($1830m) and a company tax rate of 28 per cent suggests a base level of (covered) business investment of about $33bn. GDP is estimated at just over $450bn in 2025/26. Whatever the longer-term effects, perhaps there is reason to think the short-term lift to investment might exceed the long-term one: on the one hand, the enthusiasm effect among small businesses in particular (the policy seems to have gotten good headline reaction where it was presumably supposed to do so), and on the other, the risk/possibility that if there were to be a change of government after next year’s election this incentive could be wound back or abolished (the left would need money to fund their preferred initiatives, just as this government has – and the Greens, notably, have promised to increase company tax rates). If one were thinking of doing some capex in the next few years, the next 18 months or so might seem a particularly propitious time all else equal. A 10 per cent lift in business investment in a year would itself represent about a 0.7% lift to aggregate demand. At very least, and like all tweaky tool incentives, it will make for an interesting case study.
There were good things in the Budget. There may be few/no votes in better macroeconomic statistics and, specifically, a monthly CPI but – years late (for which the current government can’t really be blamed) – it is finally going to happen.
I went along to the Budget lock-up today (first time ever), mostly to help out the Taxpayers’ Union with their analysis and commentary.
At least from my (macroeconomist’s) perspective there were two areas to focus on when we were handed the documents at 10:30 this morning:
productivity and growth-oriented policy measures,
fiscal deficit etc adjustment
On the former, the government chose to title its effort today “The Growth Budget”. The Minister spoke today against a backdrop emblazoned repeatedly with that label.
You might remember that back in January the Prime Minister made a big thing of the need to accelerate growth in productivity and real incomes, not just on a cyclical basis. The Minister of Finance in announcing the Budget date in late January went further
They did not deliver.
There was a single growth-oriented initiative in the Budget; a provision under which firms will be able to write off 20 per cent of the cost of new investments in the first year, on top of the regular tax depreciation allowances. Whatever the substantive merits of the policy, the best Treasury estimate is that it will lift GDP by 1 per cent, but take 20 years to do so (the forecast gains are frontloaded, but even in five years time they reckon the level of GDP will have risen by only 0.5 per cent relative to the counterfactual). If that looks small, bear in mind that Treasury’s number seem to assume that this measure may actually worsen overall productivity as the Minister’s press release says they estimate the capital stock will rise by 1.6 per cent and wages will rise by 1.5 per cent (at her press conference she said this was because more people would be employed).
And that’s it. This in an economy where there has been no multi-factor productivity growth now for almost a decade (chart from Twitter this morning)
and, where as regular readers know, to catch up to the labour productivity levels of the leading OECD bunch (US and various countries in northern Europe), we’d need something like a 60 per cent increase in productivity.
It is simply unserious.
Things were no better on the fiscal side. Here, for today, I’m largely just going to rerun the notes I wrote for the Taxpayers’ Union and which are already in their newsletter
“This year’s Budget represents another lost opportunity, and probably the last one before next year’s election when there might have been a chance for some serious fiscal consolidation. The government should have been focused on securing progress back towards a balanced budget. Instead, the focus seems to have been on doing just as much spending as they could get away with without markedly further worsening our decade of government deficits.
“OBEGAL – the traditional measure of the operating deficit, and the one preferred by The Treasury – is a bit further away from balance by the end of the forecast period (28/29) than it was the last time we saw numbers in the HYEFU. There will be at least a decade of operating deficits, and even the reduction in the projected deficits over the next few years relies on little more than “lines on a graph” – statements about how small future operating allowances will be – that are quite at odds with this government’s record on overall total spending. Core Crown spending as a share of GDP is projected to be 32.9 per cent of GDP in 25/26, up from 32.7 per cent in 24/25 (and compared with the 31.8 per cent in the last full year Grant Robertson was responsible for). The government has proved quite effective in finding savings in places, but all and more of those savings have been used to fund other initiatives. Neither total spending nor deficits (as a share of GDP) are coming down.
“Fiscal deficits fluctuate with the state of the economic cycle, and one-offs can muddy the waters too. However, Treasury produces regular estimates of what economists call the structural deficit – the bit that won’t go away by itself. For 25/26, Treasury estimates that this structural deficit will be around 2.6 per cent of GDP, worse than the deficit of 1.9 per cent in 24/25 (and also worse than the last full year Grant Robertson was responsible for). There is no evidence at all that deficits are being closed, and the ageing population pressures get closer by the year.
“Some things aren’t under the government’s direct control. The BEFU documents today highlight the extent to which Treasury has revised down again forecasts of the ratio of tax to GDP (which reflects very poorly on Treasury who rashly assumed that far too much of the temporary Covid boost would prove to be permanent). But, on the other hand, the forecasts published today also assume a materially high terms of trade (export prices relative to import prices), which provides a windfall lift in tax revenue. Forecast fluctuations will happen, but the overall stance of fiscal policy is simply a series of government choices. Unfortunate ones on this occasion.
“A few weeks ago the IMF produced its latest set of fiscal forecasts. I highlighted then that on their numbers New Zealand had one the very largest structural fiscal deficits of any advanced economy (and that we were worse on that ranking than we’d been just 18 months ago when the IMF did the numbers just before our election). The IMF methodology will be a bit different from Treasury’s but there is nothing in this Budget suggesting New Zealand’s relative position will have improved. We used to have some of the best fiscal numbers anywhere in the advanced world, but as things have been going – under both governments – in the last few years we are on the sort of path that will, before long, turn us into a fairly highly indebted advanced economy, one unusually vulnerable to things like expensive natural disasters.”
With just a few elaborations/illustrations
First, here is the chart of tax/GDP
Even allowing for fiscal drag, quite how Treasury thought so much of the lift in tax/GDP was going to be more or less permanent is lost on me. They don’t really say.
Second, here is Treasury’s estimate of the structural (OBEGAL) balance as a per cent of GDP, showing recent years, and the forthcoming (25/26) financial year on the Budget announced today
The government seems to have become quite adept at rearranging the deckchairs (cutting spending that they consider low priority and increasing other spending) but they are choosing to make no progress at all in reducing the structural deficit. There were big savings found in this Budget, but none were applied to deficit reduction. Sure, the forward forecasts showing the structural deficit shrinking – never closing, even by 28/29 – but that is based on wishful “lines on a graph”, suggesting that the government intends to cut core crown expenses by a full 2 percentage points of GDP over the following three financial years, when on today’s forecasts expenditure as a share of GDP in 25/26 (32.9 per cent), will be a bit higher than in 24/25, and very slightly lower than in 23/24. The Ardern/Robertson government got by on 31.8 per cent in 22/23.
Finally, a reminder from Monday’s post
Depending on your measure we were (based on HYEFU/BPS numbers) worst or close to worst in the advanced world. Today’s Budget will have done nothing to improve that ranking. It should have.
The Budget is a lost opportunity, both on the fiscal and the productivity front. A couple of journalists at the lock-up asked for a summary label for the Budget. Some people had snappier versions, but mine was simply the “Deeply underwhelming Budget”.
croaking cassandra 