Fiscal policy

New Zealand and Australian public finances

Michael Reddell Australia, Fiscal policy, Uncategorized

It is the time of year when both New Zealand and Australian governments hand down their budgets.  And these days it seems it is an opportunity for an annual comparison, in which New Zealanders feel rather virtuous about fiscal management here, and many Australians –  perhaps especially people on the right – take a turn breast-beating, regretting that they are not, in this regard, as well-governed as New Zealand.    Particularly florid Australian commentators are prone to invoking comparisons with Greece and other fiscal disasters.

I don’t find the story particularly persuasive.  Both countries had their fiscal blowouts late last decade –  in Australia, much of it was initially intended as active counter-cyclical use of fiscal policy under Kevin Rudd, while here it was discretionary choices to increase spending in the late years of the last boom.  In different ways, both the Australian Federal Treasury and the New Zealand Treasury were culpable to some extent; the former for enthusiastically embracing fiscal stimulus, when there was still plenty of monetary policy capacity left, and the latter for getting the forecasts wrong (they had told the government that big increases in spending would still leave the budget roughly balanced).    In some ways, New Zealand had a rougher time of it: the Canterbury earthquakes were a much bigger adverse hit to New Zealand government finances (a few years back) than anything in Australia.  Then again, Australia had to deal with much bigger volatility in –  and uncertainty about –  the terms of trade.

But what do the numbers show?  For history, I turned to the OECD’s database, where they have lots of fiscal series going back typically to around 1989.   While much of the attention focuses on the Australian federal government finances, it is important for New Zealanders to recognise that state governments are a large part of the overall government mix in Australia.  The OECD numbers are for “general government”, encompassing federal, state, and local government (or, specifically, national and local government in New Zealand).

It is also worth remembering that the size of government is smaller in Australia than it is in New Zealand.  That is so whether we look at revenue.

aus nz receipts

Or expenditure

aus nz disbursements

And government spending as a share of GDP has also been more stable in Australian than in New Zealand.  In fact, last time I checked government spending as a share of GDP had been more stable in Australia, over decades, than in almost any other OECD country.

What about fiscal balances, adjusted for the state of the respective economic cycles.  Here is the OECD’s measure.

aus nz deficits

A remarkably similar pattern really.    Our surpluses have averaged a little larger (and our deficits a little smaller) than those of Australia in the last 15 years, but there really isn’t much in it.  And do note that on this cyclically-adjusted measure, New Zealand is estimated to have been in slight deficit in 2016.

And what of debt?  This chart shows gross general government financial liabilities as a per cent of GDP.

aus nz gross debt

That is certainly a less favourable picture for Australia –  gross debt as a per cent of GDP higher than at any time for decades.   But here is the  –  superior for most purposes –  net debt picture.

aus nz net debt

Australian governments have had less debt than New Zealand through the whole period, and if the gap has closed just a little in the last decade, the change is pretty slight.    From a public debt perspective, Australia doesn’t seem to have much to worry about, with net financial assets (across all tiers of government) of around 10 per cent of GDP.

We won’t see the New Zealand government’s projections for the next few years until the Budget is released tomorrow.  But plenty of commentary focuses on the prospect of rising surpluses for years to come in New Zealand (as if this is somehow a good thing, when debt is already low), in contrast to the projections of deficits in the federal government books in Australia.

But one problem with those comparisons is that they aren’t apples for apples comparisons.  Thus, our government accounts for a long time have focused on the operating balance.  Relative to more traditional fiscal measures –  of the sort typically given prominence in Australia –  our deficit/surplus measure excludes capital expenditure but includes depreciation.  In a country with (a) a positive inflation rate, and (b) a rising population and rising living standards, government capital expenditure will typically exceed depreciation.   That isn’t a problem in itself, but it can make cross-country comparisons harder (the OECD historical numbers in the earlier charts are done consistently).

But here –  taken from the Australian official documents – are the federal government deficit measures done the Australian way (“underlying cash balance”) and something very like the New Zealand way (“net operating balance”).

Underlying cash balance Net operating balance
Per cent of GDP
2015/16      -2.4 -2.0
2016/17      -2.1 -2.2
2017/18      -1.6 -1.1
2018/19      -1.1 -0.6
2019/20      -0.1 0.4
2020/21       0.4 0.8

As they note in the Australian Budget documents

The net operating balance has been adopted for some time by the States and Territories (the States) and some key international counterparts as the principal focus for budget reporting. All the States report against the net operating balance as the primary fiscal aggregate. New Zealand and Canada also focus on similar measures.

One might feel slightly queasy about how the Australian government is raising additional revenue –  that populist bank tax seems to have more to do with utu (the Australian Bankers’ Association appointed a former Labor premier as their Executive Director, much to the annoyance of the Treasurer), and undermining Opposition calls for a Royal Commission into banking, as with principles of sound taxation –  but operating deficits of 1 per cent of GDP simply shouldn’t be a matter of concern, in a growing economy with low levels of public debt and relatively modest (by international standards) overall tax burdens.

But wait, as they say in the TV ads, there’s more.     The Australian Federal Treasury’s background Budget papers point out that

the Commonwealth provides grants to others (primarily the States) for capital purposes (that is, to acquire their own assets). This spending appears as a grant and detracts from the underlying cash balance and the net operating balance.

In 2017/18, the amounts involved are around 3.5 per cent of federal government spending.

Make that adjustment, and this is what the federal government’s operating balance would look like.

Underlying cash balance Net operating balance Adjusted net operating balance
                           Per cent of GDP
2015/16 -2.4 -2.0 -1.5
2016/17 -2.1 -2.2 -1.5
2017/18 -1.6 -1.1 -0.4
2018/19 -1.1 -0.6 0.0
2019/20 -0.1 0.4 0.8
2020/21 0.4 0.4 1.2

The adjustment doesn’t change anything about overall public sector finance in Australia.  The states will, presumably, in future have to account for the depreciation on these federally-funded capital projects.   But if one is looking just at the federal level, it seems like a reasonable adjustment.  On that adjusted measure, the federal operating budget in 2017/18 is projected to be very close to balance.  Of course, unlike the situation in New Zealand, Australian governments can’t count on getting all their budget measures through Parliament, but on the face of it, the endless angst in some quarters about Australian government finances does seem rather overdone.

The other thing that muddies the water in short-term comparisons is differences in rates of population growth.  A few years ago, Australia’s population was growing faster than New Zealand’s –  helped by all the New Zealanders going to Australia.  For now, New Zealand’s population is growing quite a lot faster than Australia’s –  not so many New Zealanders are going to Australia (and we have slightly larger controlled immigration programme per capita than Australia does).   In the short-term, unexpected population growth tends to boost demand more than supply, and specifically tends to flatter the government operating balance measures.   Consumption tax and income tax revenue both rise quite quickly, and operating expenditure tends to lag behind.   Even government capital expenditure tends to lag –  notice the recent announcement of more infrastructure spending here, much of which is to catch up with the unexpectedly fast population growth –  and you don’t have to maintain, and can’t depreciate (depreciation is in the operating balance), an asset that doesn’t yet exist.  That spending pressure will come.

This post isn’t intended as a criticism of New Zealand governments (there are plenty of other grounds for that), or as praise for Australian governments.  It is mostly just about making the point that, when considering overall fiscal management, if one stands back a little the similarities are much more apparent than the differences.  And that is to the credit of a succession of governments on both sides of the Tasman.

Standing back, here is how the OECD countries ranked last year on net general government liabilities as a per cent of GDP.

NZ and Aus net debt

O to be Norway one might reasonably conclude.  But given the choice, I’d take New Zealand or Australia’s cumulative (and current) fiscal management over those of almost every other country in the OECD.  And unlike many of these countries, neither country has huge off-balance sheet (ie not in these numbers) public pension liabilities either.

Productivity (or lack of it) is another story of course.

 

 

 

Fiscal policy: in defence of the last Labour government

Michael Reddell Fiscal policy, labour party

Bryce Wilkinson of the New Zealand Initiative was out yesterday with a comment, in the Initiative’s weekly newsletter, on the Labour/Greens proposal to establish a fiscal council.  I wrote about –  and welcomed – that proposal a week or so back.

Until I saw Bryce’s note, I had forgotten that the New Zealand Initiative had proposed the establishment of a fiscal council.   So add their names to the list of supporters:  the OECD (the technocratic wing of the European centre-left) favours a fiscal council, the Treasury’s independent reviewer of fiscal policy (a long-time senior IMF official) recommended a fiscal council, the New Zealand Initiative favoured a fiscal council, and even the (fairly right wing) 2025 Taskforce (of which Bryce was a member) favoured looking at something like a fiscal council.  And now our Labour Party and Green Party also do.   As many other OECD countries now have something of the sort, it all seems to amount to a reasonably strong case.

Of course, doing it well would be a challenge –  getting a succession of the right people would really matter.  But that is true of many of our public watch-dog and monitoring roles.

As Bryce notes, the current National-led government hasn’t adopted the recommendation.

Why not? Probably, it sees little need given its proven commitment to restoring fiscal surpluses. True virtue is its own witness. Establishing a superfluous agency to attest to its virtue would undermine it. To which our churlish response is that fiscal virtue is as ephemeral as the political winds and John Key’s promise to steer clear of New Zealand Superannuation was less than fiscally virtuous.

And he then asks

So why are Labour and the Greens on the virtuous side of this issue? After all, the last Labour government left National facing fiscal deficits for as far as the average geriatric eye could see.

That observation likely answers the question. Newly found virtue lacks credibility. Governments that can’t make credible commitments are weak governments. However, we hasten to add that this does not make it less of a virtue. A commitment to fiscal virtue is a fine thing.

I’ve already pointed out privately to Bryce that that seemed more than a little unfair to the previous government.   Let me explain why.

It is certainly true that when the current government took office in November 2008, official fiscal forecasts showed large deficits for many years into the future.  But the last fiscal initiatives of the outgoing Labour government had been the 2008 Budget, the parameters for which were set out in the Budget Policy Statement released at the end of 2007.

Throughout much of the previous Labour government’s term of office, a key theme of fiscal policy developments had been the surprising strength in revenue.  It was, in many respects, why the fiscal surpluses were so large during those years –   Treasury and the government kept being taken by surprise, and Treasury was (prudently) cautious about treating the surprises as permanent.  If it was just a series of one-offs, or something cyclical, it wouldn’t have made sense to increase spending or cut taxes in response.

The Treasury gradually revised upwards their assessment of the underlying fiscal position.  Unfortunately, they took a particularly optimistic stance by the end of 2007.  I can recall the then Prime Minister making much of the fact that Treasury was now assuming that most of the revenue gains would prove permanent (and thus could support some mix of increased spending and lower tax rates) without the risk of dropping back into deficits.  I joined Treasury on secondment in mid-2008 and I have seen documents written to the Minister of Finance during early 2008 stating that reassessment.  I was under the impression that some had been released, perhaps as part of the pro-active release of 2008 Budget papers, but on checking that link on the Treasury website, I couldn’t see the paper in question.

But the facts of the reassessment aren’t in dispute.  Several Treasury staff produced a paper last year on the process of getting back to surplus, including the background to the deficits.  Here is what they had to say

Over the period 2005-2008, the Treasury increased its estimates of structural revenues by around 1 percentage point of GDP each year, and by 2008 the Treasury considered most of the operating surplus was “structural”

and

When the tax reductions [along with further spending increases] were announced in Budget 2008, the Treasury was still predicting the operating balance to remain in surplus through the forecast period, albeit at a lower level.

With the benefit of hindsight, the degree to which the surpluses were structural was overestimated. Although the tax reductions announced in 2008 turned out to be well-timed from the perspective of stabilising the economy following the GFC, their permanent nature added to the subsequent structural deficits.

Here is the chart from the 2008 Budget Economic and Fiscal Update.

Figure 2.6 – Total Crown OBEGAL

Figure 2.6 - Total Crown OBEGAL.

Source: The Treasury

That document was signed off  by the Secretary to the Treasury as representing his best professional assessment of the economic and fiscal outlook, incorporating the effects of announced government policy.  In New Zealand –  unlike many countries – the forecasts are those of the professional advisers, not those of the Minister of Finance.

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and circumstances as at 9 May 2008 that were communicated to me, and of other economic and fiscal information available to the Treasury in accordance with the provisions of the Public Finance Act 1989.

John Whitehead
Secretary to the Treasury

14 May 2008

The projected surpluses by the end of the forecast period were tiny –  essentially the budget was projected to be in balance by then.  The economic and revenue outlook had worsened over the first few months of 2008, after the broad parameters of the Budget had already been sketched out in the BPS.   As we now know, New Zealand was already in recession by May 2008.   But on best Treasury advice, the then Labour government thoiught they were leaving an essentially balanced budget, on top of an already very low debt level, not deficits.

Of course, the government was wrong in that assumption.  But, specifically, Treasury was wrong in its best professional advice.    Perhaps the government would have run quite expansionary discretionary fiscal policy anyway, even if Treasury had been less optimistic about how permanent the revenue was.  They were, after all, behind in the polls, and the PM’s office –  didn’t Grant Robertson work there? –  would no doubt have been putting a lot of pressure on the Minister of Finance.  But that hypothetical didn’t arise.    They didn’t have to make such awkward political choices –  their own professional advisers told them they could have tax cuts and spending increases, and still keep the budget in (modest) surplus.  The Opposition National Party shaped its, more generous, tax cutting promises on much the same sort of Treasury forecasts and estimates.  (And a few years earlier, the 2005 election had partly been a bidding war as to how best to spend the surplus –  not whether there really was a structural surplus).

It wasn’t Treasury at its finest.  It is, perhaps, a reason to be cautious about just how much a fiscal council might add.   Would such a body, faced with similar circumstances –  a long succession of revisions upwards in revenue –  have really reached materially different judgements about the outlook then?  Perhaps.  We can’t know, but back in 2008 Treasury was using its best professional judgement, and the mistakes were still made.

There is a bit of a tendency afoot to suggest that the current National-led government has done a better job of fiscal management than the previous Labour government did.  I’m not really convinced by that story.   I’d accept that the previous government might have had an easier job than the current government has –  since one inherited modest but growing surpluses, while the other inherited deficits.  The current government had some nasty shocks (earthquakes) but also some of the best terms of trade in decades and the weakest wage pressures.      But if we expect our politicians to be guided by professional advice in areas like this, the previous government did what most orthodox opinion advised them to, keeping on delivering surpluses and reducing outstanding debt.  Probably they should have emphasised tax cuts more than spending increases, but this particular debate is about overall fiscal balances.

By the end of Labour’s term, government spending as a share of GDP was rising a lot –  but then Treasury was telling the government the money was there to spend.  And for all the talk of how the new Labour/Greens rules commit a new left-wing government to keep spending at around current National government levels, that level is around the average level that prevailed under the previous Labour government.

core crown expenses

There are things I’d criticise about the previous government’s policy. Allowing big structural surpluses to build up, as happened in the first half of the term, set the scene for a big spend-up later (which would have been big tax cuts if National had won in 2005). It is probably better to recognise the limitations of knowledge and typically keep both surpluses and deficits small. But it is easier to say in hindsight than it might have been at the time.  And in 1999, the severe fiscal stresses of 1990/91 were pretty fresh in everyone’s memory.

Of course, this note has been a defence of the previous Labour government.  The Greens don’t have experience in government, and don’t have the same degree of historical credibility.    So in that sense, no doubt Bryce Wilkinson is right to argue that part of the motivation for the recently announced package is the desire to use commitments like this to help establish some credibility (even at the expense of burning off some of their own loyalists).

And I can only endorse Bryce’s final observation on the fiscal council proposal.

So three cheers to Labour and the Greens for this initiative. May they stick to it.

Labour/Green Budget Responsibility Rules

Michael Reddell Fiscal policy, Greens, labour party

Grant Robertson, for Labour, and James Shaw, for the Greens, released on Friday a short document on the “budget responsibility rules” the two parties would adopt if they are in a position to form a government after the election.

As others have noted, it was PR win for the two parties, in what was in any case not a great week for the government (Afghanistan and all that).    If one criticism of the left-wing parties in the 2014 election was that no one seemed sure what a Labour-Green government might look like, or how the key figures might get on, this is the sort of initiative that helps build confidence and makes people nearer the centre, or just tired of nine years of a government that has accomplished little, think harder about the possibility of voting for a change.   Whatever their other specific policies, whatever their other limitations, in this release –  and, for example, in the double-page spread in the Herald, – Shaw and Robertson looked and sounded like plausible responsible senior ministers.

On the substance, I think it is only fair to note that for 30 years or so there hasn’t been a huge difference between the two main parties on the overall approach to fiscal policy, and that has been to the credit of both parties.  Roger Douglas and David Caygill broke the back of our record of fiscal deficits, and Ruth Richardson and Bill Birch finished the job.  Both parties ran surpluses through much of the 1990s and the 00s.  The budget was run badly into deficit late last decade, through some combination of poor official forecasting, the global recession and productivity slowdown, and the earthquakes.  Policy played a part –  Labour in government was responsible for a large increase in spending (advised by Treasury that it was sustainable). But had National been in government in 2005-08 it is difficult to believe that fiscal bottom lines would have been much different.  They’d have been getting the same Treasury advice about revenue sustainability, although presumably they’d have done more about tax cuts than Labour did, and put through fewer spending increases.   Since then both main parties have had a shared commitment to get back to surpluses –  helped along by relatively favourable terms of trade, and unexpectedly strong population growth, which tends to flatter the fiscal position in the short-term.

Of course, the Greens have remained a bit of an unknown quantity in the broad area of economic management, not helped by for example the flaky suggestion from their former leader that New Zealand should have been adopting quantitative easing, at a time when there was still plenty of scope for conventional monetary policy.  But that now seems to be in the past, and in this new agreement the Greens have pretty much signed on for an orthodox and fairly sensible approach to broad fiscal management.  Perhaps they always were, but sometimes writing things down and stating them openly matters.

There are six points in the Budget Responsibility Rules document.  I’m mainly interested in the sixth of them –  the genuine and welcome innovation.    My comments on most of the others are mostly around the margins, intended as constructive technical points rather than any very substantial disagreement.

The first two points are

1. The Government will deliver a sustainable operating surplus across an economic cycle.

An OBEGAL surplus indicates the Government is financially disciplined and building resilience to withstand and adapt to unforeseen events. We expect to be in surplus every year unless there is a significant natural event or a major economic shock or crisis. Our surpluses will exist once our policy objectives have been met, and we will not artificially generate surpluses by underfunding key public services.

2. The Government will reduce the level of Net Core Crown Debt to 20% of GDP within five years of taking office.

To give future generations more options, reducing government debt has to be a priority. By setting a target, provided that economic conditions allow, we will be able to make responsible debt reductions and invest in housing and infrastructure that strengthen our country and prepare us for future challenges.

On which I would make just two points:

  • if nominal GDP is growing at, say, 4.5 per cent per annum (say, 2 per cent inflation, and 2.5 per cent through some mix of population and productivity growth) then a stable debt to GDP ratio of 20 per cent is consistent with annual deficits of 0.9 per cent of GDP.  I’m not opposed to the commitment to run surpluses in normal times –  presumably offset by deficits in years with serious economic downturns –  but since those severe downturns typically come less than once a decade, and a parliamentary term is only three years, they will need to do some hard thinking about how to operationalise these self-imposed rules jointly, as the 20 per cent target comes into view.   There is a real risk of seriously pro-cyclical fiscal policy quite late in economic cycles, compounded by the fact that the commitment to run surpluses is not expressed in terms of a structural balance (ie stripping out the estimated budgetary effects of the state of the economic cycle).
  • what is a sensible debt target with, say, zero population growth would, all else equal, be too low a target if population growth was to continue at 1.5 or 2 per cent per annum.   The Greens have announced a net immigration target which is consistent with population growth of on average around 1 per cent per annum.  We don’t yet know what Labour immigration policy is.      (I should add that this technical point is relevant to the current and past governments’ specification of debt targets as well –  such targets typically arose more out of political framing etc than out of robust economic analysis.)

The third of the rules is

The Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand.

The Government will prioritise responsible investments that enhance the long term wellbeing of New Zealanders – such as restarting contributions to the Super Fund. In addition we will invest in infrastructure to support our growing population, and reduce the long term fiscal and economic risks of climate change.

I’m not going to get into debates about NZSF here (the bigger fiscal issue is how much overall public sector saving there should be, not the institutional form it takes), and presumably no one is going to quibble with the high level of generality in the italicised commitment.  All the arguments –  including those within any future government – will be about the details of specific policies, values, and preferences, and about how hardnosed project evaluation and cost-benefit analyses should be.

The fourth rule is interesting and somewhat surprising

4. The Government will take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio.

During the global financial crisis Core Crown spending rose to 34% of GDP. However, for the last 20 years, Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.

Here is the chart of core Crown spending as a share of GDP.

core crown expenses

The average over that full period has been 30.8 per cent of GDP.

I’m more hesitant about this “rule” or commitment than you might expect.   On paper it looks like a timely recognition of the cost to productivity and real future incomes of too large a state.  But when, thinking about fiscal rules, it is really important to think about (a) how they might be gamed in future, and (b) how they might lead even the authors of those rules into decisions that might less than ideal.  I’ve also not seen anyone ask Labour, in particular, how they square a semi-commitment to hold core Crown expenses to around 30 per cent of GDP with doing nothing about NZS.  Even the most enthusiastic supporters of the NZSF recognise that it will make only a modest contribution to covering those ageing population costs  –  and probably none at all in the life of any Labour-Green government elected this year.

But even setting that specific issue to one side, this is a commitment around core Crown expenditure, but there are other ways to skin a cat.  If a future government feels bound by an expenditure commitment, why not try regulation.  There doesn’t appear to be anything comparable limiting future extensions of the regulatory state (thus, say, in a US context a statutory mandate compelling people to buy health insurance might be a substitute for more direct government spending on health).  And it isn’t clear that this commitment by Labour and Greens would limit the use of tax expenditures.  And people closer to the details of how governmemt activity is classified might want to pay attention to the possibilities in the distinction between core and total Crown.  Finally, expenditure to GDP ratios can be flattered by the state of the cycle –  a ratio of 30.000 per cent late in a big boom, can quickly transform into one of 32 or 33 per cent without any new discretionary fiscal choices if there is a serious recession.

These comments are, mostly, not intended to take away from the welcome overall thrust of the Labour/Greens commitments, but they are some details to think about when it comes to firming up what the commitments might mean if/when they are in office.  Under pressure, ministers and smart bureaucrats find “outs”.  For now, one should welcome the fact that the parties believe it is politically advantageous to commit to something like an expenditure (share of GDP) ceiling.

I’ll pass over the tax commitment quickly

5. The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.

Since no one –  apart perhaps from one or two lump-sum taxers lurking under rocks somewhere –  will disagree, it means very little in substance and constrains no practical choices.  The substance of any tax reform will no doubt flow from the tax working group they propose to establish –  where the terms of reference and the people they agree to appoint will matter rather a lot.

My main interest in the whole document is the commitment to establish a fiscal council.

Measuring our success in government

  • The credibility of our Budget Responsibility Rules requires a mechanism that makes the government accountable. Independent oversight will provide the public with confidence that the government is sticking to the rules.
  • We will establish a body independent of Ministers of the Crown who will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public, and will cost policies of opposition parties.

It isn’t in the official document, but in another interview with Robertson he confirmed that the body would not be located inside Treasury.

The establishment of a body of this sort would be entirely conventional for an advanced, open, economy.  It is something the OECD, for example, has recommended for some time and (from memory) the Treasury’s own external reviewer a couple of years ago also favoured establishing one.

Early last year the Green Party came out advocating the establishment of an independent policy costing unit.  I wrote about the proposal here.  It was a well-intentioned, but somewhat flawed, proposal – including because, somewhat surprisingly, it had proposed locating the independent unit, to cost opposition party policies, inside the Treasury.

I noted at the time that

I reckon that if New Zealand is going to establish such a unit it should be done as an office of Parliament, and I wonder why the Greens chose not to take that option.  Perhaps they took the view that such a unit would be cheaper if it operated within Treasury (drawing on the corporate functions of a larger organization).  But even if that were true, I suspect it would be a false economy.

On the overall proposal, I noted

But is it worth going down this track?  I’m still ambivalent.  I don’t think there is enough thoughtful scrutiny of macroeconomic policy issues in New Zealand (and touched on some of that here), and before the Greens proposal goes any further it would be worth looking carefully at what is done in other countries.

Before concluding

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

I presume Labour and the Greens are still some considerable way from pinning down all the details of how the proposed body would work.  I remain a bit sceptical about the policy costing dimension of the proposal, for reasons outlined at greater length in the earlier post, and suspect that if they do get the unit up and running it will be a distinctly secondary function.

The main area where a fiscal council –  or indeed, a broad macro policy advisory council –  could add value is around the bigger picture of fiscal policy (not just rule compliance, but how the rules might best be specified, and what it does (and doesn’t) make sense to try to do with fiscal policy).

But there are still important caveats.  For example, it is fine to talk in terms of the council having “oversight of government economic and fiscal forecasts”, but quite what level of resource would that involve?  Does the proposal envisage that the core forecasting role, on which government bases its policies, would move outside Treasury?  Even if there was some merit in that, it would be likely to end up with considerable duplication –  since neither the Treasury nor the Minister is likely to want to be without the capability to have their own analysis done, or to critique the work of the fiscal council.  The UK’s experience is likely to be instructive here, but we also need to recognise the small size of New Zealand and the limited pool of available expertise.  Our population –  and GDP –  are less than a 10th of the UK’s.

Again, I think Labour and Greens are moving in the right direction here, so I’m keen to see a good robust institution created, not to undermine the proposal.   The success of such a body over time will depend a lot on getting the right people to sit on the Council, and to keep the total size of the agency in check.   Too large and it will be an easy target for some other future government –  no doubt enthusiastically offered up by a Treasury keen to remove a competing source of advice.  But make it too small, or with too many establishment figures on the Council, and people will quickly wonder what is the point.  As it is, we don’t have a lot of independent fiscal expertise in New Zealand at present (as distinct, say, from specific expertise on eg aspects of the tax system).   I presume that if they form a government later in the year, Labour and the Greens will be looking quickly to the experiences in this area of small advanced countries like Ireland and Sweden.

My other caveat isn’t a specific criticism of this proposal, but rather a more general one. It is always easy to establish new, small, government entities.  Each on its own doesn’t cost much, but they all add up.  Perhaps there would be something to be said for a one-in one- out “government entity budget”, to parallel the “regulatory budget” approach being tried in a few places.  I wonder which entity Labour and the Greens would kill off to make way for a fiscal council?   It would be easy for someone on the more sceptical side of the debate around the role of government, and the incentives/capabilities of government, to come up with a list.  But that isn’t usually where Labour and the Greens are coming from and in time layer upon layer of marginally useful government entities provide lots of jobs for the boys (and girls).  It has been a while since there was a good quango-hunt.  Perhaps we are overdue for another?

New Zealand Initiative on immigration: Part 4 Fiscal implications

Michael Reddell Fiscal policy, New Zealand Initiative

The next couple of chapters of the New Zealand Initiative’s immigration advocacy report cover material closer to the core expertise of the Initiative and its staff –  economics.  Chapter 3 is headed “Population Pressures” and looks at the impact of New Zealand immigration on three areas:

  • government finances more broadly,
  • house prices, and
  • the impact of an ageing population (ie improving life expectancy).

I want to focus today on the first two, but first some brief remarks about the ageing population issue.

The New Zealand Initiative tend to mischaracterise this issue.  There are some specific fiscal pressures that arise from changing birth rates through time.  Low birth rates in the 1930s, for example, gave us a considerable fiscal dividend for quite a while in the 1990s and 2000s –  there just weren’t that many people becoming eligible for NZS.  On the other hand, high birth rates from after World War Two to the early 1960s mean that since around 2011 there has been quite a big increase in the numbers claiming NZS.   But those effects tend to wash through over time.   The much bigger issue –  a cause for celebration mostly, even if it should prompt reassessment of some government spending choices –  is the strong trend increase in life expectancy (I had some thoughts on this issue here).  The issue isn’t about baby-boomers, selfish or otherwise, but about the fact that we can expect to live much  longer than our grandparents did (at a rate of improvement of towards two years a decade), and we might reasonably expect our grandchildren to live much longer than we do.    There are technically simple appropriate policy responses to those trends –  notably, it simply doesn’t make sense now to be paying universal retirement benefits to people at 65, and the age of entitlement should probably be indexed to further trend improvements in life expectancy, as various other countries have started to do.      When they aren’t trying to defend immigration policy, the able people at the New Zealand Initiative know all this, and make these sorts of points themselves.  And they (rightly) celebrate things like the gains in life expectancy.    So what are they doing making over the top claims like this

policymakers need it [immigration] as the fiscal implications of baby boomer retirement become more acute

Not even a nice-to-have, but a need.

As it happens,  in their more reflective moments even they are more hesitant

Although replacing the exiting workforce with migrants has merit, the idea should be treated with caution. International competition for skilled workers will increase as
the world becomes more interconnected and the ageing problem worsens in developed countries. New Zealand, while an attractive destination in its own right, will struggle to compete with markets offering higher financial and lifestyle rewards.

If we take lots of migrants we should do so because they increase the productivity and living standards of existing New Zealanders, not because they might temporarily help us avoid taking overdue sensible decisions on what proportion of the human lifespan we pay universal benefits to people for.   We should bring in ever more people (since this isn’t just a one-off issue) from elsewhere simply to ease pressures to change internal policy that almost everyone now knows are overdue for change?  I think not.  And nor, generally, would the Initiative.  They are usually much better than that.

What of government finances more generally?

Here the Initiative is very confident.   In the section headed “Fiscal Discipline”, while acknowledging that in other countries immigration does seem to lead to net fiscal pressures, in writing about New Zealand they begin

Migrants tend to have a positive impact on the fiscal side of the government ledger.

They base this claim on MBIE-funded work carried out by BERL.  In that exercise, BERL take some aspects of government review and spending,  and allocate them –  quite carefully –  across New Zealand-born and foreign born residents of New Zealand.  On this snapshot basis, and on these components of government finances, they estimate that in 2013 the average foreign-born person contributed $2653 to government finances in 2013, and the average New Zealand born person contributed $172 to government finances.  Overall, of course, in 2013 the New Zealand government was running quite a substantial fiscal deficit.

It is quite surprising that an economics-based think tank like the Initiative simply accepts and presents these results at face value.    The BERL report –  one of a series done over the last 15 years –  has its own value (comparable data through time).  But it isn’t state-of-the-art in estimating fiscal impacts of immigration (as the authors note, they weren’t paid for a literature review, but simply to slot new numbers into the existing methodology).  It doesn’t even cover quite a few major areas of government revenue and spending.  And in a technical appendix to the report (obtained from BERL –  it doesn’t appear to be online), the authors explicitly note that

In addition, the estimates do not allow for life-cycle impacts of migrant characteristics. That is, the calculations are of a ‘snap-shot’ single year. Issues such as migrants’ varying contributions and expenditure claims over their lifetime are not captured. Dynamic micro simulation might be used to establish the lifetime contribution of a particular type of migrant, but such a technique is beyond the scope of this project.

Bring in a whole bunch of 25 year olds, and of course they won’t involve much government health, welfare or education spending.  But over time, they’ll have children, and age.  Bring in 50 year olds, and they’ll (soon) be eligible for health and NZS spending, but won’t typically have paid that much New Zealand tax over their lifetimes

I’m not criticising the New Zealand Initiative for not producing state-of-the-art estimates themselves (that is a very substantial project) but for not at least acknowledging some of the limitations of the estimates they choose to rely on.

I’ve commented previously on the BERL estimates, when Nigel Latta made great play of them in his TV documentary last year on immigration.  Here are some of the points I made then.

But even in what it does look at, there are some quite severe limitations:

  • recall that the report estimates that both NZ born and immigrants made a net positive fiscal contribution to the government’s accounts.  Perhaps, but recall that in 2013 (the year studied) the government was still running quite a large fiscal deficit.  In other words, even if the study is roughly accurately capturing the relative contributions of immigrants and the native-born, it isn’t remotely accurately capturing the absolute contribution.
  • The BERL exercise does not appear to recognize at all that much of the demand for increased government capital spending now arises from the immigration programme itself (as it notes, between 2001 and 2013, the New Zealand born population aged 25 to 64 actually fell slightly while the foreign born population of that age increased by 222000 people).  Over those 12 years, 80 per cent of the total population growth has been among the foreign-born.   Assign much of the (above-depreciation) government capex to the immigration programme and suddenly even the fiscal numbers will look quite different.
  • These are snapshot effects rather than inter-generational ones.  It is hardly surprising that an immigration programme that brings in relatively young people involves less government operating spending (per capita) than for natives –  people that age are typically young and fit –  but if we want to think about even the fiscal impact of the immigration programme as a whole it would be important to look at the impact not just of the immigrants in the couple of decades post-arrival, but (for example) at the impact as those people age, and the impact of their own children (many of whom will be New Zealand citizens, but still a consequence of the immigration programme).
  • perhaps most importantly, any sort of exercise like this is only meaningful if it deals with very small changes (when one can keep the rest of the economy held constant).  By contrast, the potential for a large scale immigration programme to affect real interest rates, the real exchange rate, and the underlying structure of the economy, means these fiscal exercises offer no insight at all on the overall impact of immigration even on the fiscal accounts, let alone the wider economy.

In addition, I think there are at least two other points worth making.

First, company tax revenue (and, I think, trust income) isn’t included in the calculations at all.  On the sort of snapshot basis used here, this is likely to skew the results against the native-born, because it is likely that the capital stock is disproportionately owned by natives rather than immigrants.  (This is, in a sense, simply the flipside to the fact that the average migrant is younger than the average native).  Perhaps as importantly, there is a reasonable argument that revenue that results from New Zealand’s natural resources should be assigned to natives, rather than (implicitly spread across both natives and migrants).  Those revenues  –  from farming or fishing or gas extraction etc –  would have arisen regardless of whether we had any material level of immigration in the last few decades, and are unlikely to have been enhanced by the much-increased population (indeed, if my concerns about the real exchange rate are correct, they may have been reduced).

And second, it is important to remember that BERL is comparing the NZ born and foreign born populations in total.  Although they do undertake some decompositions, it isn’t really an attempt at a marginal analysis –  looking at (ideally) the lifetime impact of the next 1 per cent of the population that comes in as migrants.  The foreign-born of New Zealand today includes old people who came in the 1950s, the small numbers who came in the 1980s, as well as the huge numbers who have come in the last couple of decades.  Research evidence –  summarised in Julie Fry’s 2014 Treasury working paper – shows that, for example, migrants for the Pacific and Asia take much longer than, say, migrants from the UK to reach native-born levels of income (and presumably tax contribution) for any given set of qualifications etc.  Moreover, even with the pool of migrants we take each year, there is wide range of skills and capabilities –  some will end up making a big positive (economic and) fiscal contribution, and others –  especially, say, the parent approvals –  will be a substantial fiscal drain.   Since the policy argument now isn’t about the stock of people already here, but about who, and how many, we should let in going forward, a more appropriate analysis –  for current policy purposes – would focus on trying to better understand what level of immigration, of what sort of people, would maximise any fiscal gains, or minimise any fiscal costs.  The BERL report doesn’t attempt that sort of thing, and the New Zealand Initiative don’t even note the relevance of the perspective.

For all these specific points, I’ve never made much of the fiscal issues around immigration in New Zealand.  The comment I made a few months ago still reflects my position.

I’ve never made much of the fiscal issues around immigration.  By international standards our residence programme , if large, isn’t bad  –  if it doesn’t attract many very skilled people, at least it does successfully focus on getting people quickly into the labour market.  But precisely because in the end we are largely bringing lots of people quite like us –  who can readily get jobs –  it is very unlikely that in the long-run there will be much net difference in the fiscal effects between the contributions of those whose ancestors have been here for generations and more recent arrivals.

With an immigration programme like ours, the fiscal impact probably isn’t much of an argument one way or the other.  Although if there are fiscal gains on offer, we could probably maximise them with more demanding entry criteria than those we currently use.

On reflection, this post has got long enough.  I’ll tackle the housing issues in a separate post later in the day.

New Zealand Superannuation Fund: does it pass commercial tests?

Michael Reddell Fiscal policy, NZSF, Superannuation

There has been a great deal of coverage in the last few days of the New Zealand Superannuation Fund, all prompted by the news that the chief executive, Adrian Orr, had been given a substantial pay increase by the Fund’s Board, over the objections of the State Services Commission and the then Minister of Finance.

I don’t have a strong view as to how much the chief executive should be paid.  In general, I also don’t have a particular problem with that amount being determined by the Board, without ministerial involvement.  Then again, this is simply a body managing a large pool of (borrowed) government money, and I couldn’t see a particular problem if the relevant Act was to be amended to make the terms and conditions of the chief executive a matter determined by the Minister of Finance, or the State Services Commission, perhaps taking advice from the Board.   After all, that is exactly the model that applies for the Governor of the Reserve Bank.

Amid the recent media coverage, there has been a lot of hyper-ventilation about the performance of the Fund, and of Orr himself.  In his Dominion-Post article, Hamish Rutherford reports that

One commentator suggested if Orr had achieved such a return in New York he might have made a billion dollars.

That seems unlikely frankly.   Orr simply isn’t –  and I wouldn’t have thought he’d claim otherwise –  some investment guru, blessed with extraordinary insights into markets, prospective returns etc etc.  He was a capable economist, and a good communicator (at least when he doesn’t lapse into vulgarity), who turned himself into a manager and seems to have done quite well at that.   He always seeemed skilled at managing upwards, and his management style (in my observation at the Reserve Bank) seemed to err towards the polarising (“are you with us, or against us”), attracting and retaining loyalists, but not exactly encouraging diversity of perspectives or styles.  He isn’t exactly a self-effacing character. (That is one reason I’m not convinced he is quite the right person to be the next Governor of the Reserve Bank.)

The New Zealand Superannuation Fund has made money, both before and since Orr took over a decade ago.  Of course, amid a trend increase in global asset markets it has been hard not to.   The NZSE50 gross index, for example, has increased at an annualised average rate of about 9.8 per cent per annum since 1 September 2003 (when the NZSF opened its doors).

As for how good the NZSF have been, it is probably too early to tell.  Don’t take my word for it: here is how they themselves put it

It is our expectation, given our long-term mandate and risk appetite, that we will return at least the Treasury Bill return + 2.7% p.a. over any 20-year moving average period.

The Fund has now been operating for only about 13.5 years.  In some respects, the returns to date look quite good –  they’ve averaged 5.6 percentage points per annum above the Treasury bill return –  but for a Fund with the sort of risk parameters they have adopted one can only really evaluate performance over very long periods.  And global asset returns have been pretty attractive over much of the last 15 years.  Will that be repeated?  Will there be a big sustained correction?  The only honest answer is that no one knows.  (And the 20 year time horizon is probably a reason why the institution’s CEO shouldn’t be remunerated to any significant extent on some investment performance formula –  unless there are clawbacks built in for the next 20 years).

But even on the returns to date, it might be reasonable to pose some questions.    The Fund puts a lot of emphasis on expected returns, and not a lot (at least in the published material) on the risk they are running.    In some respects, that is in line with Parliament’s mandate for them to be

maximising return without undue risk to the Fund as a whole;

What, we might wonder, is “undue”?   Who decides, and under what constraints?

A common measure of risk, especially on assets that are frequently marked to market, is the variability of returns.    One tool for relating returns to risk is the so-called Sharpe ratio, which compares the incremental returns obtained through the fund manager’s investment management choices (ie the margin above a risk-free rate) with the standard deviation of those returns.  If the resulting number is very low, the incremental gains might often be prudently best treated as “noise” –  good luck, perhaps, rather than the result of a consistently superior investment strategy.  On the other hand, all else equal a high Sharpe ratio, over a reasonable period of time, provides greater reassurance that the fund manager is adding value.   When I ran the Reserve Bank’s financial markets operations, we had able staff proposing all sorts of clever active management schemes to add value to our foreign reserves operation.  Sharpe ratios were one of the tools we used to evaluate prospective and actual results.

How has the NZSF done on that metric?  Since it opened the doors, the average annualised return has been 9.9 per cent (recall that NZSE50 return of 9.8 per cent).  Treasury bills –  the Fund’s risk-free benchmark –  provided an average return of 4.3 per cent, so the average margin over the Treasury bill return was 5.6 per cent.

But the standard deviation of those annual excess returns over the full period since September 2003 is around 13.5 per cent, for a Sharpe ratio of just over 0.4 per cent (and these are all pre-tax numbers).  That is pretty low.  In other words, while the headline returns –  through a period of strong asset price growth –  may have looked impressive, the risks they have been running have been (deliberately and consciously) high.   I checked, by way of comparison, the returns on the low-risk (low return) superannuation fund I’m a member (and trustee) of: since 2003 the standard deviation of the annual returns on that fund since 2003 have been around 4.5 per cent.

Adrian Orr has now been CEO of the NZSF for almost a decade.  In that decade, annual returns (above Treasury bill) look to have averaged just over 5 per cent, but the standard deviation of those annual returns has been higher at around 17 per cent.  In other words, the Sharpe ratio for the Orr years, is even lower than that for the full period of operation.  But, as a reminder, the Fund itself reckons one needs a 20 year run of data to evaluate their investment management performance.

Based on the NZSF’s own data the monthly returns are also pretty volatile.  The standard deviation of monthly returns (over the risk-free rate) over the life of the Fund has been around 3.3 per cent.    Given that many of the Fund’s holdings are quite illiquid, one probably shouldn’t put too much weight on the monthly return numbers, but it is a reminder of just how much risk the NZSF is incurring –  not for itself, but for the taxpayers of New Zealand.  At best, they might just have been getting compensation for the risk they’ve taken, but there doesn’t seem to be anything exceptional about their performance given that level of risk.    That, in itself, isn’t intended as a criticism: why would we expect a public agency in New Zealand to be able to add much (risk-adjusted) value, whether through asset allocation, or tactical departures from their own internal benchmarks?  But it is a bit of a reality check.  And as Hamish Rutherford noted, on deals like Kiwibank, the super fund’s returns are, over time, likely to be flattered by the privileged position NZSF had going into negotiations –  there were very very few buyers acceptable to the government, and ACC and NZSF will have known that, and reflected it in the price they offered NZ Post.

My own unease about NZSF is rather more fundamental, and doesn’t reflect on any of the individuals involved in managing the funds or the organisation.   The NZSF is often loosely described as a sovereign wealth fund.  In fact, it is nothing of the sort.    Norway and Abu Dhabi have sovereign wealth funds –  accumulated from the proceeds of the sale of state-owned natural resources (oil and gas).   It is real wealth, and needs to be managed somehow.  Of course, it could all be passed on to citizens to do with as they please, but there are plausible –  not necessarily 100 per cent compelling –  reasons for managing the flow of the proceeds of the sale of a large non-renewable natural resource over time.    If so, the money is there and has to be managed somehow.

By contrast, the New Zealand Superannuation Fund arose because successive governments took more in taxation from New Zealanders than they needed to fund their operations.  At one stage at looked as though the New Zealand government would manage to build up a large financial asset position.  But, except briefly just prior to the 2008/09 recession, they didn’t even manage to do that.  Instead, we now have a quite large stock of government debt outstanding, $33 billion of which is used to run a state-sponsored and managed quite-risky hedge fund.   It is a discretionary commercial operation, and it should be evaluated on the same sorts of grounds Treasury and the government lay down for other investment projects.  And given that risk imposed on us by the government is risk (capacity) we could ourselves otherwise choose to utilise elsewhere, it should also be evaluated by looking at the sorts of returns private sector businesses require in analysing possible uses of capital.

Treasury has recently revised downwards the pre-tax discount rates it recommends government agencies use in evaluating projects.  Their default recommended rate is now 6 per cent real (or around 8 per cent nominal), but over most of the period of the life of the NZSF they were recommending a real discount rate of nearer 8 per cent.  They continue to assume an equity risk premium of 7 per cent.  Against those sorts of asssumptions, average annual nominal returns of 9.9 per cent just don’t look that attractive, especially when subject to huge variability (that 13.5 per cent annual standard deviation).    I don’t know what assumptions NZSF are making about expected absolute returns over the next decade, but it would be a bit surprising if they were forecasting/assuming returns as high as those on offer for the last 14 years.

Another way of looking at whether the NZSF is a good business for the Crown to be in, on behalf of taxpayers, is to look at the returns private sector businesses require.  I’ve linked previously to a nice article from the Reserve Bank of Australia, drawing on a survey of private sector businesses asked about what hurdle rates they used in approving/declining investment decisions.  I summarised it previously thus:

They report survey results suggesting that most firms in Australia use pre-tax nominal hurdle rates of return in a range of 10-16 per cent (the largest group fell in the range10-13 per cent, and the second largest in a 13-16 per cent band). Recall that nominal interest rates in Australia are typically a little lower than those in New Zealand, and their inflation target is a little higher than ours.   In other words, it would surprising if New Zealand firms didn’t use hurdle rates at least as high in nominal terms as those used by their Australia peers.     The RBA reports a standard finding that required rates of return were typically a little above the firms’ estimated weighted average cost of capital. The literature suggests a variety of reasons why firms might adopt that approach, including as a buffer against potential biases in the estimated benefits used in evaluating projects.

And here is one of their charts

rba-hurdle-rate

Bottom line: private citizens shouldn’t want governments getting into businesses –  especially not relatively risky businesses –  where the returns are less than 10 per cent.

There are other reasons to be concerned about the economics of the NZSF:

  • putting money into NZSF required tax rates to be higher than otherwise (as would the shared commitment to resume contributions at some point).  Higher tax rates discourage some economic activity that would otherwise occur here, and New Zealand tax rates are not now unusually low by international standards (our company tax rate is quite high),
  • the scheme involves all New Zealanders in direct financial exposures to companies/industries they may disapprove of. NZSF attempts to get round that with their ‘socially responsible’ investment policy, but your view of “socially responsible” companies/activities may well differ from that of your neighbour.  Personally, I’d be quite happy to have money invested in whale fishing companies.  Many others might not.    Making those choices simply isn’t a natural or necessary business of government.
  • large pools of government financial assets encourage the misuse of those funds in the event that the country/government comes under financial stress at some point in the future.  Those sorts of tail risks aren’t captured in the monthly or annual standard deviation numbers.
  • NZSF, being a quite high risk fund, tends to perform well in periods when the government’s finances are not under stress, and to perform badly (very badly in 2008/09) when government finances come under most stress. Because the assets are quite widely held, it provides some protection against some sorts of shocks, but in any severe global economic and asset market downturn –  the sort of event New Zealand is never immune to – the NZSF investment strategy simply ensures that when problems hit they are compounded by investment losses.  As the government is already, in effect, an equity holder in all New Zealand business (through the tax system), it isn’t obvious quite why it should be attractive for New Zealanders to have the government further compound their exposures.  To take those risks might be reasonable for the prospect of exceptional returns, but the NZSF strategies look to do little more than cover a bare minimum cost of capital –  while aggravating our problems when things turn bad.

The NZSF may have been a sensible practical political option back at the start of the 2000s.  Governments were running large surpluses, positive net financial assets were in prospect, and the retirement of the babyboomers was still a decade away.   It makes little sense now, and if anything is a distraction from the necessary discussion about adjusting the NZS eligibility age in line with the longer-term trend improvements in life expectancy.  Rather than debate how to remunerate the CEO, or whether Board members should be replaced, we’d be better to look seriously at winding up the Fund now,  reducing the risks taxpayers ar exposed to and using the proceeds to repay government debt.

 

 

 

Government consumption

Michael Reddell Fiscal policy

Playing around in the consumption data yesterday prompted me to have a look at what had been happening with government consumption spending.  Government consumption, in the national accounts, isn’t the same as total government operating spending.  The latter includes transfers –  the huge amounts modern governments spend on direct payments to households, through the welfare and social insurance systems etc.  Government consumption parallels private consumption –  it is the stuff governments and their agencies (central and local) purchase directly (excluding capital spending, which is investment).    That includes stuff directly consumed by households but paid for by governments –  think of lots of health and education spending –  as well as stuff “consumed” collectively, or in some sense by governments themselves.  The cost of The Treasury, MFAT, the courts, or defence spending are examples of the latter.

Take total government consumption spending first.  The OECD has data for all its member countries since 1995, so I’ve focused on that period.  Here is how New Zealand and Australia have done relative to the median OECD country over that period.

gen govt C aus nz

It is sobering to observe (a) how stable the government consumption share has been in Australia, and (b) how much government consumption as a share of GDP has increased since 1995.  We were consistently a bit below Australia, and in recent years we’ve been a bit above.  Australia may have more pressing fiscal problems right now than New Zealand does, but government consumption has been better held in check there than here.  That increase in government consumption spending will have contributed to the upward pressure on the real exchange rate (tending to raise non-tradables prices relative to tradables prices).

And here is the chart for all OECD countries, showing both the 2014 numbers and the average for the full period 1995 to 2014.

gen govt C oecd

A few things struck me.  There is, of course, a huge range across quite similarly successful countries –  Switzerland and the United States at one end, and the Netherlands, Sweden and Denmark at the other.  The same pattern shows up when one looks at total government spending.  But what struck me more forcefully this time was that while there was little change in the government consumption share of GDP among the countries in the middle of the chart –  say those from Australia to Canada – most of the countries with very high government consumption spending had been increasing that share further over the last 20 year (all seven of the countries furthest to the right).  And at the same time, the countries with the lowest government consumption shares had also been increasing that share (five of the seven countries furthest to the left).   Only a handful of countries had government consumption shares of GDP lower at the end of the period than the full period average –  and there wasn’t anything very obvious in common among those countries (eg Israel, Hungary, Portugal and Latvia).

As I noted earlier, total government consumption spending includes stuff individual households consume directly but the government pays for, as well as the more traditional stuff of government (policy advice, defence, law and order etc).  The latter is known by the national accountants as “collective consumption”.  Here are the same two charts as above, but this time just for collective consumption.

The New Zealand/Australia comparisons

collective C nz and aus

Trends here look quite a lot more favourable for New Zealand (and Australia even more so).  No doubt it helps how little we spend on defence, but I think it is generally accepted that – even if there are whole agencies that could be closed with no real loss – that the New Zealand core public sector is fairly lean.

And the OECD as a whole.

collective C oecd

Note that the countries at the right of this chart are quite different from those at the right of the total government consumption chart above.  The Nordic countries are actually towards the left of the chart –  Sweden, Denmark and Norway don’t spend much more running their governments than we or Australia do.  The big differences are in the individual consumption the government pays for   – be it childcare, health or education.  The countries to the right of this chart look a lot more like those which tend to spend a lot on defence –  those that really need to (Israel, and increasingly perhaps the Baltics,  as well as Greece and Turkey with their historic rivalries and suspicions).   It is interesting then how far to the left Korea is –  perhaps offset in part by US defence spending and security pledges?

There aren’t any very obvious patterns in the changes between the 1995 to 2014 average and the current level.  Overall, the OECD median has increased a little (as the earlier chart showed), but the increases don’t seem to be concentrated in low-spending countries, or high-spending countries, or countries that are militarily exposed, or countries that had strong fiscal positions.  And I can’t see such patterns for the countries that have been shrinking collective consumption either.

Reasonable people can differ on the appropriate role for government in income support, or provision of health and education, but this is collective consumption.  I’d be keen to learn a little more about how Switzerland manages to run such a successful and well-functioning country with collective consumption of only around 5 per cent of GDP.

Scattered thoughts on the Budget documents

Michael Reddell Fiscal policy, New Zealand economic performance

A Budget from a government that seems to have no real sense of how strong sustained growth in productivity and living standards arises was perhaps never likely to produce anything of great interest.  The cheerleading for the, demonstrably failing, “ever bigger New Zealand” approach –  failing, that is, to generate any sign of better productivity growth, perhaps especially in Auckland –  and the questionable rhetoric about a more diversified New Zealand economy, was accompanied by yet more claims that somehow New Zealand’s economic performance is better than those of almost all our advanced country peers.  Meanwhile, oppressive taxes are raised on some of the poorest people in the country, to fund pouring more money into things like KiwiRail, regional research institutes, apprenticeships, and high-performance sport.

I heard some comments on Radio New Zealand this morning about “ideological” approaches to spending, and in particular about the share of GDP devoted to core Crown operating spending.  Since politics is about conflicting values and ideologies, I wasn’t sure what the problem was.  But in any case, the tables in the BEFU (Budget Economic and Fiscal Update) suggest that the government plans that its operating spending in the coming year will be 29.9 per cent of GDP.  As it happens, that is also the average share for the three June years 2015 to 2017.  The average share in the last three years of the previous government was 30.2 per cent.

In the last three years of the previous government, taxes were probably too high.  The core Crown residual cash surplus –  which some of smarter people at Treasury encouraged me to focus on when I worked there – averaged 1.5 per cent of GDP over those years, 2006 to 2008.  By contrast, even on yesterday’s numbers there is no sign of a residual cash surplus until the June 2019 year, and over the three years to June 2017, the average residual cash deficit is expected to be 1.1 per cent of GDP.

Through some combination of fiscal drag and continuing savage tax increases on tobacco, and perhaps some cyclical effects as well,  tax as a share of GDP which had fallen as low as 25 per cent in the year to June 2011 is now just under 28 per cent.

International comparisons of spending and tax levels are largely impossible just using Budget numbers.  Countries calculate things differently, and I recall a painful few days once when I was inside Treasury trying to get from the OECD how they translated our numbers into their numbers.

But here are the latest OECD numbers, which use “total outlays” (not just operating spending) and are not done on an accruals basis.  I’ve shown spending as a share of GDP for the median OECD country and for New Zealand.  There is nothing very unusual about the path in New Zealand.  In levels terms, spending as a share of GDP is a bit below the OECD median, but it is also a bit above the median for the other Anglo countries (only the UK is higher).

gen govt outlays 2016

And here is the same chart for revenue.  Again, nothing stands out about New Zealand’s path.

gen govt receipts 2016

Of course, a notable difference is in the deficit/debt position.  We were better-positioned than most going into the recession, and eight years on we are also better-positioned than most.  In one sense that is a legacy of successive governments going back 30 years, but then legacies are only preserved if each successive government makes sensible decisions.

That is fiscal policy.  But in many ways it was the Treasury economic forecasts that accompanied, and underpinned, the fiscal numbers that got me most interested.  Several other economists have noted that they seem to err on the optimistic side.  That is my fear too.

But I was also interested in the starting point.  According to Treasury, we currently have a negative output gap of 0.9 per cent of GDP. That is a little larger than the estimated gap a year ago, and the gap is expected to just as large in a year’s time as it is now.  And that on the back of negative output gaps every year since the 2008/09 recession.

There is a lot of imprecision in these estimates.  But the idea that there is still excess capacity in the economy –  7 years on from the recession  – seems quite plausible.  After all, the unemployment rate is 5.7 per cent, and Treasury (quite plausibly) thinks a “natural” rate of unemployment (given the structural features of the labour market, the welfare system etc) is around 4.5 per cent.  That used to be the Reserve Bank’s long-term NAIRU estimate too.    And as we know, inflation has been very low, persistently undershooting the midpoint of the inflation target (after persistently overshooting the target for most of the previous two decades).  If Treasury is right, it is a pretty sorry commentary on the conduct of short-term macro policy in New Zealand.  And that, not to put too fine a point on it, has been Graeme Wheeler’s responsibility for the past four years.  I continue to be a bit surprised that the Opposition doesn’t point these things out.  People have been unnecessarily unemployed because of the choices/judgements of the Governor.

But in terms of the Budget, it is probably the projections from here that matter more.  Treasury expects real GDP growth rates to average 2.9 per cent over the next four years.  But it isn’t really clear how or why.

It doesn’t seem to be from the effects of macro policy. The fiscal impulse over the forecast period is estimated to be slightly contractionary.  And they seem to have allowed only one more cut in the OCR, but they recognize that inflation expectations have been falling, so real interest rates are going to be no lower than they were a couple of years ago before the ill-fated tightening cycle.  The exchange rate has come down quite a bit, and perhaps they are assuming some quite powerful lagged effects from that fall.  They assume some recovery in the terms of trade, but nothing as dramatic as the increase in dairy prices a few years ago.  And, on the other hand, the level of repair and rebuild activity in Christchurch –  a major impulse to demand for several years –  will be fading.

And then there is immigration. As everyone recognises, the unexpectedly large net immigration flows over the last few years have been a significant boost to total economic activity.    Treasury assumes –  fairly conventionally –  a sharp fall in met migration inflows, from 71000 in the June 2016 year, to only 19000 in the June 2018 year.  But there is no assumed change in immigration policy, and so the assumed change in net arrivals must all be endogenous to relative economic performance and opportunities.  And yet, they aren’t forecasting much of a pick-up in Australia.  To me, something doesn’t quite add up.  How are we going to get a sustained growth acceleration here –  producing per capita real GDP growth almost as fast as in the period from 1991 to 2007/08 (ie after the reforms and through the massive credit expansion) –  with a pretty sluggish world economy, and all with a substantial negative impulse coming from a sharp cut in the population growth rate?

There is so much uncertainty about medium-term forecasts, that any of these numbers could turn out right.  But they don’t look like the most plausible story to me –  and seem too reliant on just assuming that things finally come right.  If so, they don’t represent the most plausible basis for thinking about future fiscal policy options.  Frankly, I’d be a bit surprised if we ended up with incipient surpluses in the next few years any larger than the modest positive balances the government has right now.   I remain very skeptical of the case for keeping the New Zealand Superannuation Fund in existence, let alone putting more money into it at this late date.  But if my doubts about the macro outlook prove well-founded, then the date for resuming contributions –  already almost a decade on from the NZS eligibility age for the first baby-boomers –  will fortuitously be pushed further into the future.

Among the spin yesterday was the continuing claim from ministers and the Prime Minister that New Zealand’s economic performance is better  –  and will be better, on these Budget economic numbers – than that of most of our advanced country peers.  As I’ve pointed out numerous times before, our growth rate for total real GDP isn’t bad by international standards (while remaining weak by historical standards), but that almost entirely reflects the very rapid population growth.  Per capita growth has been very weak by international standards in the last 12 months or so.

How about the outlook?  I downloaded the latest IMF WEO forecasts for advanced countries. Here is a chart showing forecast growth in real GDP per capita for the next four years (calendar 2019 over calender 2015). For New Zealand, I’ve used the Treasury BEFU forecasts for the four years to June 2020 – ie four years from now –  although as it happens the IMF forecasts for New Zealand aren’t much different.

imf weo gdp growth

On these numbers, New Zealand is doing not too badly.  Our forecast growth rates are very close to those of the median country, very similar to the US and UK (among G7 countries) and Sweden and Denmark (among countries nearer our size).  Which is fine in its way but (a) as I’ve noted, the New Zealand forecasts look rather optimistic, and (b) given our starting point, so much poorer than most of these countries, a successful economic strategy would have involved rather faster growth rates.

Slovakia, for example, might be an achievement to aspire to.  On these IMF numbers, between 2007 and 2021 Slovakia will have recorded almost 43 per cent growth in real per capita GDP, while we’ll have managed 15 per cent.   After decades of Communist rule, Slovakia started a long way behind New Zealand.  It has already matched our real GDP per hour worked, and looks likely to be moving past us.

We don’t have very much positive to write home about.

 

 

 

 

Nationbuilding?

Michael Reddell Fiscal policy, New Zealand economic performance

Whenever I hear the term “nationbuilding”, and particularly when calls come for this or that programme in the name of “nationbuilding” I shudder somewhat. I spent some time working in southern Africa in the 1990s, and after-effects of the disastrous “nationbuilding” programmes of people like Kenneth Kaunda and Julius Nyerere were already apparent.  Since then, the sheer awfulness of Hastings Banda and Robert Mugabe have also become increasingly obvious.   “Nationbuilding” has a ring of something post-colonial, whether in Africa or Latin America, and (to me) a ring of persistent failure.

New Zealand has had its share (perhaps more than its share) of “nationbuilders”, people who seek to use the power of the state and its (our) resources to pursue one or another vision of what the country could become. There was Julius Vogel with the massive debt-fuelled expansion.  And Sutch/Savage/Nash, financially fairly austere perhaps, but with a vision of an insulated New Zealand with a large manufacturing sector (those 22 TV factories). We’ve had NZ Steel and Tasman Pulp and Paper –  and the Raspberry Marketing Council.   We’ve had those who actively encouraged (and even subsidized) large-scale immigration.  We’ve had the Think Big strategy of Muldoon and Birch.  And latterly another wave (of decades-length) of large scale (supposedly) skills-based immigration, supposedly as a “critical economic enabler” –  as if somehow the people we have aren’t really “good enough” for those holding the levers of power.   And there are all sorts of other programmes that fly a bit further under the radar –  film subsidies for example, or grants to those who capture the imagination of bureaucrats –  or which simply never managed to command enough public support in time (the slightly younger Roger Douglas’s call for sixteen state-funded carpet factories).  Each of these programmes that has been implemented made a difference, but how many of them were for the good is, at very least, an open question (my provisional answer is none of them).   And if they weren’t good, there was almost no effective accountability for any of the designers.

I pulled off my bookshelf this morning Brian Easton’s 2001 book The Nationbuilders, 15 profiles of people Easton saw as having “shaped the New Zealand nation in the middle years of the twentieth century”.  They are mostly political and bureaucratic figures, or people whose contribution was around politics and policy.  None was particularly market-oriented (Coates and Muldoon appear, both from the activist ends of their respective centre-right parties).  One major business figure was profiled –  James Fletcher – but even his success was in no small measure down to the huge government construction projects.  Oh, and there was Dennis Glover, who founded Caxton Press.

Which is a somewhat longwinded introduction to an article in the Dominion-Post a few days ago in which Shamubeel Eaqub called for this week’s Budget to be a nation-building one.  It wasn’t simply a line in passing –  the phrase appears three times in a not-overly-long column.  In this case, “more public debt” is the call –  in this case to build houses (30s revisited), public transport, and “rail in critical infrastructure corridors” (1870s revisited).

He continues

The reality is that the current expenses or lost revenue could be easily redirected into debt repayment to fund some serious amounts of new investment.

If we raised a 100 year bond, as Ireland has done recently, we could probably borrow about $30b for every $1b in debt repayment. Incidentally we spend about $1b a year on accommodation assistance. Redirected to borrowings, we could perhaps build about 82,000 houses on existing Housing New Zealand land in Auckland.

Set aside for the moment the long track record of poor quality government capital investment –  not just here but abroad – and then consider a key difference between Ireland (and Belgium which also recently issued a 100 year government bond) and New Zealand.

First, both have very high levels of government debt (general government gross debt in excess of 100 per cent of GDP) and so the idea of locking in some of that debt for a very long time must seem quite attractive to the respective debt managers.  Neither country seems to be launching an expansionary fiscal policy with the proceeds.

And second, there is quite a difference between the price of Irish or Belgian debt, and that issued by the New Zealand government.   Belgium issued its 100 year bond at a nominal yield of 2.3 per cent.  Ireland issued its at 2.35 per cent.  The ECB has an inflation target of just under 2 per cent, and inflation in last 25 years has averaged 2.2 per cent in Ireland and 2.0 per cent in Belgium.   At most, a reasonable estimate of the expected real interest rate over 100 years is perhaps 0.5 per cent.   That should represent quite cheap borrowing (although whether it is really cheaper than a succession of 10 year bonds only time will tell).

What of New Zealand?  We don’t have a 100 year bond.  But the New Zealand government does issue quite long-term inflation indexed bonds. A bond with 14 years to maturity has a yield of around 1.82 per cent, and one with 19 years to maturity yields around 1.93 per cent.  The implied 5 year rate in 14 years time (ie the last 5 years of the 19 year bond) is around 2.2 per cent.  Who knows at what yield the New Zealand government could issue 100 year bonds (having taken all the inflation risk back on itself) but it seems unlikely that it would be less than 2.5 per cent.   That is a huge difference in likely real borrowing costs from those European sovereign issuers.  And yet Eaqub proposes we borrow to spend (“invest”) at those high yields, even though the real productivity performance of the New Zealand economy over decades has been far inferior to that of either Belgium or Ireland.   In our case, a 2.5 per cent real interest rate not only materially exceeds past and likely future productivity growth rates, it may even exceed the likely future rate of real GDP growth.

For the government to borrowing at 2.5 per cent real might look reasonably attractive if the benchmark is New Zealand interest rates over, say, the last 25 years.  But being in debt at all, as a government, should have been extremely unattractive during that period given how high New Zealand’s interest rates have been (and, laudably, successive governments markedly lowered our public indebtedness).  Perhaps a long-term real borrowing rate of around 2.5 per cent real might be borderline attractive if we could count on excellent governance and disciplines and an assurance that projects would be subject to rigorous cost-benefit analyses.  The track record on that score isn’t promising.

On a perhaps-related issue, Treasury last week released a series of blog posts on the financial return to the Crown from its investment in Air New Zealand, from the time of the Crown bailout in 2001.    As a purchaser of last resort (in late 2001, post 9/11, no one was keen on airline shares), the Crown should have got quite good entry levels.  And Air New Zealand remained listed on the stock exchange, with minority private interests throughout the subsequent 15 years, ensuring some level of ownership-based market discipline.  Air New Zealand is widely regarded as a very well-managed successful airline, and for now is riding the back of relatively low oil prices and an upsurge in inbound tourism.

Over the period since 2001, the nominal 10 year government bond rate has averaged 5.3 per cent.  And yet the internal rate of return the Treasury analyst calculated on the Crown’s investment has been 8.4 per cent per annum –  and much of that is unrealized, and dependent on the current, still relatively high, Air New Zealand share price.    Buy the entire equity index and I suspect few investors would regard a 3 percentage point equity risk premium as reasonable (from memory, historic market estimates are typically in a 4- 7 percentage point range).  But Air New Zealand is not as risky as the index as a whole –  it is far far more risky.  Government debt financed that Air New Zealand investment, and taxpayers don’t seem to have gotten a remotely adequate compensation for the risk they assumed, even in an industry with lots of competition and market disciplines.  It isn’t clear why advocates of large scale borrowing now – in a country with still quite high real long-term interest rates –  think they would do better in generating economic returns.

So-called “nationbuilding” projects have usually been a way of wasting (with a fairly high degree of confidence) the nation’s resources in pursuit of some politician’s or economist’s pet vision.  Government don’t –  or perhaps rather shouldn’t –  make nations, and in particular they certainly don’t make the wealth of nations.  That is down to individuals, firms, and the networks of society.  There is an important role for government –  and whatever government does needs to be done as well (or least badly) as possible – but “nationbuilding” as a call seems no more likely today to result in a good, high-yielding, projects, than it did in 1870 or 1980 or 1935 or……

Krugman on the case for more public investment

Michael Reddell Fiscal policy, Public finance

Paul Krugman had a piece on his blog a day or two ago making the case for increased (“much more”) public investment spending in the US.

There are three strands to his case.

The first is a proposition that the US is still “in or near” a liquidity trap. I’m not sure I’d use the term, but the general point is one I sympathise with.  Under current legislation and central bank practices (easy convertibility into banknotes on demand), few countries are very far from the effective lower bound on nominal interest rates.  And if a new downturn comes, that could make it very difficult for central banks to do much to help stabilize economies.   To me, that argues for action (legislative and administrative) to remove (or greatly ease) the lower bound constraint.

The second is a proposition that the last few years of disappointing real economic growth are helping to bring about a sustained reduction in future potential growth –  in his words,

demand-side weakness now breeds supply-side weakness later, so that there are big payoffs to boosting the economy through public spending

In principle, it might be a plausible idea. But there is no real evidence that things turned out that way during the Great Depression when, extremely weak as demand was, TFP growth remained strong.

The third –  actually first in Krugman’s list –  is that public spending as a share of GDP is now very low:

Government borrowing costs are at record lows; markets are in effect pleading with the government to borrow and spend. So why not do it? It’s completely crazy that public construction as a percentage of GDP has declined to record lows even as interest rates have done the same

And he includes this chart

krugman chart

That chart only goes back to the early 1990s.  But here, for the US, is general government gross fixed capital formation as a per cent of GDP since 1970.

us gen govt gfcf

It is at a record low, which might seem to support Krugman’s case.

But then here is the annual rate of growth in the US population, in this case going back as far as the FRED series went, to 1953.  And what do we find, but that population growth is also estimated to be at its lowest for decades –  quite possibly in the entire history of the US.

us popn 2

If the population growth rate slows, less investment (as a share of each year’s GDP) is needed to maintain a desired stock of capital per person.  That is a good thing, on the whole –  available resources can be used for other stuff.  These effects are quite large.  Much of the government capital stock is in the form of quite long-lived assets, which depreciate slowly (schools, hospitals, roads etc).  Depreciation is one –  quite substantial –  component of the gross fixed capital formation spending, but a large share of government capital spending is about supporting the needs of a growing population.

It isn’t just the US population growth rate that is slowing –  global population growth rates have been slowing markedly too.

world popn

A lower rate of population growth, and associated lower need for investment, is now pretty widely recognized as one of the factors that has been driving real interest rates down around the world.  One could argue, with Krugman, that markets are “begging governments to borrow and spend”, but it might be better to interpret is as markets as reflecting the twin declines, in population growth and in underlying multi-factor productivity growth.  There simply aren’t as many attractive projects around as there were.  It can take time for (desired) savings rates to adjust to that deterioration in investment prospects –  and that is usually where monetary policy has a part to play.  More government capital expenditure, if the remunerative projects aren’t there, doesn’t look like a particularly attractive way to boost the country’s longer-term economic fortunes. And as the US government is still running deficits, cuts in government savings don’t look particularly sensible either.

Perhaps the US is different, and the high-returning public projects (covering not just the low cost of debt but the overall cost of citizens’ equity) are there and able to be implemented effectively in a way that achieves those returns.  But the political process is such that even if, in principle, a large pool of such projects are there, there is no guarantee that those would be the projects that would be picked.

What of New Zealand?  Here is the chart of general government gross fixed capital formation as a per cent of GDP back to 1987.

gen govt gfcf

It hasn’t fallen, but then again our population growth –  while volatile –  has recently been higher than at any time since the 1970s.  There is an awful lot of wasteful public capital spending here, that fails to pass reasonable economic tests – Transmission Gully, the Auckland rail projects, the Dunedin stadium, and the fearful prospect of large amounts of ratepayer money extending Wellington Airport’s runway –  and we should be wary of the siren calls, even here, to increase government capital expenditure as a way of stimulating the overall economy.  Poor quality projects make us poorer.

Are there exceptions –  cases where demand might be so weak that perhaps even poor quality projects might help kickstart the economy (Keynes’s example of paying people to dig holes and fill them in again).  I’m not sufficiently doctrinaire as to say “never”, but equally it is difficult to think of any actual historical episodes where “sorting out monetary policy”, and complementing that with growth-oriented structural reforms, would not have been a better option.  It was in the Great Depression. It would have been in 1990s Japan.  It looks that way in most of the world, including New Zealand, now.

 

 

An independent Policy Costings Unit?

Michael Reddell Fiscal policy

The Green Party co-leader Metiria Turei yesterday called for the establishment of an independent Policy Costings Unit within The Treasury.

Today, the Green Party has sent a letter to each party leader, asking for support from across the House to establish an independent unit in the Treasury to cost policy promises.

Political parties could submit their policies for costing to this independent unit, which would then produce a report with information on both the fiscal and wider economic implications of the policy.

Instead of New Zealanders making their decisions based on spin and who can shout the loudest, they will have meaningful, independently verified information instead.

And here are some of the details of what the Greens are proposing.

greens pcu
I don’t think this is an ideological issue at all.  The National Party is opposed, but the Taxpayer’s Union –  generally sceptical of any proposals to spend more public money, and generally a bit more towards the right of politics than the left – has come out in support of the proposal.

 Taxpayers’ Union Executive Director, Jordan Williams, says “We agree with the Greens that an independent office to cost political promises would be good for democracy and public policy debates. While our preference is to have the office as one of Parliament, rather than Treasury, the Green’s policy has real merit.”

“Seldom does the Taxpayers’ Union call for new spending of taxpayers’ money but here we think the benefits to transparency and democracy far outweigh the cost.”

“This tool would make it harder for politicians to make up expensive policy on the hoof with taxpayers bearing the costs of the wish-lists. It would likely prevent the fiasco we saw with the Northland by-election bribes.”

Like the Taxpayer’s Union, I reckon that if New Zealand is going to establish such a unit it should be done as an office of Parliament, and I wonder why the Greens chose not to take that option.  Perhaps they took the view that such a unit would be cheaper if it operated within Treasury (drawing on the corporate functions of a larger organization).  But even if that were true, I suspect it would be a false economy.

If it is worth establishing such a body at all, it is worth doing it properly.  That means establishing a body with its own mission and esprit de corps, and staffing the organization with people who sense that their primary responsibility is to Parliament and to the political process, not with people whose career is advanced primarily by their performance within Treasury –  a line department that answers to the government of the day.  I’m not suggesting that people in a quasi-independent unit in Treasury could not do the job with integrity –  after all, Treasury at times provides secondees to the office of the Leader of the Opposition, and it hasn’t obviously tended to hurt those individuals’ careers on their return to the Treasury (one is now the State Services Commissioner, and another was the previous Secretary to the Treasury).  But the role would be better done by a properly independent body, able to attract someone of sufficient standing and authority to lead it (heading this sort of unit is not just a section manager’s job).  And if it were to established as an adjunct to any existing agency, I would probably suggest the Productivity Commission –  at arms-length from day-to-day politics –  rather than Treasury.

But is it worth going down this track?  I’m still ambivalent.  I don’t think there is enough thoughtful scrutiny of macroeconomic policy issues in New Zealand (and touched on some of that here), and before the Greens proposal goes any further it would be worth looking carefully at what is done in other countries.

I can think of two highly-regarded examples, from two quite different political systems.  In the Netherlands, the CPB has, for decades, provided costings for political party proposals.  Although it is not compulsory for parties to seek such costings, I understand that it has become the norm for them to do so –  an equilibrium, which looks (on the whole) like a good one.  The CPB is very highly-regarded and does a wide range of other work (not just electoral costings).  It is administratively a part of the Dutch Ministry of Economics Affairs (but with protections for its independence).  The CPB was founded in 1945 and had already functioned at arms-length from the government for decades before it began providing political party costings.  The CPB has more than 100 staff (not all doing political costings).

And in the United States, the Congressional Budget Office also plays a highly-regarded role as non-partisan “scorer”.  It is a quite different political system, and the role is not about scoring party promises doing into an election campaign, but in evaluating the fiscal implications of legislative proposals.

Both the CPB and CBO are highly-regarded.  I’m not sufficiently familiar with Dutch politics to offer any thoughts on how much impact the CPB costings have on retail politics in the Netherlands –  and I imagine that views differ anyway.  But regardless of technical capability and impartiality of the CBO, US fiscal policy and legislative processes don’t look overly attractive.  Of course, in a huge country there is cacophony of voices –  more or less expert –  and so it might be unreasonable to think that any publically-funded independent agency would make much difference to the debate.

What about the other Anglo countries –  the UK, Ireland, Australia and Canada?

The UK and Ireland have both established fiscal councils in recent years, and there have been calls for those agencies to be given a mandate to cost political party promises.  To date, neither country has altered the mandates of the fiscal councils (which are more macro in their focus).

Canada and Australia have each relatively recently established a Parliamentary Budget Officer.  The (fairly small) Canadian office does not appear to do political party costings (but can, on request of an MP, evaluate the cost of a proposal before Parliament), but the Australian PBO  (with about 40 staff) does make that facility available.  But here is the important thing –  politicians have been reluctant to use the facility, and there has been no obvious public backlash more or less compelling parties to have their policies evaluated by the PBO.   I’m not entirely sure why, but it is an alternative equilibrium to the Dutch one.  Which model would hold in New Zealand?  Perhaps, given resourcing constraints, smaller parties might use the Treasury office the Greens propose, but the proposals of the smaller parties generally matter less than those of the major parties.  Would Labour, or National in future when it is in Opposition, use the facility?  I don’t know.

Why might politicians be reluctant to have such a agency evaluate their policies?  Yes, there might be cynical reasons –  the proposals are just too expensive and parties don’t want that cost authoritatively exposed.    But there might be other reasons.    In the end, people often don’t vote for one party or another on the basis of detailed costings, but on “mood affiliation” –  a sense that the party’s general ideas are sympathetic to the broad direction one favours.  And I can’t think of a New Zealand election in my time when the results have been materially determined by the costings (accurate or inaccurate) of party promises  – perhaps in 1975 National might have won a smaller majority if the cost of National Superannuation had been better, and more openly, costed, but I doubt it would have changed the overall result.

And then, of course, there is the fact that economists, and public agencies largely made up of economists, have their own predispositions and biases.    The Economist touched on this issue quite recently.  It isn’t that economists are necessarily worse than other “experts”, or that people consciously set out to favour one side or another in politics, but (say) whatever the merits of the sorts of policies the Greens have favoured, it is unlikely that the New Zealand Treasury (1984-90) would have evaluated them in ways that the Greens would have found fair and balanced.  Perhaps ACT might have the same reaction to today’s Treasury?  If it were only narrow fiscal costings an agency was being asked to evaluate, perhaps these predispositions of the analysts would not matter unduly (although even there, much depends on the behavioural assumptions one makes), but the Greens’ proposal includes analysis of the “wider economic implications” of policy proposals.

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

At very least, though, if this interesting proposal is going to go anywhere, it should be underpinned by a more in-depth analysis of the experiences, and contexts, of other countries.