HYEFU thoughts

I don’t have that much to say about the HYEFU and the Budget Policy Statement released yesterday.  If governments are going to keep on with the insane and destructive (to the economic wellbeing/prosperity of New Zealanders) policy of supercharging population growth then, sooner or later, they are going to need to spend more on increasing the associated public “infrastructure” (roads, schools, hospitals etc).  One can, of course, question the quality of some of that expenditure –  baseline or projected –  but more people pretty reliably means a need for more capital.

That said, if the population is growing rapidly you’d usually expect to see all sorts of investment growing quite strongly.    As I illustrated in a post last week both government and business investment have been really rather subdued in recent years.  The Treasury doesn’t give us forecasts that separate out government and business investment, but here is a chart of their forecasts for total non-housing investment (public and private) as a share of GDP.   The first observation is an actual, the rest are forecasts.

inv hyefu 19

Note the scale.  These are not huge moves, but they are falls.  Treasury expects that non-housing investment will be a smaller share of GDP in the coming years than it has been in the recent past.    Something doesn’t seem right about the economic policy settings, at least if the governments cares about lifting average material living standards of New Zealanders.  Treasury forecasts on the basis of policy as it is, and (fiscal) policy changes the government has told them it will be making.

The picture in the forecasts also doesn’t look very good if we concentrate on trade with the rest of the world.  Here is exports as a percentage of GDP.

exports hyefu 19.png

When it first took office, the government occasionally used to talk about a more export-oriented economy and all that.   No sign that the Treasury thinks that policy settings are consistent with delivering that.  I didn’t include imports on the chart, but the fall in imports as a share of GDP over the forecast period is slightly larger than the forecast fall in exports.     Taking on the world and winning, consuming more of the best the world has to offer, it isn’t.

And it isn’t as if The Treasury is forecasting doom and gloom: they expect overall GDP growth to pick up and be running at around 2.75 per cent per annum.

You’d hope that, faced with projections like these, the Minister of Finance would be demanding from the Secretary to the Treasury –  and that the Secretary would be proactive in offering –  robust advice on what might, after all these years, begin to reverse New Zealand’s woefully poor long-term economic performance.    It doesn’t seem very likely, but the Secretary is new.  Perhaps she is genuinely shocked at how poorly New Zealand does.  Perhaps she is demanding answers, analysis, and advice from her staff.

On page 2 of the HYEFU I noticed this claim

The Treasury is in a unique position to focus on improving the way our economy can raise New Zealand living standards. Along with delivering first-rate economic and financial advice,

Treasury certainly is in a unique position.  They have a lot of staff, have had their budget increased, and have (or should have, if they are doing their job) ready access to Ministers and input across all major areas of policy.   And yet, the actual performance has been poor, and there is little visible sign of that “first-rate economic and financial advice”.  It might be bad if governments were consistently rejecting such advice, but that is their prerogative.   But there isn’t much sign that The Treasury has been offering hard-headed searching advice on the failures of overall economic performance, whether or not successive governments had been inclined to give it heed.

All that said, one can’t argue too much with the fiscal performance.    Here is a chart of the best of the debt indicators Treasury publishes forecasts for.

net core crown debt

Modern New Zealand governments manage debt and the aggregate public finances in a pretty responsible way (I’m not one of those who thinks low interest rates mean governments should take on more debt: rates are low for a reason), and government debt levels near zero seem pretty prudent given the way other government policies remove some of the need for private savings.   And while Treasury thinks we have a small positive output gap, my own inclination –  and the balance of the other estimates they quote –  is that things are a bit weaker than that.  Commodity prices are pretty high to be sure, which always flatters the public finances a bit, but overall I’m pretty comfortable if the operating balance is somewhere just either side of zero.

Successive governments have done aggregate fiscal management pretty well.  It is just a shame they’ve haven’t shown the same degree of interest, passion, commitment etc to fixing the longrunning productivity failures.  Overall fiscal management matters, but in terms of the long-term material living standards of New Zealanders, it is a bit akin to keeping the garden pretty and the fences well tended even as the house itself slowly –  ever so slowly but surely –  rots.

 

Spending and saving

Another post, probably the last, looking at some of the recently-released national accounts data.

First, a useful reminder of how much, relatively speaking, New Zealand benefited from the fall in interest rates over the last decade.

IIP

The chart shows the share of New Zealand’s GDP (the value of stuff produced here) that accrued to foreigners as returns on their loans to New Zealand residents or their equity investments here.  When the chart starts, in the year to March 1972, the net international investment position (NIIP) was very small, and so were the returns to those who’d provided the funds.   The (negative) NIIP positioned widened a lot over the 1970s and 1980s, and so did the servicing burden.

As recently as just prior to the last significant recession (2008/09) the equivalent of just over 7 per cent of everything produced here accrued (net) to foreign lenders or investors.  That wasn’t wholly a bad thing of course: interest rates were cyclically because the economy was doing relatively well, and when the economy is cyclically strong profits –  to domestic and foreign-owned businesses operating here –  also tend to be high.  One of the big transitions over the 1990s and 2000s was that almost all the net debt owed by New Zealanders abroad was, in effect, in New Zealand dollar terms, thus it was the NZ interest rates which affected the servicing cost.

As late as mid 2008, the OCR was 8.25 per cent.  It was 1.75 per cent in the last year on this chart, and is 1 per cent now.  That shift is the biggest contributor to the reduction in the servicing burden to around 3.5 per cent of GDP now.  It is a significant shift: on average in the 90s and 00s about 94 per cent of what was produced here was available for local uses, these days something like 96.5 per cent is available.  In a decade when productivity and real GDP growth have been pretty lacklustre, it is a saving not to be sniffed at.

I’m not here wanting to imply that the sharp fall in New Zealand (and global) interest rates is a good thing in and of itself.  After all, New Zealand and global interest rates are likely to have fallen so much partly for reasons reflecting a reduction in perceived investment opportunities and a dearth of profitable (risk-adjusted) projects.  But if that reduction has been fairly global in nature, at least all else equal as a country that had taken on a lot of foreign (debt and equity, although in net terms mostly debt) we’ve benefited from the unexpected collapse in servicing costs relative to countries which were net providers of funds to the rest of the world.

It was just one of several things that should have been going for New Zealand.  Not only did the debt we’d taken on prove much cheaper to service than we’d expected, but the terms of trade (prices of stuff sold abroad, relative to the prices of stuff imported) also proved unexpectedly strong.   There were real income gains from those direct effects, but little or none of it seems to have translated into, say, stronger business investment or any narrowing of the productivity gaps between New Zealand and the rest of the world.  But investment was last week’s post.

What about consumption and saving?

Here is net national savings as a percentage of net national income (ie ‘net’= after deduction of depreciation from both sides, and “national income” is domestic product adjusted for net factor income flows accruing abroad –  mainly the investment income shown above).

net savings to nni dec 19

Net saving (from income) of New Zealanders perhaps averages a bit higher than it did over the period from the mid-70s to around 1990 (although in these earlier numbers there are some material inflation distortion), but the current cycle doesn’t look much different than the previous one, despite windfall income boosts discussed above.

The sectoral savings data are available only from 1987 onwards.  Here is the household savings rate,

household S

It has been quite stable for a few years now, although still around zero.     For those convinced that somehow house price inflation is a material part of the household savings story, a reminder that the all-time low in this series was in the year to March 2003, and 2003 was the very first year of the 2000s surge in house price, subsequently built on in further rises in real house prices this decade.

And here are the two components of private savings, this time shown as a share of NNI.

savings per cent of NNI

If (net) business savings are higher than they were (on average) in the first 20 years or so, they are still lower than the peak (year to March 2003 again) seen in the previous growth phase.  Given that business investment has been pretty quiescent, one is left wondering whether, for example, the gap between company and maximum personal tax rates is encouraging owners to save in the corporate entity, rather than taking a distribution and saving personally.

And here is government and private (household plus business), again as a share of NNI.

govt and pte saving dec 19

There is, pretty clearly, some element of offset in these two series –  which makes some sense; when the government is running big surpluses, households in particular may not need to be quite as cautious –  but that story shouldn’t be overstated.   After all, the overall rate of private savings has been remarkably stable all decade, even as government saving was gradually getting back to more normal levels.  Private savings rates do seem to have been averaging higher than they were in the 15 or so years prior to the last recession.

And on the other side, what about consumption?

C NNI

We consume more than 90 per cent of what we (New Zealand residents, including resident companies) earn.  But, if anything, that share seems to have been falling a little; in particular, last year private consumption as a share of NNI was the lowest in the 30+ year history of the series.  So much for those stories about people consuming on the back of high/rising house prices: I’m sure it happens for a few people, but for the economy as a whole (where an increasing number of people can’t buy a home at all) it isn’t a thing, and that isn’t surprising because higher house prices don’t make us better off in aggregate.

And what about government consumption?  There are two different types of consumption here: individual consumption (things government pays for but you consume directly, such as schooling and hospital services) and collective consumption (defence, law and order, and all those officials in Wellington head offices).  Both measures, of course, exclude transfer payments (eg welfare benefits) to households.

govt C dec 19.png

Focus on the blue line first.  Despite the rhetoric from each side in politics, government consumption spending (as a share of income) hasn’t changed much in 30+ years, and the bigger changes look to be mostly cyclical in nature.  Thus, Ruth Richardson and Jim Bolger weren’t greatly increasing government spending in the early 1990s; instead, there was a recession and government consumption spending tends to hold quite steady.   Similarly, the last Labour government wasn’t slashing spending (the low point on the blue line is 2004), but the economy was quite cyclically strong and terms of trade were turning up.  And so on.

But the orange line did catch my eye.  Whereas in the late 1980s governments were spending almost 10 per cent of GDP on collective consumption –  things more akin to public goods – now that share is only about 8 per cent.    There will be all sorts of things going on inside that aggregate, and there may have been some reasonably material genuine efficiencies garnered over time, but….. I can’t help wondering if this number isn’t a little low.  It is easy to highlight a lot of silly, pointless (except as something like virtue signalling) public agencies, which could quite readily be eliminated, but most of them are pretty small, often very small indeed.  The amounts involved are also small.  But look, for example, at the state of our national statistics –  including the debacle of the last census –  and you have to wonder.  As even my fairly dry right-wing friends on the 2025 Taskforce noted a decade ago, things governments actually need to do need to be done well, and that involves spending money.

Then again, perhaps that is simply a Wellington perspective, born of mixing with public servants.

(It is perhaps worth noting in passing that when she made her schools spending annoucement yesterday, every second word from the Prime Minister seemed to be “investment” (or “infrastructure”).  No doubt much of the extra spending will manage to be categorised as capital spending for government accounting purposes, and perhaps even as investment for national accounts purposes, but spending that doesn’t generate a return –  in some form or another –  is really just consumption, and interest rates can be as low as you like – typically for reasons having to do with a dearth of remunerative opportunities –  but consumption spending still has a substantial cost (100 per cent of it) relative to which the interest costs are pretty second order.)    Businesses undertake stuff categorised as “investment” with the intent (not always realised) of generating an economic return.  Governments can often be less disciplined, motivated by different considerations, not excluding re-election.)

Long-term fiscal choices

Fifteen years ago now Parliament passed an amendment to the Public Finance Act requiring that every four years or so

the Treasury must prepare a statement on the long-term fiscal position

There is nothing in the Act as to what these long-term statement should cover, just a minimum time horizon” “at least 40 consecutive financial years”.

This wasn’t a pathbreaking fiscal reform by New Zealand.  By the time our amendment was enacted a fair range of other OECD countries had somewhat similar requirements (see table on page 4).

Fifteeen years ago I probably thought this new requirement was a good thing.  I’m much more sceptical now  It is unlikely that such reports do much harm, but:

  • they cost a lot to do (at least as Treasury typically does them –  the legal requirements could probably be met with a two page report),
  • come around much more frequently than any underlying issues change, and
  • there is little sign that long-term fiscal management is any better for them existing.

There are fiscally reckless countries and fiscally cautious countries, and there were both types before and after the introduction of long-term fiscal reports.  It isn’t obvious which country has switched sides (or moved much at all) as a result of these sorts of reports.  New Zealand, after all, introduced the requirement when our own fiscal surpluses were around an all-time high already.

What is more, the underlying issues are really pretty obvious to blind Freddy.   Here is what I wrote when the last Long-Term Fiscal Statement was released in late 2016

The Treasury yesterday released its latest Long-Term Fiscal Statement.  These documents, in some form or other, are now required under the Public Finance Act to be published at least every four years.  I was once a fan, but I’ve become progressively more sceptical about their value.  There is a requirement to focus at least 40 years ahead, which sounds very prudent and responsible.    But, in fact, it doesn’t take much analysis to realise that (a) permanently increasing the share of government expenditure without increasing commensurately government revenue will, over time, run government finances into trouble, and (b) that offering a flat universal pension payment to an ever-increasing share of the population is a good example of a policy that increases the share of government expenditure in GDP.  We all know that.  Even politicians know that.  And although Treasury often produces an interesting range of background analysis, there really isn’t much more to it than that.  Changes in productivity growth rate assumptions don’t matter much (long-term fiscally) and nor do changes in immigration assumptions.  What matters is permanent (well, long-term) spending and revenue choices.   

There really isn’t much more to it than that.

That statement was released in November 2016, which means –  time flying as it does –  the next report is due next year.   A Treasury that wanted impact might reasonably be expected to publish before the election, and if they do that they need to be sufficiently early in the year not to be caught up in the immediate highly partisan pre-election period.

As it happens I went to an event at Victoria University the other day at which one of Treasury’s researchers was presenting some modelling results of work done for the next Long-Term Fiscal Statement.  I can’t tell you about those results, but it did get me thinking about some of the past Statements and wondering how they looked with the passage of time.

In my excerpt above I referred only to spending on New Zealand Superannuation which, on current policies, will rise indefinitely as a share of GDP so long as life expectancy keeps increasing.  But the other big issue –  which sage Treasury officials will sometimes suggest is really the bigger one – is health spending.  There are new technologies and drugs, rising public demand, not much productivity growth (at least in the health sector in New Zealand), and an ageing population itself seems likely to create additional cost pressures.

This is the sort of chart The Treasury likes to show, from the background papers to the 2009 Long-Term Fiscal Statement.

health 09

On those numbers, health would be a simply huge fiscal pressure, and the case for higher taxes might be hard to resist.

I’ve always been a bit more sceptical that health is quite the issue it is sometimes made out to be.  That is mostly because there are so many more dimensions on which government health spending can be adjusted than there are around NZS (for the latter, one can play with the age of eligibility, the rate, and the indexation formula, all of which get a lot of attention) and the societally-accepted boundaries are fuzzier (whose GP visits should be free or heavily subsidised, how much should be spent on drugs, how much other rationing should there be).

Anyway, on that 2009 Treasury chart, the projecting forward of historical trends (as Treasury did it) would have had government health spending by now (year to June 2020) well in excess of 7 per cent of GDP (eyeballing the chart suggests about 7.3 per cent).  Here is a chart from a recent post including budget numbers for the current (to June 2020) year.

cc2.png

Government health spending now is sitting just on 6 per cent.  It was about 6 per cent in the year to June 2008 (just prior to the recession) and not much below 6 per cent forty years (note that period –  the LTFS statutory focus) ago.

Now, quite possibly there is a totally unsustainable huge shortfall in government health spending at present.  But if so, none of the political parties is making that case (notwithstanding the rhetoric from Labour in the last campaign) or doing anything very much about, and since the issues around fiscal policy are really political in nature (how easy/hard is it to make decent choices in a timely way) it does suggest that the margins are more fluid, the fiscal outlook more readily malleable, than the quadrennial publications from The Treasury are sometimes taken as suggesting.   The system copes, and adjusts, perhaps less elegantly than officials might like, but that it does so nonetheless.  That is consistent with, now, 30 years of fairly sensible, often quite conservative, fiscal management by governments led by both main parties.  Adjustment rarely, if ever, occurs in response to projections 30 or 40 years ahead, but to pressures that become apparent within much more near-term windows.

As for NZS itself, personally I’m not overly interested in arguing the case for reform on fiscal grounds but on a rather more moral ground.    Even if we could afford it, even if there were no productive costs from the deadweight costs of the associated taxes, there just seems something wrong to me in providing a universal liveable income to every person aged 65 or over (subject only to undemanding residence requirements).    45 per cent of those 65-69 are now in the labour force –  suggesting they are physically able to work –  which is substantially greater than the 30 per cent of those aged 60-64 who were in the labour force 30 years ago when NZS eligibility was at age 60.

I don’t consider myself a welfare hardliner.  I think society should treat quite generously those genuinely unable to work, especially those who find themselves in that position unforeseeably.  Old age isn’t one of those (unforeseeable) conditions, but personally, I have no particular problem with something like the current flat rate of NZS, or even of indexing it to wage movements (which would be likely to happen over time anytime, whether it was the formal mechanism from year to year), from some age where we can generally agree a large proportion of the population might not be able to hold down much of a job.  I don’t have a problem with not being overly demanding in tests for those finding work increasingly physicallydifficult beyond, say, 60.   But what is right or fair about a universal flat rate paid – by the rest of the population – to a group where almost half are working anyway?  It is why I would favour raising the NZS age to, say, 68 now (in pretty short order) and then indexing the age in line with further improvements in life expectancy, and I’d favour that approach even if long-term fiscal forecasts showed large surpluses for decades to come.    At the margin, I’d reinforce that policy change with a provision that you have to have lived in New Zealand for 30 years after age 20 to be eligible for full NZS (a pro-rated payment for people with, say, between 10 and 30 years of actual residence).  Why?  Because in general you should only be expected to be supported by the people of New Zealand, unconditionally, in your old age, if most of your adult life was spent as part of this society.

Reasonable people can, of course, debate these suggestions.  But they are where I think the debate should be –  about what sort of society we should be, what sort of mix between self-reliance and public provision there should be, even about what mix of family support and public support there should be, or what (if any) stigma should attach to be funded by the taxpayer in old age –  not, mostly, about long-term fiscal forecasts.

Fiscal thoughts

I was flicking through the annual fiscal numbers released earlier this week and really only a couple of things caught my eye.

The first was welfare spending.    Here is the long-term chart from The Treasury’s data showing annual spending as a share of GDP back to 1972.

soc security 1

The big trends –  up to around 1992, down since –  are pretty striking.  So too is the fact that we now spend almost twice the share of GDP on welfare as we did in 1972 (by contrast, education spending as a share of GDP was exactly the same in 1972 as in 2019).

But what mostly caught my eye was that last observation – quite a substantial tick up from 9.0 per cent in the year to June 2018 to 9.6 per cent in the year to June 2019.   Welfare spending does go up some years –  and has done even in face of the declining trend since the early 1990s –  but it usually does so when the economy isn’t doing well and the unemployment rate is rising.

soc security 2

The three previous episodes in which welfare spending rose as a share of GDP (late 80s to 1992, late 90s, and over the last recession) were also episodes in which the unemployment rate was rising.   You’d expect that sort of relationship; not only will there be more people on the unemployment benefit (whatever they call it these days) but people on other benefits will also find it harder to get off and into work.

By contrast, in the latest year, welfare spending rose (considerably) as a share of GDP even though the average unemployment rate fell quite a bit during that year.

Despite that fall in the official unemployment rate, the number of people getting a benefit as a jobseeker increased a lot.jobseeker support

There has been no suggestion from the government that they don’t believe the HLFS and really the unemployment was rising over their first full year in offfice.

The new government has chosen to spend a lot more money on (certain classes of) welfare beneficiaries.  And, thus, to many the increase will probably look like a “good thing”.  Count me rather more sceptical.  I think there are some categories of welfare recipients who are poorly treated by the system and to whom society should be rather more generous.   But, for example, the Accommodation Supplement is now costing well over $1 billion dollars per annum (0.3 to 0.4 per cent of GDP) and yet with better government choices, rents should have fallen a lot in real terms and decent housing been cheaper than ever.  And the cost (per cent of GDP) of NZS keeps rising even year, with unchanged parameters even as life expectancies increase.  (In the longer-term, a stronger cultural emphasis on marriage might even reduce the number – 60000 – of solo parents receiving benefits.)   Perhaps our culture and society are so far gone that we can’t readily get back to 1972 when “only” 5.6 per cent of GDP was being spent on welfare – in a pretty comprehensive welfare system –  but it isn’t obvious why we couldn’t be both humane and firm without heading back towards spending 10 per cent of GDP on welfare.

The other series that caught my eye was that for the “core Crown residual cash” balance.  It doesn’t get a lot of attention, although a sage Treasury official once encouraged me to pay more attention to it than is perhaps customary.

resid cash

It isn’t a perfect indicator either –  anything can be gamed – but it is a reminder that the government isn’t exactly awash with cash.  In fact, on this measure there was a modest deficit (0.2 per cent of GDP) last year.  This year’s Budget projected the deficit to widen a bit further in 2019/20.   In itself, that is nothing to be alarmed about, but it is a rather different situation than we were in in, say, 1999 or the period from 2005 to 2007.

One can mount an argument –  which I’m sympathetic to –  that this balance probably should run in modest deficit in normal times, at least while we continue with our bipartisan immigration policy insanity, that generates such rates of population growth.  With a strongly population population, you would expect cash outflows associated with capital expenditure to be quite high, without jeopardising fiscal health.  Modest residual cash deficits will be consistent over time with modest levels of public debt as a share of GDP.  Some support that, although I’m more persuaded by the case for something more like what we have now –  general government net financial liabilities of basically zero per cent of GDP (our governments try to hide this by using net debt measures that exclude the big pool of financial assets managed by the New Zealand Superannuation Fund).

I remain somewhat ambivalent at best about the case for larger deficits and/or higher government spending.  Of course, were I a died-in-the-wool Labour (or Greens) voter I might wonder why my left-wing government was really only spending about as much (per cent of GDP) as the previous National government.  But setting that to one side, the terms of trade have been high and we can’t count on them staying up indefinitely.  I’m sceptical that the unemployment rate is yet at or below the NAIRU, but if a recession were to hit in the next few years, it would mean quite a loss of revenue at least temporarily.  And the evidence that governments are spending wisely, at the margin, on either capital or current proposals is already pretty slim.  I can see a case for increased health spending, for example, but wasted spending such as fees-free for tertiary education, doing nothing about the NZS age of eligibility (or years residence required to receive it), or the PGF don’t convince me that there is any pressing case for materially higher spending in total, as distinct from a more rigorous reprioritisation.  Waste is waste.

And on the revenue side, the tax rates facing businesses (especially foreign investors) looking to invest in New Zealand are among the highest in the OECD.

Of course, the limits of conventional monetary policy are approaching. I’m not persuaded by, on the one hand, some local banks suggesting there is no point taking the OCR below about 0.25 per cent – I reckon there is a full percentage point usefully on offer beyond that  – or, on the other hand by international reports from central banks (including from the BIS/CGFS this week) sounding complacent about (eg) asset purchases can do, but there is action central banks and governments can take to give themselves more monetary policy leeway, making the effective lower bound on nominal interest rates materially less constraining.  It is a mystery to me why they show no sign of taking that option seriously.

On the fiscal front, I am somewhat attracted to the notion of a temporary reduction in GST as a stabilising instrument in a recession. The Herald’s Brian Fallow has recently been championing this idea, and it was argued for here a decade or more ago as a potential tool by prominent UK/Dutch economist Willem Buiter.   The UK actually did it in the last recession.   GST cuts can be implemented pretty quickly, and directly affect both the absolute price of consumption now, and the relative price (making consumption more attractive now relative to the future).  It isn’t a foolproof instrument –  they don’t exist –  but I was a little surprised to learn that Grant Robertson appeared not to regard it as an option worth his officials exploring.  I guess IRD would hate the idea, but that isn’t good grounds to ignore it as a potential fiscal option.

Economists and “populism”

My son is doing the Scholarship history exam this year and the topic is something like “populism in history”.  It got me interested and I’ve been reading various books and talking the issue over with my son trying to get straight in my own mind just what “populism” actually is.

It seems like one of those elusive terms where each user means something subtly different, usually –  at least when it is quasi-academic usages –  things/beliefs/actions the author themselves disagrees with, often almost viscerally.  I’m still left unclear that it means anything much different than “things/views which are popular with a significant share of the population, perhaps even a majority, but where those views cut across or defy those held by the contemporary elites of the society in question”.   Since there is no particular reason to suppose that contemporary “elite” opinion is any better or closer to being right, to the truth,  than anyone else –  especially where competing values are at stake – any use of the term derisively seems to mostly tell you more about the user than about the merits (or otherwise) of the particular cause/movement at that moment bearing the label populist.     Is there any real difference between, say, Brexit and, say, the climate strikers, but one often bears the label “populist” and the other typically doesn’t –  even though the latter often seem considerable more fevered, even messianic (“the end of the world is nigh”) than the former?

What prompted all that was the latest survey from the IGM panel of European economists which turned up in my in-box the other day.   I find these surveys interesting, but the reason depends a bit on the question.  Sometimes the answers genuinely tell you something about the balance of the literature and expert opinion on some relatively technical aspects of economics.  At other times, the answers tell you more about the political preferences and inclinations of the (European) elite economics profession than anything else.   The latest survey was about populism, undefined of course.

Here was the first question.

IGM 1

As a group they seem pretty confident of that answer.  I’m a bit sceptical that one can be quite that confident (hardly anyone was even uncertain), but that question wasn’t the one I was mainly interested in.

Here is the second question.

IGM 2.png

Taking the right-hand panel (where answers are weighted by the relevant experts’ confidence in their answer), 62 per cent of this expert group believe that more government spending (or more tax and spending in combination) would be likely to “limit the rise of populism in Europe”.  Only 5 per cent of respondents disagree.

And here is the third question

IGM 3

A similar proportion believe such fiscal measures should actually be taken.   This time, a larger proportion (15 per cent) disagree, but (a) no one disagrees strongly, and (b) the net balance favouring more such measures is still huge: 65 per cent in favour, 15 per cent against.

I found these results pretty extraordinary.   They are frustrating in a way because one can’t quiz the respondents on why they think government spending/tax can make such a difference, but perhaps they reflect that old line that the solution you propose is often influenced by the tool you happen to have, regardless of whether the tool and the problem are well aligned at all.    Economists tend to think primarily in terms of economic instruments  (tax/spending) and perhaps to economic diagnoses.  I suspect the results also tell you something about just how centre-left oriented (a big place for smart government and clever interventions) economists as a group (whether in government or academe) have become.

Because it is not as if Europe doesn’t already have quite a lot of government spending.   Here is the OECD measure of general government outlays as a share of GDP (in the Irish case, it is as a share of modified GNI –  a measure the Irish authorities use to adjust for the international corporate tax distortions to reported Irish GDP).

gen govt 2018.png

There are a few small European countries down the left-hand end of the chart but every single one of the top 22 government spending OECD countries are European, and not one of the non-European countries has government spending in excess of 40 per cent of GDP.   Where do people worry about European “populism”?  Well, one reads stories about France (Le Pen), Italy, Austria, Germany, Hungary, Poland and so on.  A few years ago the concern was Geert Wilders in the Netherlands.  And, of course, there is Brexit.  Every single one of those countries is in that top-22 group of really rather large spenders.

Perhaps those big-spending Europeans are, in many cases, spending a bit less (share of GDP) than they were 25 years ago  but it is hardly a climate where government spending is at minimalist-government levels (even Korea is now over 30 per cent of GDP).  And yet these expert economists want even more taxes and spending?  Perhaps doing so wouldn’t dash longer-term growth and productivity prospects –  some of the countries with the highest average labour productivity are also among the group of largest spenders – but when your starting point is the highest rates of government spending anywhere, it is hard to believe that more spending, more tax, could be more than a very short-term palliative, buying off the symptoms of discontents for a few months or years with more bread and circuses, without actually dealing with the root causes (whatever they are) behind the various phenomena the economists had in mind when they use that “populist” label.  Brexit sentiment will dissipate because a UK government chooses to spend more like a Continental?  Seems improbable.  The popular support for Viktor Orban will dissipate if Hungarian governments increase government spending from 10th highest in the OECD to, say, 5th?  Again, it doesn’t seem to get to grips with what bothers voters, or Orban. (Or, outside Europe, Trump as a phenomenon of insufficient government spending? Really?)

In fairness, I guess the questions don’t invite the respondents to offer a menu of possible responses.  Perhaps many of them think things other than more government spending are equally, or more, important.  But the overwhelming support for more government spending/tax gives a pretty strong hint that they think simply spending more money, perhaps more smartly, is an important part of responding to those concerns they so much dislike.  My own suspicion is that is more a case of “physician heal thyself” –  that today’s “elites”, with no particular claim to legitimacy (can’t point to God, heredity, sustained military virtue or anything more traditional), might look in the mirror and reflect on themselves, their values, aspirations and behaviours.  Perhaps they lay claim to having “technical expertise”, but it doesn’t (probably shouldn’t, other than as advisory input) count for much –  even if sound –  if conflicting values are at stake.   Do today’s establishment leaders invite trust and confidence?  It doesn’t look that way to me (in New Zealand either) and so it seems unlike that simply tossing more money at the situation is anything like a big part of “the answer”.

But Europe’s top economists, rightly or wrongly, see things differently.

Policy costings office: a perspective from Australia

Over the years I’ve written a fair bit here about the idea of some sort of independent fiscal analysis body (most recent post here, with links to earlier ones).   There are ever-increasing numbers of such agencies around the world, partly because the EU says each of its member countries has to have one.  As I’ve argued here, I think there is a reasonable case for some sort of such body here – small and focused on all macro policy rather than just fiscal policy – but I’ve become increasingly sceptical of the sort of direction the current government has chosen to take.   They seem to be looking at something that serves mostly as free research for MPs costing policies, perhaps most closely resembling the Australian Parliamentary Budget Office set up a couple of election cycles ago.

The Treasury yesterday held an excellent guest lecture on the issue, with the visiting speaker being no less than Jenny Wilkinson, the Australian Parliamentary Budget Officer (CEO of the office) herself.  She spoke very well, answered lots of questions, and certainly left me (and I assume others) with a much better understanding of how the Australian system works.  Of course, as the incumbent CEO speaking in an open forum in another country, one doesn’t expect her to highlight any weaknesses or pitfalls but it was very valuable nonetheless.

Wilkinson included in her presentation this chart, used in our own government’s consultation document, categorising the responsibilities of the various independent fiscal offices around the advanced economies.

fisc council chart

Not many such agencies do policy costings for political parties.  Of those that do, all are in much larger economies than New Zealand.  And the US CBO is largely an adviser to Congressional committees, not costing proposals for candidates for office.

Small countries don’t have this sort of state-funded function.  One reason might be that there really aren’t many economies of scale.  Policy is probably no more complex in Italy or Australia (right hand of the chart) than in Iceland or Slovenia (left hand end) but there just aren’t so many resources to throw around in smaller countries.  Wilkinson told us that her office has about 45 staff, scaling up to around 55 around elections, and as if to confirm my prior that there aren’t many economies of scale she told us that Victoria’s own state PBO doesn’t have many fewer staff than her federal version.  Given that states and the Commonwealth between them do all the stuff our central government does –  and such an office has to be able to handle issues in any area of policy more or less on demand – it is hard to see how a high quality operation (and the Australian office appears to be one) could be run in New Zealand with fewer than 40 staff.  By contrast, the Parliamentary Commissioner for the Environment reports that it has 20 staff, and the Productivity Commission has three commissioners and about 15 staff.

As Wilkinson noted, every country’s fiscal institution has its own backstory.  One of the reasons I’ve been sceptical of a New Zealand costings agency is that, having followed New Zealand politics closely for 40+ years, it isn’t obvious when, if ever, a modern New Zealand election has turned on specific policy costings.  Wilkinson told us that the origins of the PBO relate to the period after the 2010 Australian election when both the Coalition and Labor were vying for the support of independents to form a government, and one of the independents insisted that both parties submit their programmes to the Commonwealth Treasury and the Department of Finance for costing.  Under the (rather loose) Australia rules, the (Labor) government’s policies had already been costed by the bureaucrats, but when the Coalition programmes were evaluated the officials reckoned there was a significant fiscal hole.    She went on to claim that in almost every election back to 1987 there had been significant debate about costings (of opposition parties) and that some elections “may” have turned on that (she didn’t given details of which, or how).  In the last two elections she claimed that use of the PBO has meant that costings are just no longer an election issue.

As she spoke there was discernible titter around the room, clearly remembering the “fiscal hole” debate before our own last election.  But I think it is wrong to think the Australian experience is relevant to that episode, which wasn’t about the cost of any specific programmes (which is what PBO evaluates for parties) but was mostly about the overall fiscal parameters and just how tight they’d prove.  As far I could tell, nothing in what a policy costing body was doing would have changed that debate (which resulted more from the current New Zealand focus on debt targets, of the sort they don’t really seem to have in Australia).

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

In many respects, the PBO seems to operate as a (in NZ parlance) “shadow Treasury”.  The PBO is apparently required to use the same economic parameters etc as the government is using (through the Commonwealth Treasury and the Department of Finance), so there is no independent view on how the economy or programmes might work.  What the PBO is doing is, in effect, telling parties how the Commonwealth bureaucrats would score/cost their policies if they found themselves in office after the election. I guess that has some uses, but it is hardly independent advice or an alternative perspective –  it not only cements the dominance of existing parties in Parliament (since only existing MPs can use it) but cements the dominance of the paradigms and models of the existing public service departments.

Related to this, and in answer to a question from me, Wilkinson observed that what the PBO can best do is cost programmes that represents small deviations from the status quo (they have good tools to estimate direct and immediate fiscal costs/gains) while wider economic second round effects, and the associated fiscal impacts, are likely to be small.  But, and using her own (deliberately extreme) example, if some party were to campaign on getting rid of the welfare state, her office could do the direct fiscal costs, but could offer little or nothing on the wider economic (or social) effects of such a policy, including the possibility that it might have large long-term indirect fiscal implications.    They will only offer qualitative statements about those wider effects.  Which left me thinking that the the PBO probably does very well on things that don’t matter that much, and can’t offer much on the bigger issues that elections probably should really be about  (whether about the welfare state, climate change, productivity or whatever).     We don’t devote 45+ FTEs to a specialised institution to help parties develop their welfare or productivity policies.   And while fiscal costs will always matter, arguably reasonably credible aggregate fiscal rules (commitments to surpluses or low debt) provide most of the effective discipline that is needed (at least, that would be my interpretation of the last 25 years of New Zealand).  Plans change in office, as do economic and political circumstances.

Another thing not to like about the PBO model is that it operates in secret.  Costings are not published by the PBO before an election (although the PBO will correct things if a party mischaracterises material PBO has provided them), whereas (in NZ) the Official Information Act would generally, and appropriately, apply to work and costings undertaken by executive government agencies at public expense.

From a New Zealand perspective, I’m also not persuaded how important detailed programme costings are.  Australia has an electoral system that usually produces a majority (in the lower house) government from a single party/bloc.  We don’t.  At least while we have a party (or parties) who can go either way after an election, any election manifesto is really little more than an opening bid.  Sure, there is more onus on the big parties to have a decent set of numbers, but (say in 2017) both knew that whatever they took into the election would, in government, depends on what price they had to pay to secure New Zealand First support (and, in Labour’s case, on how large the Green share of the centre-left vote was).  Perhaps you might spend a lot on detailed costings (of the PBO sort) of the service was free to the user, but what real value is there to the public in that service.  Especially when, for example, New Zealand First has never been a party unduly focused on providing lots of detail in its manifestoes (somewhat rationally so, since what they can actually get will depend on vote share and coalition partner –  they don’t expect to lead a government themselves).

I could go on, but that is probably enough for now.  As I say, it was a very useful presentation (I hope Treasury makes her slides available) from a technocrat’s technocrat.  I’m left sceptical on two main counts:

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

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

A policy costing unit

The Government’s plans for an independent policy costings unit were back in the news this week, with the announcement that Cabinet had agreed that the proposed new body should enjoy the exalted status of an Officer of Parliament  (a status it would share with the Auditor-General and the Ombudsman –  where the case is clear-cut –  and the Parliamentary Commissioner for the Environment –  where any case seems more grounded in feel-goodism).

Back when I was still a bureaucrat, I favoured the establishment of a small Fiscal Council (along Irish or Swedish lines) and thought (and think) that the mandate of such a body could usefully be widened to monitoring and reviewing macro policy more generally.   But what the government appears now to have in mind is primarily a policy costings unit, as championed for several years by the Green Party.   I’ve written about the idea on several occasions and have become increasingly sceptical.

This post in early 2016 dates from when the Greens first openly called for such a body.  And there have been various others since, including here, here, and here.    There was a Treasury-led consultation process last year (the document is here) which I made a short submission to (submissions are here).

Rereading my submission now, I find my views largely unchanged, with the exception that I am now much more sceptical than I was then of the case for making any new entity an Officer of Parliament –  the more so if, as now seems envisaged, the entity serves primarily as a costings unit for political parties (thus, essentially playing the sort of role economic consulting firms do).  If such a body is to be established, an independent Crown entity model might have been more appropriate, better protecting the relative status of the two absolutely vital Officers of Parliament (Auditor-General and Ombudsman), which act as crucial checks on the Executive.     It would be odd to have a policy costings unit as an Officer of Parliament while the –  much more vital –  Electoral Commission is only an independent Crown entity.

My summary observation was as follows:

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

There is an important distinction here.  Private entities (parties and their supporters) have every incentive to invest in convincing voters of their case/ideology/competence/costings. By contrast, no one has a strong private incentive to do the sort of analysis and commentary –  often longer-term in nature –  that a traditional (narrow) Fiscal Council does.  That is why a reasonable case can be made for a public institution of this sort (preferably macro policy focused –  since the same absence of incentives applies to monetary and financial regulatory policy).

There has been plenty of talk this week of how 29 of 36 OECD countries have some sort of independent fiscal institution.  This was the chart from the consultation document.

fisc council chart

But only a small number of those do policy costings, and none of the countries where the independent fiscal body does policy costings are themselves small.   I’ve not seen Treasury or the government engage with that point –  resources are more scarce in small countries, especially perhaps in relative poorer ones.   And although the US Congressional Budget Office is widely cited in such debates (and is pretty well-regarded) it doesn’t do policy costings for political parties or candidates as part of the election process, but rather produces independent expert analysis on proposals actually before Congress (the sort of role our less-politicised public service is supposed to play).   A policy costings unit for political parties, for use heading into an election, and paid for by taxpayers, remains quite unusual in OECD countries.

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

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

In sum, I’ve become quite strongly opposed to the notion of a costings unit.  Mostly it probably won’t do much harm – I thought some of the comments from Simon Bridges were a bit overblown –  and relative to other stuff governments waste money on to buy off their bases or to win over small support parties (Super Gold Card anyone) it is probably small in the scheme of things.  It won’t improve policymaking, it won’t change the character of elections, but it might –  at the margin –  create a few more jobs for economists.

.

Fiscal policy

Bernard Hickey, of Newsroom, had a passionate piece out the other day lamenting the fiscal conservatism of the Prime Minister and the Minister of Finance, and calling for a  large increase in New Zealand government net indebtedness (albeit over “the next decade or two”) under the ambit of something he calls the “Re-Engineering New Zealand” project.

It was a curious article because it seemed to throw together a variety of different things that don’t necessarily belong together: the cyclical on the one hand (potential limits of monetary policy in the next recession, at least on current technologies) and long-term structural issues (climate change, skills, productivity, infrastructure, housing etc) on the other.

On the cyclical side, Hickey’s case isn’t helped by the claim that monetary policy “did little to solve…the short term…problems facing the economy”, which simply has to be not true.    Unemployment rates, which shot up sharply during the last recession are as low as, or lower than, they were just prior to that recession in most advanced countries (not too far away even in New Zealand).  I wouldn’t recommend the alternative –  places like Spain, Greece, and Italy that had no nation-specific monetary policy open to them.    Central banks were often too slow to ease, and too often looking towards the next tightening (see NZ with two lots of pre-emptive, soon-reversed, tightenings) but monetary policy worked when it was embraced and given a chance.

But, of course, in many of those countries the limits of conventional monetary policy were reached, which slowed the recovery in some countries.  In New Zealand and Australia the limits weren’t reached, but as we head towards the next severe downturn –  whenever it is –  almost every advanced country now needs to be planning on the likelihood of monetary policy reaching its limits (on current laws and technologies).    There are monetary ways through that obstacle –  which I’ve been drawing attention to here for years – although for reasons not entirely clear central banks globally have been reluctant to embrace those sorts of options.   If central banks won’t do anything to free-up monetary policy leeway, then it seems quite likely to me that in the next recession there will be significant discretionary fiscal stimulus –  if politicians are not totally indifferent to the plight of the unemployed.

Since we are not now in a recession in New Zealand (well, we may be, but not a single forecaster is suggesting we yet are), and since conventional monetary policy has probably 175 basis points of leeway to go –  and the real exchange rate is still so high – now isn’t the time for rushing to temporary counter-cyclical fiscal stimulus.  Do it now – on the promise of being temporary –  and you might well find that when it was actually needed the political pressure was already mounting to tighten up again, to unwind the stimulus, just when it might do some good.   It was, after all, the Governor the other day who was openly worrying about additional government spending now either crowding out private sector activity, or being unable to be implemented because private sector activity crowded it out.

I’m sure Hickey is quite sincere about his cyclical point –  and the next serious downturn globally is going to be very tough to get through for many countries – but his real argument seems to be a structural one.  He is a bigger-government man, and one who favours much larger government debt (the two are, of course, separate issues).  He wants governments that do more, and seems pretty confident that he knows what they should spend our money on (and is quite dismissive of anyone complaining about potentially injudicious use of public money).  Interest rates are low on his telling primarily because of quantitative easing –  a strange story to tell in a country where there has been no quantitative easing and yet where five year real government bond rates are now zero or slightly negative –  and thus represent a windfall opportunity for borrowers.

Here is his list of what needs doing

Productivity, which is the only thing that matters in the long run, is slowing globally and has been stagnant here for more than five years. Housing affordability is collapsing in most developed countries because of rising house prices, restrictions on new developments and, tragically, falling interest rates.

Real climate change action is scarce because it requires massive public investment in public transport and new medium density housing close to city centres. Our skills, economies and cities need re-engineering massively if we’re going to restart productivity, make housing affordable for the young and poor and achieve net zero emissions by 2050.

It is a global problem, but even more acute here because we have among the worst housing affordability, productivity and climate change emissions figures in the world.

Massive investment in transport, health and housing infrastructure, education, workplace skills, business technology and research and development is required everywhere, but the central and local governments who are the only ones with the authority and balance sheets to do it are frozen in the headlights of politics and 30 years of austerity and smaller Government dogma.

And yet one was left wondering whether there might not be at least some connection between weak productivity growth and low interest rates –  firms just don’t see the profitable opportunities and so aren’t looking to invest heavily.   And if –  as is so –  regulatory restrictions limit land use and housebuilding why not get on and get government out of the way: remove or greatly ease up those restrictions (as some in the Labour Party suggested they might) and let the private sector get on with building the sorts of houses people would prefer when they are free to choose (rather than the sort some experts might prefer them to adopt).

Quite how this proposed large scale government investment was going to solve the productivity problems wasn’t clear –  when private firms aren’t investing it has the feel of the old line about “fools rush in where angels fear to tread”.  We’ve been that before in New Zealand –  not that long ago with the Think Big programme.  And –  all else equal-  big government investment programmes will push real interest rates and the real exchange rate further against the prospects of large outward-oriented private sector investment.  Perhaps it might be helpful to see some robust empirical evidence or argumentation about the past ability to New Zealand governments to do these sorts of projects wisely and well, in ways that make us consistently better off.

And I’m always uneasy when people suggest that the relevant cost of capital is the borrowing rate on (even the longest-term) government debt.  It isn’t.    The cost of equity has to be factored in, and just because the government doesn’t have a share price doesn’t the issue less relevant.  When the government undertakes projects it is using your money and mine to do so –  either actual (already taken) or potential (the power to increase taxes whenever it likes).  No commercial operation is going to be undertaking projects that seek a zero or one per cent real rate of return –  even if they can raise at that price –  and the standard Treasury advice, which I endorse, is that governments should not do so either.  Given that the incentives on the governments to get things right are relatively weak, and the disciplines when they fail are weaker still, I’d argue that the required rate of return on government projects should be higher than those on a comparable private project.  The relevant hurdle rates are lower than they were, but the cost of capital is still by no means trivial.

Hickey makes quite a play of a claim that the entire New Zealand political and official class is still living under the shadow of the potential double credit-rating downgrade in 1991.  I don’t fully buy that story.  It isn’t that long –  how soon we forget –  since people used to talk a lot about the desirability of the government running a low level of debt as some of counter-balance to the large negative net international investment position (ours still among the more negative in the advanced world), in a country with a fairly modest rate of national savings.  Sure, there was a credit-rating dimension to that story, but it wasn’t the whole story by any means.  Perhaps one can run some sort of over-savings story in places like the Netherlands or Germany (or Singapore) –  and some might even find the argument for more government debt in those places persuasive –  but this is New Zealand we are talking about.   Savings rate haven’t suddenly gone stratospheric, and –  low as our interest rates are now in absolute terms –  the implied long-term forward rates are still higher than those anywhere else in the advanced world (while, as Hickey notes, our productivity growth record is terrible).  And don’t forget the argument that if you run as pay-as-you-go age pension system –  something most New Zealanders support –  there is a good argument for also aiming to keep net government debt lower than one might find in other countries with different state-sponsored retirement income systems.

None of this is to suggest that the world would come to end if, instead of the current level of net general government financial liabilities (about zero on the OECD measure, and a little above the median advanced country rated AAA by Moody’s) we had net public 20 percentage points of GDP higher. It wouldn’t.  All else equal, interest rates would be a little higher.  But, equally, we can only say that we would be better off by doing so with some really hard-headed realistic analysis of the sorts of specific projects people would propose to use the debt for.  I’m sure there would be beneficial projects –  as there are daft and costly ones that happen now –  but across the gamut it is as well to be very cautious.  We’ve been this way before.

(As an alternative we could look at getting out of the way of private investment: freeing-up urban land use, foreign investment law, resource management act constraints, prohibitions on GE, prohibitions on offshore oil and gas drilling, and lowering our company tax rate which –  from a foreign investor perspective – is among the highest in the advanced world.   And here I’m not even going to my story on immigration: since short-term demand effects of immigration outweigh the short-term supply effects even I would be wary of large cuts to immigration right now –  helpful as they would be in the longer–term.)

Having said all that, I come back to what has puzzled me for at least the last couple of years, and where perhaps my story overlaps to a much greater extent with Hickey’s. It is about how small a share of GDP the current government is spending, and is planning to spend.  Here is core Crown operating expenses as a share of GDP, using Budget numbers out to 2023.

CC 1

Spending in every year under this government (or on its fiscal plans) would be smaller as a share of GDP than the average under the previous government –  mostly smaller than the average under the previous Labour government.  By the year to June 2023, spending as a share of GDP would be lower than all but the last two years of the previous government.  And yet in the run-up to the last election we kept hearing talk of critical underfunding in all sorts of areas of government.   I guess the swing voters who just thought it was time for change weren’t looking for lots more government spending, but it is hard to believe the base in Labour and the Greens (and true believers among the journalists) weren’t looking for material increases.

In a way, what staggers me more is this chart.   All that talk about underspending was focused on health and education.  But here is core Crown health and education spending, only to 2019/20, because budget operating allowances haven’t yet been allocated for later years.   The first version goes all the way back to when Treasury’s data start (1972)

cc2.png

and this version just for this century

cc3.png

Education spending this year was last this low in 1988.  Health spending has increased a little, but the share of GDP spent this year is lower than in all but the last two years of the previous National government.  And this in a sector where the ageing population –  and, arguably, advances in technology – could probably make a case for a rising share of goverment spending in GDP.  At least if you were a party making the sorts of arguments Labour was making at the last election.

There is something about their fiscal choices that –  based on their professed values and rhetoric –  doesn’t make a lot of sense to me, a mere centre-right economist.

Of course, one reason why government spending no longer needs to be quite as high is that interest rates have come down.    Finance costs (mostly interest) were almost 2 per cent of GDP in 2000 and were still about 1.5 per cent in the middle of this decade, but are projected to fall to only 0.9 per cent of GDP by 2023.

On the other hand, there is the fiscal burden of New Zealand Superannuation, the age of eligibility not now having been changed for many years, even as more of the baby boomers got to 65 and the life expectancies more generally increased.   In 2008 –  just as the last recession began NZS cost 3.9 per cent of GDP, in 2015 4.75 per cent, and in 2023 the cost is projected to be 5.04 per cent.

Strip out both finance costs and NZS costs and all the rest of the stuff governments do, operating spending as a share of GDP in 2023 is projected to be 2 whole percentage points of GDP less than it was when Labour ended its previous term in government (year to June 2008), and about the same as in 2015 and 2016.  It is a curious achievement for a party that talked so much about underfunding, generational change etc etc.   Perhaps it would be one thing if it were genuinely the result of winnowing out wasteful programmes etc, but there has been little real sign of that.   Perhaps –  whatever your view on the extent to which health should be funded by the state –  it is one reason why our national statistics agency, something close to a public good, appears so badly underfunded.

So sceptical as I am of the Crown taking on another $150 billion of debt –  as Hickey calls for – with net general government liabilities at zero, real interest rates basically zero, and the budget in surplus throughout the forecast period, one could make a reasonable case for a slightly higher level of government spending (or lower taxes).  A small deficit –  consistent with a small primary surplus –  is consistent with keeping net debt at around its current level (share of GDP) in normal times, while providing plenty of leeway to handle the next serious recession (some mix, probably, of automatic stabilisers and discretionary stimulus).

 

Keep the focus on monetary policy

As we approach the OCR decision this afternoon and as some market economists are now talking about the possibility that the OCR could be below 1 per cent before too long, there has been more and more talk about whether fiscal policy should be brought to bear, to stimulate demand and (in some sense) assist monetary policy in its macroeconomic stabilisation role.  Just this morning there was an editorial in the Herald, a column on Stuff, and a comment from Bernard Hickey at Newsroom.   Some of the discussion is about what should be done now, and the rest is about contingency planning –  what happens when the next serious recession happens if the OCR is still constrained.

Much of the discussion seems to stem from people on the left who aren’t that happy with the government’s fiscal policy.  As someone not on the left, it has always seemed strange to me that Labour and the Greens pledged themselves to keep much the same size of government (and much the same debt) as National –  especially when, at the same time, you were running round the country talking about severe underspending on this, that, and the other thing.   I’m also of the view that structural budget surpluses are a bad thing, in principle, when net government debt is already acceptably low (on the OECD measure of net general government financial liabilities, New Zealand is now about 0 per cent of GDP, which seems like a nice round number – an anchor – to target).  There is an argument there –  whether from left or right – for some fiscal adjustment (taxes or spending), which might have the effect of a bit more of a boost to demand.

But those arguments really have almost nothing to do with the situation facing monetary policy.    They are fiscal and political arguments that should be made, and scrutinised, on their own merits: the arguments would be as good (or not) if the OCR was still 2.5 per cent as they are now, and you can be pretty sure that people on the left would have been making them then anyway?   The Governor of the Reserve Bank, for example, (a pretty staunch representative of the centre left) seemed keen on more infrastructure spending a year ago.  I guess he is a voter to so is entitled to his opinion, but it really doesn’t have much to do with monetary policy.

The general arguments that led countries around the world to adopt monetary policy more exclusively as the primary stabilisation policy tool have not changed.  Monetary policy can be adjusted quickly (to ease or tighten), operates pervasively (gets in all the cracks, without making specific distributional calls), is transparent, and so on.  If we had a fixed exchange rate –  as individual euro area countries largely do –  it would be a bit different (individual countries don’t have the monetary policy option any longer) but we have a floating exchange rate system which, mostly, works well for New Zealand.

To the extent that there is a monetary policy connection to the current calls for fiscal policy to be used (or the ground prepared to use it), it has to do with the looming floor on nominal interest rates.  International experience suggests that, on current laws and technologies, short-term nominal interest rates can’t be reduced below about -0.75 per cent without becoming ineffective (as more and more people shifted from other financial instruments into physical cash).  We don’t know quite where that floor is, as no central banks has been willing to take the risk of going further, but there is a fair degree of consensus (and it has long been my view too).

But that still means that in a New Zealand context there is 200 basis points of OCR cuts that could be used if required.    That isn’t enough for a typical New Zealand recession (rates have often been cut by 500bps), but is still quite a degree of leeway if what we are entering were to turn out to be a fairly mild slowdown in New Zealand.  It could (I’m not hedging here).   That capacity should be used energetically, not timorously.   So the issue –  monetary policy needing “mates” deployed now –  is not immediate.  It is about preparing the ground.

And there, the best macro stabilisation option remains the one the Reserve Bank –  and other central banks –  have done nothing active about, but really should.  Authorities (and it probably needs political support to do so) should be moving to make the effective floor on short-term nominal interest rates much less binding than it is.   It binds because the practice of central banks –  perhaps backed by law – has been to sell banknotes, in unlimited quantities, at par.   That practice can be changed.  It could be as simple as putting an (adjustable) cap on the volume of notes in circulation (quite a bit above the current level, but not at a level that would be transformative) and then, say, auctioning the right to buy additional tranches of bank notes from the Reserve Bank.  In normal times –  with the OCR at, say, current levels – the auction price would be at par.  If the OCR were cut to, say, -3 per cent (and be expected to stay there for some time) the auction price would move well above par, acting as a disincentive on people to attempt to make the switch from deposits to cash.  There is a variety of other ideas in the literature, as well (no doubt) as much less efficient regulatory interventions that could prevent really large-scale conversions happening.

Unusual as such options may sound, this is where the authorities –  here and abroad –  should really be concentrating their energies: giving monetary policy more leeway, in ways that will buttress market confidence that monetary policy will do the job when it is required.  At present, by contrast, when market participants contemplate a severe downturn they look into an abyss wondering what, if anything, will eventually be done, by whom, and for how long.  In a serious downturn that will just worsen the problem, driving down inflation expectations as economies slow (note that in the RB survey out yesterday, medium-term inflation expectations fell away quite noticeably –  and this while we still have conventional monetary policy to use).   And if there are objections that all this is somehow “unnatural”, bear in mind that had the inflation target been set at zero (rather than 2 per cent), as was the normal average inflation rate for centuries, we’d already have run into these practical limits, and been unable to get real interest rates even as low as they are now.

So there is plenty to be done with monetary policy, and the work programme to do it should be something open and active, drawing in the Bank, the Treasury, the Minister, and other interested parties.  The time to do preparation is now, not in the middle of a surprisingly severe downturn.

I have a few other reasons –  than “it shouldn’t be necessary” –  to be wary of calls for large scale fiscal stimulus now.  Just briefly:

  • there would be little agreement on what should be done –  these are inherently intensely political issues.  There is lots of talk of infrastructure gaps etc, but no agreement on what those are, let alone recognition of the twin facts that (a) the best projects, with the highest economic returns, have probably already been done, and (b) New Zealand government project evaluation is not such as to inspire confidence that new projects would add economic value.    And suppose there were attractive roading projects –  perhaps central Wellington and the second Mt Vic tunnel? – we know the attitude of the government’s support partner to new major roads.  Not a thing.  So what should we then spend on?  Uneconomic new railway lines?  Or what?  Perhaps some just favour more consumption or transfers spending – which might be fine if you are a lefty who believes in permanently bigger government, but if you aren’t the issue has to be addressed of how programmes once put in place are unwound later.
  • I don’t rule out the possible case for discretionary fiscal stimulus in the event of a new severe recession (especially if the authorities refuse to address the monetary policy issues above) but my prediction is that (in many ways fortunately) the political appetite for large deficits would not last very long, and that therefore we should preserve the option for when it might really be needed.  It isn’t now.   I take much of the rest of the world after 2008 as illustrations of my point: in late 2008 all the talk was of fiscal stimulus, but within two or three years all the political pressure was to pull deficits back again.  I don’t see why New Zealand would be any different (and that is to our credit, since low and stable debt has become established as a desirable baseline).
  • And thirdly, a point we don’t often hear from champions of more fiscal stimulus, relying more on fiscal policy and less on monetary policy to support economic activity and demand will, all else equal, put more upward pressure on the real exchange rate, further unbalancing an already severely-unbalanced economy (see yesterday’s long-term chart of the real exchange rate).  In a severe recession –  when the NZD tends to plummet –  that isn’t a particular problem, but it should be a worry now (when the TWI is still a bit higher than it was a year ago, let alone thinking about the longer-term imbalances.

Perhaps the Governor and the (experts-excluded) Monetary Policy Committee will proactively address some of these issues this afternoon. I do hope so. If not, I hope some journalists take the opportunity to push the Governor on why he (and the Minister and Treasury) aren’t actively pursuing work to make the lower bound on nominal interest rates much less binding, in turn instilling confidence in the capacity of New Zealand policy to cope conventionally with a severe downturn if/when it happens.

Oh, and I do hope some journalists might also ask the Governor this afternoon about the justification for ruling out from consideration for appointment to the Monetary Policy Committee

“any individuals who are engaged, or who are likely to engage in future, in active research on monetary policy or macroeconomics”

The Governor is, after all, a Board member and was one of the three person interview panel.    What was it that he –  or the Board generally –  were afraid of?    Expertise?  An independent cast of mind?  Of course, it isn’t only active researchers who have such qualities –  indeed, not all of them do either –  but it simply seems weird, and without precedent in serious central banks elsewhere in the advanced world, to simply disqualify from consideration for the (part-time) MPC anyone with the sort of background that many other central banks (Australia, the UK, the euro area, Sweden, the United States, and so on) have found useful, as one part of a diverse committee.

Overselling past reforms

Today is, apparently, the 30th anniversary of the Public Finance Act.    There is a conference being held this weekend at Victoria University to mark the occasion, with all manner of speakers over three days, including various famous figures from the reform era including Roger Douglas, Ruth Richardson, Graham Scott, and David Caygill.

There is nothing particularly wrong with conferences of this sort –  although the ever-present question is how much taxpayers’ money gets spent, one way or another –  but much depends on the extent to which such conferences lean towards on the one hand the self-congratulatory and, on the other, the self-scrutinising and challenging.    There was a conference in Wellington a few years ago to mark the 25th anniversary of inflation targeting and the Reserve Bank Act, and although it leaned to the mutually self-congratulatory, a) it had speakers who seemed to offer greater rigour than this weekend’s conference programme suggests is likely, and (b) even partial sceptics occasionally got a word in.   Time will tell about this weekend’s conference, and I hope that at least the New Zealand academic and public sector speakers make their addresses available more widely.

I have no particular problem with the Public Finance Act, which now incorporates the provisions of the later Fiscal Responsibility Act.  But what consistently irks me is the way a handful of champions of the Act oversell it.   Most prominent among the oversellers in Professor Ian Ball of Victoria, who had a fairly senior role in financial management at The Treasury at the time the Public Finance Act and the Fiscal Responsibility Act were being passed.   And the real prompt for this post was an article he had in yesterday’s Dominion-Post.   Whatever else Professor Ball picked up, or contributed, in his time at The Treasury, he seems to have missed the pretty elementary line, drummed into students from an early age, that correlation is not the same as causation.   And that isn’t the worst of what was on display in the article.

He begins

When New Zealand’s Public Finance Act was passed in 1989, it represented a set of changes that was both radical and untested. Partway through its implementation, in 1992, the Economist published an article describing the changes in a generally positive way, but withholding judgment and concluding: “Time will tell.”

With the act’s 30th anniversary on July 26,  it seems the right moment to consider what time has to say, and whether New Zealanders should, at last, break open the bubbly.

To jump to the end, he thinks we should be breaking out the bubbly.  But why?

Much of his case seems to rest on this

[Government] Net worth now stands at over $134b, equivalent to about 45 per cent of gross domestic product (GDP).

But he makes no effort at all –  not even hinting at more-developed arguments in fuller papers –  to demonstrate why we should conclude that the improvement in New Zealand’s fiscal position stems in whole, or even in large part, from these process-focused pieces of legislation (Public Finance Act and Fiscal Responsibility Act).  He also offers no particular reason to suppose the government net worth of 45 per cent of GDP is somehow optimal, or better than (for example) a number near zero, or even negative  (given that by far the Crown’s largest asset, its sovereign power to increase taxes is not included in these balance sheet calculations, and that the actual taxes supporting the net worth Professor Ball celebrates have material –  large in some cases –  deadweight costs, in an economy that has continued to badly underperform).

And while no one is going to disagree that a decent fiscal position (whatever that means) can be a “source of security” (Ball’s words), the evidence he adduces in support of his claim is less than convincing.

The comparison with other countries is striking – the governments of Australia, Canada, the United States and the United Kingdom all have significantly negative net worth, and in the case of the UK and US the negative net worth is roughly the size of their respective GDPs.

The principles of fiscal responsibility imported into the Public Finance Act from the Fiscal Responsibility Act see positive net worth as a “buffer” to economic and other shocks. So it has turned out.

While net worth declined for only four years after the financial crisis, in the four countries cited above government net worth remains, a decade later, on a downward track. A strong balance sheet apparently allows a much quicker recovery.

But, but, but…..Our recovery wasn’t “much quicker”, let along stronger, than those in Australia (which on some measures didn’t have a recession in the first place), Canada, or the US.  And whether one approves of those choices or not, the fact remains that unlike those countries we didn’t use discretionary stimulatory fiscal policy to respond to the last recession (I argue we didn’t need to because we could still cut interest rates).

Ball continues with his straw men

But has the history of running surpluses resulted in slower economic growth than in the comparable countries that have been incurring consistent deficits?

I’m not sure anyone would think there was such a relationship, but set that to one side.  What does Ball have to say?

Apparently not. The latest World Bank numbers (for 2017) show that the five countries have growth rates between 1.8 and 3.0 per cent, with New Zealand second at 2.8 per cent.

Can he be serious?  A senior professor, former senior official, really thinks one year’s GDP growth data, not even correcting for differences in population growth (hint: New Zealand’s has recently been extremely rapid) is some sort of support for his case about legislation focused on the medium to long term?

Perhaps instead he might consider the productivity record over 30 years?  Of his group of countries, ours has been the worst (to be clear, I’m not suggesting that has anything to do with the PFA, simply that one can’t seriously advance New Zealand “economic success” as support for the PFA).

He moves on to matters social.

Perhaps, then, the impressive fiscal and economic results have been at the expense of the social fabric? By no means are things perfect in New Zealand.

To which he responds

The Wellbeing Budget in May focuses on problems of child poverty and mental health, among many other issues that require government attention and resources. Yet these issues are still able to be addressed while budgeting to maintain a surplus.

Few of the (few) cheerleaders for this year’s Budget would claim it was any more than a start, but since the PFA was never supposed to constrain the size of government (it is mostly about process and transparency), of course it doesn’t stop governments spending more –  wisely and otherwise –  if they choose.

Ah, but we are “happy”

New Zealand stacks up very well, scoring near the top in a number of international rankings of social progress, living standards and even happiness (where we are eighth, ahead of the other four countries).

And yet –  and not because of the PFA –  the net flow of New Zealanders is still from here to other countries.

We then get into the folksy analogies

But do New Zealanders benefit from their government having a strong balance sheet?

It is very like having a strong personal balance sheet. There is a greater ability to absorb shocks or surprises without being forced into taking drastic remedial steps – you can fix the car without having to cut the food budget. This was demonstrated in the way the government bounced back, financially, from the financial crisis and the earthquakes.

As part of managing a shock, a strong balance sheet also enables easier access to emergency debt financing. Coupled with this is the benefit of being able to borrow more easily and more cheaply in normal times, if it is necessary or desirable to do so. This might be useful, for example, if there is a need to invest in infrastructure.

I like a folksy analogy as much as the next person, but you always need to be careful using them to ensure that the key elements of comparison are valid.   Here they mostly aren’t.  Positive accounting net worth means nothing about a sovereign’s access to credit, none of the comparator countries whose fiscal performance he laments have had any problem raising debt, New Zealand bond yields (for other reasons) have been consistently among the highest in the advanced world……and, unlike someone whose car breaks down, governments have the power to tax.  And did I note that there was nothing impressive about New Zealand’s recovery from the 2008/09 recession, and New Zealand’s productivity record this decade is even more dire than usual.

And then, without even really noticing, he rather undercuts his own case.

At the time the Public Finance Bill was going through Parliament, the auditor-general said the reforms “will give effect to the most fundamental changes to financial management practices seen in New Zealand’s history. These reforms are enormous, ambitious, and, in large part, unprecedented anywhere in the world”.

Thirty years on, the act has been amended  several times, but the most ambitious elements remain firmly in place. Notwithstanding the apparent success of these reforms, a number of key elements have been attempted by few, if any, other countries.

Reforms that, 30 years on, have not been followed by many, if any, other countries surely should be deemed to have failed an important test.  Other smart people have looked at those “key elements” and concluded that actually they weren’t so valuable or generally appropriate after all.  It was a bit like that with the Reserve Bank Act and inflation targeting: various countries did take some practices and inspiration from our model, but not a single one followed for long our model of putting all the power in the hands of a single Governor and building an accountability framework primarily around the ability to sack the Governor.  Eventually, even New Zealand changed those bits of law, and moved back towards the international mainstream.

Professor Ball ends this way

In October 2018, the Economist weighed in again, saying: “Only in one country, New Zealand, is public-sector accounting up to scratch. It updates its public-sector balance-sheet every month, allowing for a timely assessment of public-sector net worth.”

Perhaps, ahead of any further changes, this might be an opportunity to raise a glass to celebrate an ambitious and successful act.

I don’t update my personal balance sheet every month.   Superannuation funds I’m a trustee of don’t look at their balance sheets every month.   For what conceivable practical purpose do we have monthly estimates of the government’s financial net worth?  At best, financial net worth is some sort of constraint on governments, not the reason for being –  as in, say, corporate accounts.  I’m not necessarily opposed to having the data, but it looks a lot like an example of giving prominent place to what is measurable (on all sorts of assumptions) and not necessarily to what actually matters.   We don’t even need monthly house price data (although we have it) or monthly productivity data (we don’t, and probably shouldn’t) to highlight these egregious failures of New Zealand governments.  And monthly government net worth data –  or the rest of the panoply of features of the PFA –  has done nothing discernible to improve the actual quality of New Zealand government spending (or taxation).

As I’ve argued repeatedly here over the years, I think fiscal policy outcomes are something that successive waves of New Zealand politicians can take considerable credit for.   We had a bad scare in the mid 80s and early 90s and that clearly played a pretty formative part, both in choices political parties made in successive elections/budgets, and in the legislation (eg PFA/FRA) they’ve been willing to pass –  but my hypothesis is that there is a common explanation for both, rather than causation running from the (facilitative, transparent) legislation to the fiscal outcomes.

I tend to be relatively sceptical of net worth numbers (for governments) and the data often aren’t available for lots of countries for long runs of time.  But I’ve run this chart in an earlier post, looking at net general government (ie all layers of government) financial liabilities.

net debt OECD

Here I’d concentrate on the comparison between the blue line (New Zealand) and the yellow line (the median of small OECD countries). New Zealand’s performance doesn’t particularly stand out relative to those other small countries (or to Australia, which has lower net general government financial liabilities than New Zealand), even though we – like them – even though there is a stark contrast to several of the largest OECD countries (notably US and Japan).

Any story about the successes of New Zealand fiscal policy that tries to put much weight on New Zealand specific legislative reforms needs to grapple more seriously with the experience of other well-governed small advanced countries, and make more effort to demonstrate how our legislation accounts for any (rather more marginal) differences.    It also has to ask how credible is a story that suggests that, say, US fiscal problems result largely from, say, insufficient transparency (and other bureaucratic type solutions).  In that respect, it is a bit like the Reserve Bank Act: it wasn’t responsible for the much lower inflation of the 1990s and 2000s (there were global phenomena at work, including widespread political choices to lower inflation), but was a broadly useful framework for managing a commitment to lower inflation and (at least in principle) being open and transparent about how policy would be conducted.

I guess it is good to be able to be proud of things one was involved in over the course of one’s working life.  But I hope this weekend’s conference is a bit more rigorous, and self-scrutinising, than what was on display to Dominion-Post readers yesterday.   Careful evaluation, careful analysis, should be key inputs to the design and updating of good policy.