Losing $128 billion

I don’t usually pay much attention to forecasts of nominal GDP.  Not many people in New Zealand really seem to.  But The Treasury takes nominal GDP forecasts more seriously than most, since nominal GDP (in aggregate) is, more or less, the tax base.

Out of little more than idle curiosity I dug out the numbers from last December’s HYEFU forecasts –  the last before the coronavirus –  and compared them to the numbers published in last week’s BEFU, accompanying the Budget.  And this was what I found.

Nominal GDP ($bn)
HYEFU BEFU Difference
2019/20 319.8 294.2 -25.6
2020/21 336.4 294.2 -42.2
2021/22 354.1 328.3 -25.8
2022/23 371.5 352.3 -19.2
2023/24 389.2 374.3 -14.9
Total 1771 1643.3 -127.7

Over the full five years, New Zealand’s nominal GDP is projected to be $128 billion less than The Treasury thought only a few months ago.

Recall that changes in nominal GDP can be broken down into three broad components:

  • the change in real GDP  (the volume of stuff produced here),
  • the change in the general price level (inflation), and
  • the terms of trade

On this occasion, changes in the terms of trade make only a tiny difference over the five years taken together.

General (CPI) inflation is expected to be lower than previously thought.    On average over the five years, the price level in the BEFU forecasts is about 1.8 per cent lower than in the HYEFU forecasts.  That accounts for about $33 billion in lost nominal GDP.

The balance –  the overwhelming bulk of the loss –  is real GDP.

I haven’t written anything much about The Treasury’s forecasts, which were done quite a while ago, and could not fully incorporate the final fiscal decisions the government made.  But for what it is worth, I reckon Treasury’s numbers were on the optimistic side –  quite possibly on all three components of nominal GDP.  On inflation, for example, they are more optimistic than the Reserve Bank (which finished its forecasts later), even as they assume tighter monetary conditions than the Bank does.

But the point I really wanted to make was that these forecast GDP losses will never be made back (in the sense that some future year will be higher to compensate –  resources not used this year mostly represents a permanent loss of wealth).  And that these losses occur despite all the fiscal support (and rather limited monetary support).   And fiscal here includes both the effects of the automatic stabilisers (mainly lower tax revenue as the economy shrinks) and the discretionary policy initiatives (temporary and permanent).

How large are those fiscal numbers?  Well, here is core Crown revenue (more than 90 per cent of which is tax)

Core Crown revenue ($bn)
HYEFU BEFU Difference
2019/20 95.8 89.5 -6.3
2020/21 101.6 87 -14.6
2021/22 106.5 94.6 -11.9
2022/23 112.7 104 -8.7
2023/24 117.7 109.9 -7.8
534.3 485 -49.3

Almost $50 billion the Crown was expecting but which it won’t now receive.  Some of that will be the result of discretionary initiatives –  the corporate tax clawback scheme, much of which will result in permanent losses, and the business tax changes announced in the 17 March package –  but the bulk of the loss will be the automatic stabilisers at work.

And on the expenditure side?

Core Crown expenses ($bn)
HYEFU BEFU Difference
2019/20 93.8 114 20.2
2020/21 98.8 113.5 14.7
2021/22 102 119.8 17.8
2022/23 106.3 118.6 12.3
2023/24 109.2 113 3.8
Total 510.1 578.9 68.8

Almost $70 billion of current spending the Crown didn’t expect to make only a few months ago.  A small amount of this will be the automatic stabilisers at work (the unemployment benefit), but The Treasury is pretty optimistic about unemployment.  Most of the change is discretionary policy initiatives (announced or provided for).

And here is the change in net debt

Net core Crown debt (incl NZSF) as at year end  ($bn)
HYEFU BEFU
2018/19 14.1 14.1
2019/20 14.6 47.6
2020/21 17.6 82.8
2021/22 17.1 111.7
2022/23 12.3 131.7
2023/24 3.9 138.2 134.3

That will be almost $135 billion higher than expected.

As I’ve noted in earlier posts, I don’t have too much problem with the extent of overall fiscal support (although I would have structured it differently and made it more frontloaded –  consistent with the “pandemic insurance” model).

But even on this scale, fiscal policy is nowhere near enough to stop the losses.  Some of those losses are now unavoidable.  It is only five weeks until the end of 2019/2020, so we can treat $26 billion of nominal GDP losses (see first table) as water under the bridge now.   As it happens, fiscal policy looks to have more than fully “replaced” the income loss in aggregate (whether $27 billion from operating revenue and expenses in combination, or the $33 billion increase in net debt) –  not as windfall, but as borrowing (narrowing future choices).   (UPDATE: Even in quote marks “replaced” isn’t really quite right there, as without the fiscal initiatives it is near-certain that actual nominal GDP would have been at least a bit lower than The Treasury now forecasts, even for 19/20.)

But there is a great deal of lost income/output ahead of us, even on these (relatively optimistic) Treasury numbers.

Which is really where monetary policy should be coming in.   The Treasury assumes that monetary policy does almost nothing: there is no further fall in the 90 day rate (the variable they forecast), and as they will recognise as well as anyone inflation expectations have fallen, so real rates are little changed from where they were at the start of the year.  And although the exchange rate is lower throughout than they assumed in the HYEFU, the difference is less than 5 per cent –  better than nothing of course, but tiny by comparison with exchange rate adjustments that have been part of previous recoveries.  It isn’t entirely clear how The Treasury has allowed for the LSAP bond purchase programme, but whatever effect they are assuming…….there is still a great deal of lost output.

The Governor has often been heard calling for banks –  private businesses – to be “courageous”.  It is never quite clear what he means, but he apparently wants to risk other peoples’ money.  But the central bank is ours –  a public institution.   A courageous central bank, that had really grasped the likely severity of this slump, could have begun to make a real difference.  If they’d cut the OCR back in February, and taken steps to ensure that large amounts of deposits couldn’t be converted to physical cash, and then cut the OCR to deeply negative levels (perhaps – 5 per cent) as the full horror dawned, we’d be in a much better position now looking ahead.     Wholesale lending and deposit rates would be substantially negative at the short end, and even real rates on longer-term assets might be as low as they now, without much need for bond purchases.   Retail rates might also in many case be modestly negative –  perhaps for small depositors achieved through fees.   And, almost certainly, the exchange rate would have fallen a long way, assisting in the stabilisation and recovery goal.  There are winners and losers from such steps –  as there are from any interventions, or from choices just to sit to the sidelines –  but it is really just conventional macroeconomics: in a time of serious excess capacity and falling inflation expectations, act to seek to bring domestic demand forward, and net demand towards New Zealand producers.    Working hand in hand with the substantial fiscal support (see above), we’d be hugely better positioned to minimise those large future nominal GDP losses –  losses that at present, we risk never making back.

But neither the Governor nor, apparently, the Minister of Finance seem bothered.

Finally, if nominal GDP appears to be a slightly abstract thing, it is worth recalling that almost all debt is nominal and it is nominal incomes that support outstanding debt.  There is about $500 billion of (intermediated) Private Sector Credit at present (and some other private credit on top of that).  Most likely that stock won’t grow much over the next few years. But government debt will –  on Treasury’s numbers net debt rises by $134 billion.   Against those stocks, a cumulative loss of nominal GDP of $128 billion over five years is no small loss.  As noted earlier, amid all the uncertainties, the precise numbers are only illustrative, but the broad magnitude of the likely losses (on current policies) are what –  and that magnitude is large, if anything perhaps understated on The Treasury’s numbers.

 

Insufficient macro policy action

Before getting into the substance of this post, let me note that for a Budget allegedly ‘all about jobs’ our official data are so grossly inadequate that our next official employment/participation/unemployment data won’t be available until early August and then it will be only quarterly.  By contrast, the US and Canada released their April (monthly) data last week.  Here, Statistics New Zealand has shown no sign of being willing to release on an experimental basis –  for the duration of the crisis – the results of each monthly set of interviews they do (of which there are thousands) and sent out a note a couple of weeks ago suggesting that even the full quarterly labour market data may be less than ideal.  It is at times like these that the gaps in New Zealand’s official macroeconomic data are most glaring –  and yet there was no sign (I heard/saw) of anything in yesterday’s Budget to remedy these failings, the combined outcome of neglect by successive governments (mainly) and by SNZ itself.   Analysts are left looking to the data for other countries, and attempting to interpret them in light of the (typically smaller) falls in GDP expected in those countries.   Looking at those Canadian and US numbers suggests pretty severe labour market excess capacity here (no matter how many people are twiddling their thumbs but not technically unemployed or out of the workforce, under the cover of the wage subsidy scheme).

What of the Budget itself?

I’m really not bothered by the fiscal bottom lines.    If one takes the government/Treasury numbers at their word then in the year to June 2024, core Crown expenses will be about the same (share of GDP) as they were in the year to June 2014, while core Crown tax revenue will be about the same share as in the year to June 2015.    I’m not entirely convinced nominal GDP by then will be as high as Treasury supposes, but the critical point here is that most what the government is spending as a response to the crisis isn’t a permanent worsening in the structural primary balance.  If so, then as the economy recovers –  and future governments restrain themselves – we get back to balance, and then debt/GDP ratios drop away steadily, even if future potential nominal GDP growth were to be as low as 2-3 per cent.   When I saw those tax/spending comparisons, it reminded me of the fairly far-left commentator I saw yesterday suggesting that the Budget might have been the sort of thing Bill English might have brought down in the circumstances (not, of course, intended as a compliment to anyone, Labour or National).   In the detail, that probably isn’t quite right, but National threw money at Kiwirail too, and did all sorts of other spending people on the right didn’t much approve of.

What of the debt itself?  I try never to pay any attention to the government’s preferred net debt measure, and to at least focus on the measure that includes all the money in the New Zealand Superannuation Fund.  For some reason, not known to me, the government is going to put lots more money in the NZSF over the next few years –  beyond what the statutory formula provides for –  as if having a flutter on the world markets, at your risk and mine, was an important part of a recovery programme.  On that measure, net debt as per cent of GDP peaks in the year to March 2023 at 37.4 per cent (up from 4.6 per cent in June 2019).  On the then Crown net debt measure, the recent peak was about 48 per cent in 1990 –  at a time when real interest rates (servicing costs) were almost breathtakingly high.   And although there is a lot of folk memory about the pressures then, they were political more than economic, and it is worth remembering that in 1990, our overall net (negative) international investment position was quite a bit larger than it is now.   As I noted in a post a couple of weeks ago, a hundred years ago we had much more government debt again (per cent of GDP).

And international context isn’t irrelevant.   For international comparisons, I reckon the best measure is the OECD’s measure of net general government financial liabilities as a share of GDP.  In 2019 the OECD estimate that New Zealand (all layers of government) had net financial assets of 3 per cent of GDP.   Add, say 36 percentage points of GDP to that – the 32.8 from core Crown and a bit more from local authorities and other total Crown entities – and we’d have net financial liabilities of 33 per cent of GDP at peak.     Round it up to 35 per cent and if we’d have that much debt last year we’d still –  then – have had about the 14th lowest net debt ratio among the OECD countries.

Do I have instinctive bias toward net government debt being close to zero?  Yes, I do, but (a) disasters and good times will alternate, and (b) even though I often make the point that interest rates are low for a reason (and can’t just be assumed to be a windfall) the drop in real interest rates is larger than the slowdown in the underlying rate of growth in the economy.  It is quite rational to be more relaxed about higher debt ratios now than we might have been 30 years ago.

None of which is to say the a cavalier approach should be taken to the spending/tax choices that get us to the higher debt level.  All such choices have opportunity costs –  the possibility that the money could, perhaps should, have been used for better initiatives, perhaps with long-term payoffs for the economy or wider society.

I’m not entirely persuaded by the particular ways the government has gone about distributing money.   The wage subsidy scheme was initially conceived in a climate in which it might, almost reasonably, have been assumed that the old pattern of the economy would be back again very soon –  as soon as the PRC got on top of the virus.  As it is, the largest of those initally-affected sector (tourism) may well be the very last to get back to anything like pre-crisis normal –  and, for now, as matter of policy we don’t even want it to (given we have travel bans in place). In a sense, yesterday’s extension of the policy only reinforces that bias –  the people who can claim 50 per cent reductions in monthly revenue (from the same period last year) by next month are likely to be mostly firms in the tourism and associated sector.  But it may be many years –  who knows how the virus will progress globally, let alone here –  before anything like the pre-crisis capacity is required from those firms, if (as individual firms) they have a place at all.    And so we will be in the weird position where firms that face reality soonest and close in the next few weeks will see their workers miss on the extended wage subsidy, while those who cling on – whether from over-optimism or just supporting their workers short-term –  will get the money.

There are other oddities.  The company tax clawback scheme –  allow companies making losses now to offset those against past income and get a refund of past tax paid now –  will act as a gift for the firms that fail (since there will never be profits again) but only a loan to those that succeed.   Given that many of the firms that do fail will be in the sectors that are likely to come back only slowly, there seems no compelling public policy interest for that approach.

Or, as I’ve pointed out previously this week, the weirdness that see the new “bank of the IRD” lending to smallish businesses at a zero interest rate, even as retail lending rates for businesses that can’t get debt funding elsewhere, while existing borrowers are stuck with real interest rates that may have made sense last year but which aren’t fit for this year.

It isn’t that I’m opposed to a pretty liberal approach.   Earlier in the crisis I argued for thinking of assistance in terms of a national pandemic insurance policy –  under which, perhaps, we might guarantee 80 per cent of last year’s income for this year (or, as some commenters suggested, even just for six months).  Part of the attraction of that model was that it wasn’t tied to trying to keep existing firms in place –  it provided a buffer, and time, but left it up to individual firms’ owners to decide about what was best for the future, and treated equally those who had no work –  whether or not they still had a formal tie to a previous firm.   People suggested that the likely cost was too high, but actually I reckon total debt would have been no higher than what the government is now proposing, and the framework for the distribution of upfront assistance would have made more coherence.

But even though the pandemic insurance approach might have helped, at the margin, in securing a recovery, recovery itself was never the prime focus –  it was always primarily about income support, and buying time.  Recovery was always going to rest more on (a) the passage of time, (b) a recovery globally, and (c) domestic monetary policy.

I suspect that, even on the government’s fiscal plans yesterday, that is still the case, but unfortunately with almost nothing from monetary policy.

The one chart that caught my eye in the BEFU document was this one of the fiscal impulse measure.

impulse measure

I’ve written previously about the impulse measure, which was first developed perhaps 20 years ago by The Treasury to help give the Reserve Bank a better sense of how much discretionary fiscal policy was adding to demand.  In my experience, it wasn’t always that good for the most recent few years –  there is quite a lot of unpicking goes on working out what is potential output etc –  but that for forecast periods it was a good indicator, and for periods well enough in the past generally quite useful too.

In this chart, there are two periods of a substantial positive fiscal impulse –  around the time of the last recession, and now.  For the previous episode the positive fiscal impulse over the two years is equal to just over 4 per cent of GDP.    OECD estimates, done independently, suggest something of that magnitude or perhaps a bit higher.  There was a lot of fiscal support in the works –  not from crisis-response measures, but from the big easing in the fiscal policy the government had put in place before it realised a serious recession was upon us.

And what does Treasury think is happening now?    The total fiscal impulse across the two June years (2020 and 2021) is around 8 per cent of GDP, most of which is happening in the year just about to end.  Beyond that –  as really must happen if the fiscal situation is to be kept in check – the fiscal impulse, on current government policy, is really quite materially negative (perhaps almost implausibly so later in the period).

The fiscal impulse is reasonably materially larger –  optimistically, perhaps double –  than it was at the time of the last recession.  Then again, the adverse economic shock is much larger –  even if one were able to look through this quarter and next.

And, to be boring and repeating a point (that nonetheless seems to keep being made):

  • there was huge amounts of effective monetary support in the last recession (substantially lower real retail and wholesale interest rates, and a sharply lower exchange rate), for which there is no parallel at all this time (notwithstanding the big and expanded bond purchase programme), even if the Bank is inching ever so reluctantly towards a possible negative OCR next year, and
  • even though the unemployment rate rose only by just over 3 percentage points at peak, it still took 10 years after 2007 to get unemployment back to a level that some –  notably the Reserve Bank –  plausibly might consider a normal (NAIRU) sustainably level.

And in the years after 2008/09 we had the fruits of a strong terms of trade and a big boost to effective demand from the Christchurch repair and rebuild process.

It simply doesn’t seem credible that there is anything like enough policy stimulus in the works now, and (perhaps especially) looking just a few months ahead (the more so when we bear in mind that there is no certainty all the big fiscal numbers will be carried through, including because the election is close).   In a sense, as I noted in yesterday’s post, the Reserve Bank’s (more recent) forecasts tell that story, with inflation forecast to be below the bottom of the target range for the next two years, while the Bank sits on its hands.

It is also worth bearing in mind just how much of that fiscal assistance is heavily frontloaded.   Partly because of very restrictive government measures, economic activity in the last couple of months has been savaged.  Plausibly, nominal GDP in the first half the year will be $25 billion less than might normally have been expected.    That means an equivalent loss of national income.

Direct payouts from the government –  mainly the wage subsidy scheme but also the corporate tax clawback scheme –  has compensated many of the losers to a considerable extent.   Wage subsidy payments have already exceeded $10 billion and there is more to come in the next month or two.  If I recall the tables right, the tax clawback scheme has refunded something like $3 billion.

But there won’t be repeat of anything on that sort of scale.  Of course, the income/output losses in future quarters are unlikely to be as large either.    But my point really is that the output gap by later this year will still, almost certainly, be materially larger than anything we say in 2008/09, and already the biggest fiscal impulse will be in the past.

With no support from monetary policy – real retail rates are barely changed, and the exchange rate isn’t down much – everything rests on either domestic fiscal policy or some surprisingly strong global economic rebound.  Neither seems like a safe bet for getting us back to full employment any time soon.

This isn’t a plea for fiscal policy to do more, but for the government to wake up to the outlook and insist –  using formal statutory directive or appointment powers if necessary – that monetary policy start making a real difference.   I don’t suppose it will happen, especially not this side of the election: the government will prefer an “everything in hand, heroic saviours” narrative, even if the outlook is far from in hand.  I take them at their word when they say they care about full employment, invoking Peter Fraser and all that.  But the current set of policies simply is not likely to be consistent with achieving those sorts of outcomes in any reasonable timeframe.

(My other worry on front is that there are people who will criticise the government for doing too much on the fiscal side, but not many of them have credible alternative approaches to getting back to full employment rapidly – few, for example, embrace calls for more aggressive monetary policy.  It sometimes looks as if they don’t care.  There is that old maxim “it is better to have tried and failed than never to have tried at all”.  It isn’t an excuse for poor policy, but history would judge poorly any figures who were, in effect, indifferent to lingeringly high unemployment.)

Meanwhile, of course, there is also nothing that is at all likely to lift our longer-term economic performance – despite various bows in the direction of productivity in the Minister’s speech –  but sadly that doesn’t mark this Budget out from any of its predecessors this century.

 

The curate’s egg

It was a poor package.  On so many counts.  And my sense of that has only strengthened overnight.  Perhaps at best one might label it as a curate’s egg –  and rather more in the original meaning than the colloquial one.

It had the feel of a package that started as one thing, perhaps relatively small, two or three weeks ago when the government was still focused on the coronavirus as a China issue –  things that had happened, but which would now gradually if slowly sort themselves out – and on the small range of sectors materially directly affected by the China experience.  They were backward looking, and they refused to face up to what was clearly coming –  and it was as clear as day at least a week ago.  So then rushed changes were made to the package on the fly, including efforts to bulk it up to look enormous –  presumably solely for political reasons –  regardless of whether the components were relevant at all to the times or to the specific needs in responding to the situation that is upon us.   And at the same time, whether because they were caught by the momentum of their own process, or because they are still reluctant to front the severity of what awaits us, most of the really pressing issues were barely even addressed.

The government then has the gall to talk of a new round of measures in the Budget –  two months away –  allegedly to be focused on the recovery phase.  There is (a) absolutely no way they can wait until the Budget to do a lot more, and (b) the recovery phase is much more likely to be something to think about in next year’s Budget.  Remember the comments from Prof Michael Baker reported in the Herald a day or so ago: anyone who thinks this will be over by Christmas hasn’t thought hard enough.  Or, as he went on to rephrase, perhaps Christmas 2021.

I want to focus mostly on the economics, but the politicisation by the government was also unfortunate.   Crisis times, all in this together etc.  But there were the silly boasts that somehow this package was bigger than was done in 2008/09 –  which is true but irrelevant since (a) this is quite different sort of shock, (b) there was huge fiscal stimulus already put in place in the 2008 Budget, oblivious to what was just about to break, and (c) there was room for 575 basis points of interest rate cuts (and the exchange rate fell sharply).  There was, in fact, no discretionary fiscal stimulus in New Zealand during the recession itself: it wasn’t needed.   Then there were the attempts to wrap themselves in the cloak of Michael Joseph Savage –  Labour’s icon –  in “responding to the Great Depression”.  At least some of them are presumably historically literate enough to know that Savage didn’t take office until the worst of the Depression in New Zealand was long past and recovery was well underway.   Or the silly attempts to boast that their package was bigger than some others when (a) as we shall see, for coronavirus purposes a lot of their numbers were simply irrelevant, and (b) the scale of interventions globally is rising by the day (those other packages were last week’s news).      It isn’t exactly confidence-inspriring re the seriousness of the Prime Minister’s leadership in a crisis when she goes on TV to claim this would be the biggest package she announced, and then it becomes very evident that the numbers were simply cobbled together in a way that produces just barely that result – headline-grabbing rather than substantive policy.

What would have been much more welcome was evidence that the Minister and Prime Minister clearly understood what was going on, what the key issues were, what the relevant horizons were, and so on.  But there was little or none of that.

To get specific, this is the table summarising the package

package

We’ll get the easy bits out of the way first.  No one is going to argue with more resources going to health, although (a) some have asked why it wasn’t more (is that really all the sector can really use if we face 18 months of suppression strategies?), and (b) why this hadn’t been done at least six weeks ago.

And there probably isn’t much to quibble about (at least for now) re the sick leave and self-isolation support.

I didn’t see any details of the “redeployment package” although in his speech Robertson did make some comments, including mention of a package for Gisborne to be announced in the next few days. I guess the amounts are small, but mostly it seems to be a waste of time –  most likely before long hardly anyone (well apart from the health system and a few online retailers) will be taking on any new staff, and that could be the case for many months.  Face to face training doesn’t seem likely either.  It looks like just a legacy of where the package began weeks ago.

There is nothing to say about the “initial aviation support package” because they’ve said nothing about it, except that it apparently doesn’t include an Air New Zealand bailout.  Other than that, it isn’t entirely clear why this line item exists in the package, but I guess it bulked out the headline number.

And then we started getting to the big bucks.  Unfortunately, many of the big bucks are scheduled to be spent in several years time, and have nothing whatever to do with the coronavirus, whether stabilisation or recovery.   Because the thing that doesn’t get much attention in public consciousness is that the $12.1 billion number is total additional spending over four fiscal years.    That is an approach that makes sense in normal times (recognises the ongoing implications of new commitments) but it bears no relationship to the support provided for the coronavirus situation this year.

Thus, the business tax reforms they announced seem generally sensible.  I’ve argued against the previous government’s abolition of depreciation on buildings ever since the National Party adopted the policy in 2010. It was daft and without any good economic foundation, so I’m really glad to see it being scrapped.  Probably this was planned for this year’s Budget anyway (I hope so).  But it has nothing whatever to do with coronavirus, with stabilisation, or even with recovery.  And the bulk of the spend will be in future years.  It is simply in here to (a) bulk up the numbers, and (b) as some sort of political counterpoint to the next item, welfare benefits.

Raising welfare benefits permanently also has nothing to do with coronavirus.  Again most of the spending (at least $1.8 billion of it) won’t even be in the March 2021 fiscal year, and of the remaining billion probably only $700 million will be paid out in the next six months (largely the “winter energy payment”).  Raising welfare benefits permanently has long been a cause of the Green Party and probably much of the Labour Party.  There is talk that this too was going to feature in the (election-year) Budget.    If so, it is just in this package to (again) bulk out the headline number.

But the increase in welfare benefits now is much more pernicious than that.  Life on a benefit isn’t easy (and before anyone scoffs about what do I know, that isn’t just rhetoric: I have a close family member living on a long term benefit).   But what beneficiaries at least had going for them this year was certainty of income: the government was not going to default or closedown, unlike many private sector employers (with the best will in the world on their part).  They and public servants were safe.  And yet the government chooses to lock-in a permanent boost to its spending commitments (a) to those with the least degree of income uncertainty now, and (b) when the country is in the process of becoming a lot poorer and scarce resources need to be used wisely.   Raising benefits might or might not have been a reasonable luxury in settled times.  It is simply irresponsible and evidence of fundamental unseriousness to do so now.  (And before anyone tells me about the high marginal propensity to consume that beneficiaries have, let me remind you that now is not the time for stimulus or encouraging people to spend more: instead we are entering a phase of deliberately choosing to shrink the economy to give us the best hope of fighting of the effects of the virus).  Oh, and the unemployment rate is going to rise a lot, and one of the big challenges after this is all over is going to be reconnecting people with the labour market, at a time when wage inflation will have been depressed anyway.  In that context, higher benefit replacement rates (relative to wages) is really the last thing that makes sense in getting the economy back on track.

All of which leaves us with the centrepiece of the strategy, the wage subsidy scheme.  It is probably reasonable enough as far as it goes, but “as far it goes” is no more than a very short-term holding action, not remotely enough to really address much at all (it runs til June, the crisis will not, banks (for example) and other creditors will know that. So, before long, will most households).

But again there is a strong suspicion of political vapourware in the numbers.   The scheme is estimated to pay out $5.1 billion in the next three months.  That is a lot of money.

It is paid out at a rate of $7029.60 per full-time employee.  That means they expect to pay out for about 725000 fulltime equivalent employees (there is a lower rate for part-time employees).   That sounds like a lot.

In the latest HLFS, there were 2.6 million employees in total (including the self-employed). Of them 2.1 million were fulltime.  Applying the same ratio the package does (part-time staff are paid for at 60 per cent of the fulltime rate) to the 519000 part-time staff produces a full-time equivalent number of employees of 2.44 million.  In other words, the headline budget figure is premised on paying out in respect of 30 per cent of all employees in the coming quarter.   And this is even though the payment is capped at $150000 per employer, equivalent to compensating for only up to 21 staff.  And you can only get the payment is your monthly revenue is down 30 per cent year on year

Now, sure, there are lots (and lots) of businesses with fewer than 21 staff.   But lots of employees (by number) work for big organisations, both in the public and private sectors.  All those universities who were moaning about foreign students a few weeks ago could only each get $150000 (if total revenue had even fallen 30 per cent) even though they employ thousands of people each.

I am not saying that the $5.1 billion total is impossible.  But it seems unlikely.  And in particular it seems inconsistent with (a) the political messaging about the severity of the economic shakeout (even yesterday the Minister still wouldn’t accept that a recession was a done deal), and (b) the preliminary Treasury forecast the Minister was happy to wave around suggesting that at worst we’d have only about a 3 per cent fall in GDP.

I reckon I have been consistently one of the most pessimistic commentators about the economic effects.  It isn’t that hard to envisage GDP falling 5 per cent in the June quarter alone (reality could be a lot worse than that if suppression really comes to New Zealand), but that isn’t the sort of message the government is giving New Zealanders.   Either they aren’t being honest with us, or they’ve just bulked up the headline numbers (it isn’t as if any underlying assumptions about any of the forecasts have been released).

So for all the talk of a 4 per cent of GDP package etc, it would probably be more realistic at this stage to think in terms of immediate additional outlays (next few months) of no more than half that (and not even all that will be helpful).  Those are still big numbers: 2 per cent of annual GDP is 5 per cent of four months’ GDP.    The Minister released a chart suggesting the package will boost annual GDP itself by 2 per cent over the next year, but that too seems optimistic (but hard to tell how much without Treasury releasing their assumptions/workings).

But for whatever immediate good some elements of the package might do, it still largely fails to address the real and pressing issues.   In particular, in typical recession debt service costs for borrowers (new and existing, at least for floating rate borrowers) drop sharply, and returns to depositors drop sharply.  That reallocation is a natural and normal part of the rebalancing and stabilisation process.  Despite the spin from central bankers (abroad as well as here), 75 points just does not cut it: 500 points has been more like it in recessions (over a period when none has been as bad as what we are facing now).   Between a central bank that refuses –  adamantly promises –  not to cut further, and a failure to ever deal with the lower bound issues, nothing is on the way.  That has to change.  The government could and should simply insist on it changing now.   (Related to this, what fall in the exchange rate we’ve seen –  also a natural part of shock absorption –  is tiny compared to the usual recessions.)

And even more pressingly, in this unique sort of shock, the package does nothing about stabilising income expectations for firms or households in a way that would support banks being willing to (a) maintain existing credit exposures, and (b) be willing to significantly extend credit to cover the gaping net revenue holes that will be opening up for many firms (and households).    That needs urgent action.   With the best will in the world, and much harassment from the Governor and the Minister, banks are businesses too and have shareholders to answer to (primarily) and their own future existence to protect.   They can read things like this week’s Imperial College paper arguing that suppression strategies may need to be kept in place for most of the next 18 months.  If so, with no income guarantees –  and not even any certainty about what subsequent emergence looks like – as a bank you would often be in breach of your duties to extend more debt in many cases.  And many people –  firms and households –  would be reluctant to borrow more.   Better to manage and minimise exposures early, to whatever extent one feasibly can.

Of course, governments could lend direct.  But that simply isn’t realistic on any sort of scale.  Much better to think hard about the sort of idea I advanced in a post on Monday where the government passes emergency legislation guaranteeing –  in legally enforceable form (perhaps it could even just be done under the guarantee powers of the Public Finance Act, but better to get parliamentary sanction) – that no firm or household/individual would have net income in 2020/2021 (and perhaps even the following year) less than 80 per cent of that for the last year (for firms, the guarantee would be scaled to the extent they retained staff).   Doing so would give a floor –  and thus remove much of the variance in expectations – for households, firms, and for actual/potential lenders.  It should help underpin a willingness to extend credit.  It should also serve as an underpinning if we find ourselves adopting shorter-term expedients –  as say France has done –  of temporarily suspending utlilities bills or mortgage payments:  utility companies could themselves get bridging finance if banks knew household would still have most of their income, and banks themselves wouldn’t face the need to record impaired assets etc.

I want to come back, in a further post, this afternoon to my overall proposed package, including answering some of the questions/objections.  I still believe it is the best and fairest approach to take, complementing some of the other shorter-term cash income support measures (which would be nested within the guarantee).  But whatever the precise form of what they do, the government simply must act very quickly to ensure that credit is available. (And on that score the Reserve Bank temporary suspension of the scheduled increase in capital requirements is of second order significance, not remotely the main game.

Finally, I can only repeat a point I’ve made in various posts and numerous tweets over the last week: this is not the time for encouraging new private spending.  There will come a time for that, and it is likely that fiscal policy will have a significant role to play then.  But this is a time when we are deliberately scaling back the economy –  quite possibly savagely for months at a time – and discouraging spending in many areas.   We need to ensure have the income to live on, but for now much the most important economic priority is some set of guarantees –  supported by the strong Crown balance sheet – that means households are able to borrow, existing businesses are able and willing to borrow, and banks are genuinely willing to maintain and increase lending…..in the face of the most hostile and uncertain economic conditions of the lifetimes of almost all of us.

The government now needs to get serious and get down to real economic policy work.  It would be also good if they started authoritatively fronting with New Zealanders about just how tough things are going to get.    A lot of New Zealanders, who don’t obsessively follow the news or events abroad, really still have little no idea.

 

 

Thinking about fiscal policy

A few weeks ago the Minister of Finance announced that the government’s Budget would be delivered on 14 May.    That really isn’t far away now.  I noticed the Minister, on TVNZ’s Q&A yesterday, suggesting the timing was opportune in light of the coronavirus.     Perhaps, but contemplate some relevant dates.   Last year’s Budget was delivered on 30 May and according to the documents these were the relevant deadlines

budget 19

Assuming much the same sort of timetable holds this year, the economic forecasts the Budget draws on will have to be finalised in not much more than three weeks from now.  The tax and other fiscal forecasts are finalised later but they draw on the economic forecasts.  And who supposes that there will be any meaningfully greater certainty in three weeks time than there is now?  In truth, the Budget economic forecasts will be little more than (well, really less than given the long publication lags) one potentially useful scenario.     They simply aren’t going to be –  and can’t be –  any sort of useful guide for policy in the current climate, and I hope the Minister and the Treasury Secretary (the forecasts are Treasury’s and the Secretary has to sign off on them) start making that clear soon.    Consistent with that, in setting budgetary policy no one should be getting hung up on (for instance) whether the bottom line is a small surplus or small deficit.   Any such forecast number –  in a period of extreme uncertainty –  will be just meaningless.

In his interview yesterday the Minister of Finance seemed to be saying much the same sort thing as in his speech on Thursday.   Much of it was, at one level, sensible enough, but to me it fell a long way short in grappling with the likely severity of the issues, and the related uncertainty, and with the vulnerability of the world economy and the limitation of current macro policy.   Perhaps it was partly what he was (wasn’t) asked, but he is an experienced politician and knows how to get across the messages he wants to convey.    When community outbreak becomes a significant thing here, there is going to be a lot of economic disruption (even in the most optimistic cases abroad, eg Singapore, containment so far has appeared to rely on extensive social-distancing –  voluntary and compulsory –  none of which is conducive to holding up short-term GDP (or similar indicators).

But even pending that, what will be happening to tourism right now?  We know tourism from China collapsed a month ago –  first PRC restrictions and then our own –  but what about travel from other markets.  How many people are going to be keen on booking new trips, or even – if they have the option –  embarking on new trips now? I don’t know about you but I flicked through the travel sections of newspapers yesterday and today, wondering quite how many takers there would be.  Allowing for both direct and indirect effects, tourism is estimated to be about 10 per cent of the economy and about 55 per cent that is international tourism.  Even if international tourism only halves for the duration –  and it would be a lot lower than that if there is significant community outbreak here, that alone is equivalent to taking almost 3 per cent out of GDP.   Sure, there is scope for some switching –  more domestic tourism, as New Zealanders pull back on their foreign travel –  but a couple of nights in Picton is for most hardly a substitute for the trip to Disneyland.     And, of course, there are more and more reports of business travel –  typically higher-end – being cancelled.   And all of that is just one sector of the economy: that associated with foreign travel.   It takes no account of scenarios in which people are unable to work, whether because of illness, movement restrictions, school closures or whatever.

There is simply no way of knowing how long or how deep the economic effects will be, or (for example) what public psychology –  including eagerness to spend and to travel –  will be like as the world gets through the other side.  But with strongly asymmetric risks I reckon there is a pretty strong for an aggressive macro policy response.  And some part of that clearly has to be fiscal, especially given the failure of authorities –  here and abroad – to deal with lower bound constraints on monetary policy (covered in my post on Friday).  If you are sceptical that I’m over-egging the monetary policy limits point, I’m not nearly as pessimistic as the local ANZ economics team

Not as pessimistic only in that I think the OCR can usefully be cut further than they believe.  But if they are right and we really will be at the conventional limits of monetary policy by May (the day before the Budget in fact) people really should start worrying, because the ANZ economic scenario is not as bad as it could get.  And there are few additional buffers that people can really count on in planning and forming expectations (including of inflation).

There has been quite a bit of talk about how monetary policy (and aggregate fiscal policy for that matter) can’t solve immediate problems –  even bizarre articles from people who should know better suggesting there is some sort of either/or dimension between medical solutions and macro policy responses.  And that is true, of course.    Macro policy can never deal with the sectoral effects of sectoral-focused shocks.  Macro policy is about stabilising the wider economy.  Macro policy also can’t do a great deal in the very midst of a crisis –  financial or otherwise.  But what it can do in the midst of a crisis –  perhaps especially a disease one, where moral hazard concerns are less of a worry –  is better than nothing (easing servicing burdens, easing the exchange rate, signalling activity, leaning (a little) against collapses in confidence etc).  Perhaps more important is the value of such tools when either the immediate crisis passes and we are left with chronic weakness in demand (perhaps for a few quarters, perhaps longer) and during the recovery phase.   Macro policy tools work with a lag, and it is well to get adjustments in place pretty early (which is why monetary policy flexibility is so good to have: it is a very easy instrument to adjust, including to unwind when the need has clearly passed).

What sort of fiscal policy?   I’m not that interested in specific assistance packages to individual sectors.  In some cases, that sort of action might be justified, but much won’t really be –  and the announcement a couple of weeks ago of funding to promote non-Chinese tourism looks even sillier now.  Realistically, political considerations are likely to be more important than anything else in shaping those sorts of handouts, but (fortunately perhaps) such specific interventions/distortions/bailouts aren’t likely to be large enough to materially respond to wider weaknesses in aggregate demand.

And whatever you think of the case for more – even much more – government infrastructure spending, there are long lags to getting any such projects up and going.  The case for a second Mt Victoria tunnel in Wellington might be rock-solid –  and it is even in Grant Robertson’s constituency – but it is no sensible part of a response to a coronavirus-induced recession, even if (say) you worried about several waves of the virus over a couple of years.

Generalised tax cuts in income tax rates –  which might or might not make sense longer-term –  aren’t particularly effective because (a) the overwhelming bulk of any cut would go to higher-income households, (b) there is no particular incentive to spend (and some of the things higher income people might othewise spend on –  an extra overseas holiday –  aren’t likely to be so attractive in the next few months, and (c) as the Minister observed in his interview yesterday, such cuts tend to be permanent.

One could do, as Hong Kong announced last week, some sort of lump sum distribution –  perhaps $1500 payment to each adult.  It is much more concentrated ($ value) towards people likely to spend additional cash, but it is still less likely to be spent at the height of a crisis than in other circumstances, just because people will be (eg) staying away from shops.  But perhaps a more significant issue is precisely that it is one-off –  you might get a one-month lift to demand and activity, but the situation is reasonably likely to require longer-term support than that.

The point of this past was really to explore one other option I haven’t yet seen mentioned: an explicitly temporary reduction in the rate of GST.     The idea has been around for a while, it was tried by the United Kingdom as part of their macro policy response in 2009, and was discussed in some detail in a paper presented in New Zealand almost 15 years ago by the (then) academic economist Willem Buiter, who had also served as a member of the Bank of England Monetary Policy Committee.

Buiter was invited to New Zealand as part of a focus in the mid-2000s (including this work) looking at possible tools that might enable more downward pressure to be maintained on aggregate demand –  keeping inflation in check –  without the concomitant upward pressure on the real exchange rate; the latter having become something of a sore point with both the Governor and the Minister of Finance.    One element of that involved inviting four international experts to offer advice.  The resulting papers, and discussant comments, are here.  Buiter was invited to focus on fiscal policy issues and his specific paper is here.  One of the options he explored (from p51 at the link) was using a temporary change in the rate of GST.

As a stabilisation option, supplementary to whatever monetary policy can do, a variable GST rate has one very big advantage relative to most fiscal options that are often touted.  Not only does a temporary cut put more money in the pockets of households –  and do so in a moderately progressive way (whatever lifetime consumptions patterns, in any particular period low income people typically spend a larger proportion of that period’s income, and face tighter credit constraints) –  but it provides an active incentive to spend now because you know that prices will be more expensive later.   Take as an example, an announcement that the rate of GST would be lowered by 2.5 percentage points for a year.  For a person/household facing the choice between saving and spending now, at the start of the period, it is akin to a 250 basis point cut in interest rates.  As the year goes on, the (annualised) effect gets even stronger (as we’ve seen with past GST increases, spending is brought forward to just before the increase).

There are all sorts of drawbacks with this instrument in general, whether used for temporary increases or temporary cuts, including judging when it would be appropriate to deploy the instrument (relative to, say, using monetary policy). Buiter favoured an independent committee –  akin to an MPC –  having the power to adjust the rate (something which I’m old-fashioned enough –  only Parliament should change tax rates –  to find abhorent).    But this is an unusually stark situation (and may well be starker still by Budget day) –  as, in a different way, was the UK financial crisis in 2008/09.    It is not just a matter of slowly accumulating pressures (or lack of demand pressures) but a stark, truly exogenous (to the New Zealand economy) event.  Defining a trigger for action shouldn’t really be a problem.  And we are very close to the limits of conventional monetary policy, so the tradeoff-among-instruments questions also presents less starkly than Buiter would have imagined.

One of the other drawbacks –  which the UK ran into –  is defining an exit point.   The period of weak demand around the world lasted much longer than any authorities expected in 2008 when they were devising responses to the financial crisis/recession.    The extent of that weakness was hard, perhaps impossible, to foresee.  With a pandemic virus perhaps it is a little easier – these things tend to sweep through in perhaps 12-18 months (even in 1918) so –  for example – a cut in the GST rate announced/implemented in May, to end at end of 2021 might seem reasonable (while still providing a substitution effect signal).  And if, spare us, at the end of the next year severe problems still faced us, then realistically choices could still be made then about whether to proceed with raising the GST rate or not (to not do so should require new legislation) –  there shouldn’t be (but who can really imagine) the same debates about whose fault it was the banks had failed etc.

One other drawback in the risk to inflation expectations.   Cut the rate of GST by 2.5 percentage points and the level of the CPI will fall by perhaps 2.1 per cent –  and the reported annual rate of inflation will be that much lower than otherwise for a year.   With a heightened risk of inflation expectations sliding away, there is a risk that those headline effects could accentuate the problem, even though none of the core inflation measures –  the ones most analysts emphasise –  would fall.   There is no easy way to know how large this effect would be, and it would be quite circumstance-dependent.  If, for example, the New Zealand dollar fell sharply –  as it usually does in severe adverse global events –  the direct price effects of more expensive imported tradable goods would lean against the GST effect on headline inflation (the UK, for example, had a sharp fall in its exchange rate around 2008/09).  And if the temporary GST cut was part of an aggressive multi-faceted (monetary and fiscal) stabilisation package, the (helpful) demand effects might well outweigh any risks of adverse headline effects on expectations.

The other downside concern might be implementation lags.  When I was around these sorts of discussions, IRD used to emphasise that these sorts of changes couldn’t be done overnight.  Announce on Budget day a GST cut starting three months hence, and the risk is that you worsen things in that three month period.   But when I went back to check the UK experience, I found that the policy had been announced on 24 November 2008, to come into effect on 1 December 2008.    If a change can really be implemented that quickly –  and hard to see why New Zealand IRD should be less capable than HMRC – a one week disruption might be tolerable.

Finally, relative to using monetary policy more heavily, fiscal options will tend to hold up the exchange rate more than otherwise.  That might be less of concern in a scenario in which it has fallen a lot anyway and –  as importantly –  monetary policy options are approaching their limits.

I am not, repeat not, recommending that the rate of GST be temporarily cut, even on the assumption that the economic situations looks as bad or worse late next month when final Budget decisions have to be made.   But, in a highly policy-constrained world, it looks like an option that should be pulled out of mothballs and looked at fairly closely by the Minister’s advisers, including a closer review of the strengths and pitfalls of the UK experience.   In situations like the one we seem to find ourselves in –  with the world one shock away from exhausting normal macro policy capacity, and that shock now seeming to be upon us –  it is probably better to err on the side of doing more rather than less, and to consider taking risks with instruments that would not normally count as ideal (in which category I put the variable GST).

And whether or not the Minister of Finance thinks it an option worth exploring, I’d welcome comments here, including from those closer to the operational details of GST than I am.

 

 

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