Before the election I ran several posts here trying to look at New Zealand’s fiscal position – deficits and debt – by comparison with other advanced countries. The problem with doing so was that the IMF and OECD only come out with their comparable numbers/tables every six months, although the IMF Article IV report released in September did have some updated New Zealand numbers in IMF format.
The IMF Fiscal Monitor came out in early October and I did a quick post the day before the election using those numbers across the full set of advanced economies. Those comparisons, using cyclically-adjusted primary balance estimates, showed New Zealand in a pretty poor light.
The OECD published its latest Economic Outlook a day or two ago, and with it a full database. Nothing much fiscally will have happened in New Zealand between when the IMF and OECD numbers were finalised (the new government’s policy programme released last Friday won’t have been incorporated), so these are probably the last read on fiscal policy and fiscal imbalances based on the Labour government’s policies.
(Unfortunately, the Treasury HYEFU may yet be something of a mixed bag in what it tells us, as it isn’t clear how much of the new government’s policies will have reached a point where estimated effects can be included in the Treasury numbers, which might well being finalised in a week or so from now.)
I downloaded several series. My preference has been to focus on the general government primary balance, as a per cent of GDP, whether headline or cyclically-adjusted numbers (the latter are generally preferred in principle but……a lot turns on output gap estimates).
Here is the headline primary balance series, shown by comparison with that for the median OECD country
We (a) used to run primary surpluses and no longer do, and (b) used to have a more favourable fiscal balance than the median OECD country, but no longer do. Things were heading in that direction even before Covid, and the picture still holds now and (in the projections for the next year or two) now that Covid fiscal pressures are a thing of the past. But….the gap between us and the median OECD country isn’t very large.
Here are the same two series on a cyclically-adjusted basis, where the gap – NZ worse than the median OECD country – is larger (and where the median OECD country has much the same balance as the average of the previous 20 years).
As something of a memo item, here is another fiscal balance measure. Net lending is a measure of the gap between government saving and government investment flows. The picture isn’t too different from the first chart above.
What about debt? The OECD measure is (general government) net financial liabilities
We used to have a lot less net debt than the median OECD country but that gap has closed considerably in the last five years, and on pre-election policies was on track to close quite a bit more in the next couple of years. Note (a point clear in earlier posts) that the median other advanced economy has not increased debt as a per cent of GDP since just prior to Covid. That is a stark difference to New Zealand.
(Incidentally It isn’t true of the OECD wastrel big countries. Here is the feel-better comparison between them and New Zealand
I set out to do this post mostly for completeness, but in doing so it also became clear how different the IMF and OECD numbers are for New Zealand’s cyclically-adjusted deficit measures. I highlighted pre-election that on the IMF’s numbers our cyclically-adjusted primary deficit for 2024 was the third largest in the group of advanced economies. As you can see from the second chart above, the OECD thinks our deficit this year and next, on current policies, will be larger than that of the median OECD country. But we aren’t anything like third worst. perhaps 10th worst (out of 30 or so countries). That isn’t great, but it is rather less headline-grabbing than the IMF numbers had suggested.
What accounts for the difference? Fiscal policy hasn’t changed.
But there are quite different views how much any headline fiscal deficit needs to be adjusted to account simply for the state of the cycle. In other words, the two international agencies have widely divergent views on the output gap (calender year numbers)
Taking last year (2022) as a starting point both the IMF and the Reserve Bank see the New Zealand economy as having been hugely overheated, with positive output gaps of almost 3 per cent of GDP. By contrast, the OECD’s 1 per cent output gap represents only a modest degree of overheating. For this year, the OECD thinks that across the year as a whole there has been no excess demand, whereas the IMF thinks the economy has still been badly overheated (the Reserve Bank is somewhere in the middle, and I’d noted the contrast between their view and the IMF’s in a post a month or so ago).
For next year – all essentially on current policy as the Reserve Bank’s endogenous monetary policy projections don’t have the OCR changing materially – the differences are equally large, but this time the OECD number is between those of the IMF and the Reserve Bank. The IMF reckoned the economy would still on average be moderately overheated next year, while both the Bank and the OECD see a lot of disinflationary pressure.
What is interesting is that the three agencies have almost identical unemployment rate numbers. Last year’s numbers are, of course, already hard, but when the IMF did this year’s numbers it had only the June quarter outcomes, and all the 2024 numbers are simply forecasts (calendar year averages)
If I had to punt, my sense would be that “truth” about excess demand/capacity rests somewhere between the OECD and RBNZ numbers for this year, with a lot more uncertainty about next year. Whatever the correct answer our deficits are projected to be worse than those of the median OECD country – and a lot worse than they used to be – but quite how much worse depends on just how stretched the economy has really been. (If it is still materially overstretched the Crown will be pulling in a lot of revenue that simply won’t be sustained when things normalise).
In one of my pre-election posts, I lamented the fact that Treasury does not provide their own fiscal numbers, and own cyclically-adjusted balance estimates, in a format that allows their numbers for New Zealand to be compared to those the international agencies are producing for other countries. Failure to do so makes timely international comparisons hard, and if at times that suited the politicians, one would hope that Treasury itself had a stronger commitment to enabling effective cross-country comparisons (New Zealand data on its own really only allows comparisons across time in New Zealand, a relevant metric but far from being the only one).
But first a correction. As I noted on Twitter and very briefly on the post itself on Saturday, it seems that the gist of my post on Friday was wrong. The repeal of Labour’s tobacco de-nicotinisation legislation – whatever motivated the parties that championed the change – will leave the flow of tobacco excise revenue largely as it was, providing the government an extra flow of revenue – relative to what was allowed for in PREFU – that will, if anything, more than compensate for what National had told us they expected the foreign buyers’ tax would have raised. With the various other bits in the various coalition agreements they are probably back to being in roughly the – very demanding – fiscal situation National thought it would be facing before the election: large deficits, very demanding indicative operating allowances, and an aversion to cutting programmes/”entitlements”,
As for the impact of fiscal policy on aggregate demand, and thus the pressure on monetary policy, they’ve ended up – without really consciously trying, or so it seems, with a somewhat helpful policy switch; dumping the foreign buyers’ tax which was supposed to raise money from wealthy foreigners who mostly would not have been earning or otherwise spending that money in New Zealand (which revenue therefore would not have dampened demand) and replacing it with the reinstatement of the tobacco tax revenue scheme, mostly raising money from relatively low income New Zealanders who will, on average, have a very high marginal propensity to consume in New Zealand. Whatever the substantive merits (or otherwise) of either policy, all else equal the switch is slightly helpful for monetary policy.
A few days after the election I wrote a post “What should be done about the Reserve Bank?” itself if (as I put it in that post) a new government is at all serious about a much better, and better governed and run, institution in future. Perhaps unsurprisingly I stand by all the points in that post, around both individuals (Orr, Quigley, external MPC members, and so on) and the institution.
That post ended this way
That final paragraph was about the fact that unless he leaves more or less voluntarily it would be hard to get rid of Orr (judicial review risks etc and attendant market uncertainty) and yet it would be highly beneficial were he to be replaced well before March 2028.
Anyway, with the release on Friday of the two coalition agreements we know a little more re the options for the monetary policy functions of the Bank.
At a high level, both agreements commit the parties to make decisions that are “focused” to “drive meaningful improvements in core areas including
One might have briefly hoped that this might have resulted in the government lowering the inflation target to something actually consistent with price stability – eg, allowing for index biases, 0 to 2 per cent annual inflation – but it probably only means the abolition of the so-called dual mandate (something both National and ACT had campaigned). The specific material on monetary policy is from the ACT agreement
In National’s own 100 day plan the legislation to amend the statutory goal of monetary policy was to have been introduced – not passed – within the first 100 days, but in the coalition agreement there is no indication of the legislative priority. However, the Act makes it clear that the Minister of Finance could issue a new Remit – the actual targets the MPC is supposed to work to – at any time
It would be a simple matter of deleting one short paragraph from the Remit, which would then also have the appeal (to the government) of being clear that the MPC was working to this government’s Remit not the last government’s one. That doesn’t need to await the other advice, it could be done today or tomorrow (perhaps after the first Cabinet of the new government), and before the MPS on Wednesday. If the Minister moved that fast it would no doubt prompt specific questions at the MPS press conference, but…..they are going to be asked anyway. (UPDATE: The Minister is required to consult (but not necessarily have regard to the views of) the MPC before issuing a new Remit, so the next day or two probably isn’t an option, but it need not be an elongated process when the government has a clear electoral mandate for change.)
(To be clear, I am not a big fan of this change. I largely supported the 2018 legislative change. But……from the then-government’s perspective the change then was mostly about political product differentiation (essentially cosmetic) and so will the reversal be. Few serious observers think either change has made, or will make, any material difference to monetary policy decisions (and the Governor has repeatedly stated that it has not done so to now), but the change is – I guess – a way of signalling that the government recognises the public’s visceral distaste of high inflation and that it expects the Reserve Bank MPC to do so too (for the last two years there has been no sign of that).)
What about those other points on which advice is to be sought (presumably things ACT championed that National refused to agree to upfront, and may be disinclined to support at all)?
There are three of them:
replacing the “over the medium-term” time horizon for meeting the inflation target with some specific time targets (eg “over a rolling 18-24 month horizon” or somesuch),
removing the Secretary to the Treasury as an non-voting member of the MPC, and
returning to a single decisionmaker model for model (given the heading and context, presumably only for monetary policy, but perhaps more broadly).
I would not favour any of those changes.
The most marginal call – which wouldn’t excite me if it went the other way – is the position of the Secretary to the Treasury. I favoured the non-voting member provision in 2018 (it is a not-uncommon arrangement in other countries, and in Australia the Secretary to the Treasury is still a voting member), but there is no evidence from the four years of the MPC’s existence that the Secretary to the Treasury (or her alternate) has added any value (most often one of her deputies attends), whether around substance or process. The evidence we have also suggests a risk that the Bank and the Treasury are too close to each other, undermining the likelihood that the Treasury does its job – as the Minister’s adviser monitoring and holding to account the Bank – at all rigorously or well. How likely was it, for example, that there would be any serious accountability around the LSAP losses when the Secretary to the Treasury sat through all the meetings and there is no record of any ex ante concern being expressed? We also now know – from a recent OIA – that Treasury did nothing at all about the way they were lied to by the Reserve Bank Board chair as regards the earlier blackball on experts serving as external MPC members.
(More generally, if the new government is serious about a much better public sector they should be looking to replace the Secretary when her term expires next year, but this post is about the RB not the Treasury per se.)
I would not favour specific time targets for monetary policy. These were used in the early days of inflation targeting (when the first target was 0 to 2 per cent inflation by 1992), but once the target was achieved things reverted (sensibly in my view) to a model in which it was expected that inflation should (a) be kept within the target range, and (b) if there were deviations (headline or core), the Bank was expected to explain the deviation and explain how quickly it expected to get inflation back to target (either inside the band, or the target midpoint the MPC has been required to focus on since 2012).
It would not be advisable to put ex ante specific imposed timeframes on the MPC, mostly because shocks and deviations from target will differ. They may include, on the one hand, essentially mechanical things like GST changes (or other indirect tax or subsidy changes) which will appear in annual CPI inflation and, all else equal, automatically drop out 12 months later. But they will also include things like big – and perhaps sustained – supply shocks. You could think of a sequence of years in which – unexpectedly – the price of oil kept moving sharply higher (this happened in the 00s). A surge in petrol prices might take inflation above target. It is fine to require the MPC to bring inflation back 12 or 18 months hence, but if there is another surge six months on, you’ll end up with another overlapping target (the first having been deemed essentially redundant). And nine months later there might be a third surge.
Or we could – although let us fervently hope not – have a repeat of the last few years in which most everyone – RB, Treasury, outside forecasters – misunderstand and misjudges the severity of the pressures giving rise to the inflation, and thus the seriousness of the inflation problem. Back in November 2021 the Reserve Bank’s best professional opinion (presumably) reflected in their published forecasts was that inflation would have been back within the target range by March 2023 (a mere 18 months), with the OCR never having gone above about 2.5 per cent. Given a target to get inflation back in 12-18 months they’d have thought they were on course. That was wrong, of course, but the addition of a time-bound target wouldn’t have helped greatly with what was mainly a forecasting/understanding problem by then.
I do think there is reason to amend the remit. At present it does not really deal with mistakes like the last few years at all, stating just
which tends to treat all deviations are much like those resulting from GST or indirect tax changes, and never really envisages the need to correct serious policy failures (of the sort we’ve seen in the last few years). A provision that read something like “when the inflation rate moves outside the target range, or persistently well away from the target midpoint, the MPC shall explain (a) the reasons for these actual/forecasts deviations, and (b) the timeframe over which they expect inflation to return to around the target midpoint, and the reasons for that timeframe.” would be a useful addition. If the government was unwise to go down the “specific set time targets” path it would then need to allow for resetting/renegotiating such time targets when, as is inevitable, sustained shocks/mistakes happen. It was a model used in the very first (low-trust) Policy Targets Agreement, and was sensibly dropped a few months later in favour of the emphasis on transparent accounting.
The case for moving to a Monetary Policy Committee has been pretty compelling for decades (at least since Lars Svensson first recommended the shift in his 2001 review commissioned by the then-new Labour government) and it is to the credit of the 2017 to 2020 government that they finally made a change to a committee system. Not only is there no other area of public life (or politics) in New Zealand in which we delegate so much power – without appeal or review scope – to a single individual (Luxon himself can be ousted by his caucus with no notice), but hardly any other central bank anywhere operates a single decisionmaker system (the Bank of Canada is an exception in law – a legacy of old legislation – but they are at pains to stress that their senior management Governing Council functions as a collective decisionmaking body for monetary policy).
The right path now is not to strengthen the hand of the Governor – perhaps especially the current one if they are stuck with him – but to strengthen the Committee around whoever is Governor. It was quite disquieting to see ACT pushing for a return to the pre-2019 system. The old arguments about “we can sack one person not a whole board or committee” not only aren’t right generally (look at council, hospital boards, boards of trustees who’ve been replaced) but aren’t right in the specific context of monetary policy, and not only because in the face of the biggest monetary policy failure in decades no one lost their job, not even the person who was clearly most responsible (for the outcomes and the spin and misrepresentations around them). In practical terms, even if Orr could be removed shortly, it would be quite a punt in the dark to return to a single decisionmaker model, the more so when there is no single ideal candidate around whom people have united as “the” person to replace Orr.
Much better to focus on (a) replacing Orr as and when you can, b) reopening urgently the application process for the appointment of external MPC members to ensure that really strong candidates are appointed early next year (not those who got through the Robertson/Orr/Quigley RB winnowing process, selecting for people who won’t rock the boat, and have not rocked the boat in the last 3-4 years when things went so badly wrong at the Reserve Bank), and (c) amend the MPC charter etc to (a) require individual MPC members to record votes at each meeting, b) to require those votes to be published, c) to encourage external MPC members to give speeches/interviews, and d) to require FEC hearings for all MPC members before they take up their appointments. None of that requires statutory changes. It could usefully be backed
(There is course no guarantee that a better more-open MPC would have produced a less-bad set of inflation and LSAP outcomes this time – many other countries with better central banks have done pretty much as badly – but that is not a reason to simply settle for an inadequate status quo, one in which we never hear from most of these powerful officials, there seems to be no effective accountability, all supported by little or no serious research, analysis or insight.)
UPDATE: I meant to include this (from Stuff this morning), and now include it mostly for the record. As I said in my earlier post, there is no great harm in the independent review (of monetary policy under Covid) that they are talking of, but it also isn’t clear what is to be gained (and much will depend on who is appointed to do it). The failings of the RB in recent years are pretty well-understood, and the institution commands little respect now. If change is to be made, just get on and start now.
You’ll remember during the election campaign how National (Willis and Luxon) repeatedly told us that their fiscal plans (notably the Back Pocket Boost giveaway plan) was fully funded. Whenever doubts were raised about the foreign buyers’ tax revenue estimates National (a) asserted full confidence in their numbers, and b) reiterated that their plan was…..fully funded. The pretty clear implication – one might even be able to find specific quotes – was that if by some chance the revenue from that tax fell short they’d make it up elsewhere.
National’s fiscal plan – with the foreign buyer tax – was already some mix of ambitious and unambitious. Unambitious in that by 2027/28 (beyond the next election) National envisaged net debt at 0.7 percentage points lower than Labour’s plan, which had been captured in the PREFU numbers. The operating balance, having been in deficit for years (with no good economic basis for deficits) also wasn’t to return to surplus until 2026/27. “Ambitious” in the sense that National promised to do all this – closing a large structural fiscal deficit – without cutting any specific programmes, but with promises that fat would be squeezed out of the public sector. Like Labour’s fiscal plan there was a considerable element about it of “we’ll draw a line on a chart, and then just ask you to trust us that we might deliver”. Alternatively, as the target date for a surplus drew closer it might be pushed out further, as Labour in government has now done a couple of times.
You will recall that Labour has left a large fiscal deficit. On the New Zealand operating balance measure, a deficit this year of 2.7 per cent of GDP (in an economy more or less fully employed), while on the IMF’s internationally comparable metrics, a deficit among the very largest among advanced economies (all having nothing to do with the pandemic, the heavy spending on which was in 2020 and 2021).
Today we got the two coalition agreements. There aren’t any specific fiscal numbers in those documents, but there are policy commitments that all three parties are pledged to support.
To no one’s great surprise, once it was clear NZ First was going to be in the mix, the foreign buyers’ tax is not proceeding (and so unless some researcher with IDI access gets curious – about the detailed pattern of foreign purchases pre-ban) we may never know whether National’s revenue numbers were ever plausible), and with it $750m per annum of promised revenue has gone.
In my post last week I speculated that perhaps National might look to cover this by delaying a few of their promised giveaways a bit, and at least kicking the shortfall a year down the road. Instead, promises of fully funding the giveaways were scrapped along with the proposed foreign buyers tax.
In fact, not only did they not delay any of their giveaways but the restoration of interest deductibility (a good policy) is being done a little faster than National had promised, costing a bit more over the four years than National had allowed for. Not mentioned was the point some critics made pre-election that the deductibility costings had been done in a climate of low interest rates, such that at least over the next few years the cost of restoring deductibility will be a bit more than the National costings had allowed for.
Oh, and the agreement with NZ First allows for an extra $1.2 billion of regional development capital expenditure. That won’t count against the operating balance – at least until depreciation cuts in – but it is all debt, and NZ First last term didn’t have a great track record for high quality regional development spending. It is likely to be much more akin to extra public consumption (one reason why those IMF and OECD fiscal balance measures don’t use an operating balance concept – when governments are spending the money the distinction between operating expenditure and capex often tends to be hazy).
If one wants to look on the bright side of things, there is agreement to shift the tertiary fees-free policy from first year fees to third year fees. That seems pretty daft in terms of any substantive case for the policy – presumably about helping encourage people into tertiary education (which it hasn’t done) – but it does have the one-off fiscal advantage that it should mean no outlays in 2025 and 2026 before normal service resumes in the 2027 academic year. The optimist in me wonders if having operated for two years with no outlays, Cabinet in 2026 might decide to just scrap fees-free altogether but….that will be the election year budget. [UPDATE: paying fees-free for the third year will be cheaper, on account of students who don’t complete, but that just highlights the absurdity of the policy – rewarding those on the cusp of the higher incomes qualifications usually bring.]
A point I’ve made all along is that none of these sorts of things individually amount to much macroeconomically. The foreign buyers tax, for example, was supposed to raise less than 0.2% of GDP in annual tax revenue, but that comes on top of an already large structural deficit for which the parties had no clear or explicit plans for closing. A 2.7 per cent deficit becomes a 2.9 per cent deficit. A large fiscal hole bequeathed by Labour is dug a bit deeper by today’s announcement, making climbing out of that hole all the more challenging (especially if programmes aren’t to be cut). There would seem to be now next to no hope of the fiscal drag tax bracket adjustments in 2026/27.
And it is not as if this is all the potential slippage.
I looked through the ACT agreement and found these items:
a promise to consider sharing a portion of GST collected on new residential builds with councils. The same revenue can’t be spent twice, and
“explore further options to increase school choice and expand access to integrated and independent schools including reviewing the indepedent school funding formula to reflect student numbers”
And in the NZ First agreement:
Fund Gumboot Friday $6 million per annum
Look to increase funding of St John
Ensure Plunket is funded to do their job properly
Investigate the funding formula for new residential care beds
Look at asset thresholds for aged care
Work towards a bipartisan agreement on funding care and dementia beds
Upgrade the Super Gold Card
Some of those are more specific than others, and several may go nowhere. It also isn’t as if it could ever realistically have been expected that there would be no new spending initiatives even within the tight planned operating allowances. But, the pressures for nice shiny new stuff are going to be very real…..in a government that launched itself today by widening the structural fiscal deficit.
I was critical of National during the campaign for not making more of the fiscal deficits, a legacy of a succession of expansionary budgets by Labour even after the pandemic spending period had passed. But one might have hoped that they (Luxon/Willis) would at least hold the line on the starting point – to coalition parties if you insist on some revenue things not proceeding, additional savings need to be found, not in the never never land of successive budgets, but now.
But no.
Perhaps the deal is good politics – not for me to say – but it is unfortunate macroeconomic management policy, and is likely to further dent Willis’s reputation before she has even formally taken office. Robertson gathered a reputation as a Minister of Finance who was reluctant to say no. We really don’t need a successor like that.
It all puts a heightened pressure on Willis in her micro-budget before Christmas to start laying out some credible specifics as to how the large deficits are to be closed. There are limits to what she will be able to do in 3-4 weeks, but simply drawing lines on a graph again shouldn’t cut it (remember those Treasury cautions on even Labour’s numbers, and the task has just gotten bigger today). ACT had talked up the abolition of various government agencies, but it seems the coalition deals ruled that out – the Productivity Commission goes but the money just goes to fund a new public sector agency (whose effectiveness we can only guess at, but have to hope lasts longer than that of the PC), and the Maori Health Authority goes (as National always promised) but the cost of that just gets transferred into the main health votes. Willis and her leader in particular should face serious scrutiny about just how serious they are about sustained fiscal discipline.
It was always one of the worst things of Labour’s voluntary lurch to large deficits in the last year or two. Once the commitment to a firm focus on balanced budgets was sacrificed by one main party – voluntarily running larger deficits when times (revenue-wise) are good – it provides cover for the other lot. What’s another year they will each ask themselves.
Defenders of National will no doubt say “that’s MMP”, but I think it is fairer to say something like “that is what you get when the putative next PM and Minister of Finance don’t campaign hard on the unacceptable starting point of some of the largest deficits in the advanced world”. If they aren’t too bothered, why would their coalition partners be?
UPDATE (Sat): Realised that the discussion above does not allow for the fiscal effects of the change in tobacco policy. Those changes look as though they will avoid the large drop in tobacco excise revenue that was otherwise expected (and which was allowed for both in PREFU and by implication in National’s fiscal plan). The amounts involved are large and may well cover the gap opened by the absence of the foreign buyers tax.
I did a couple of media interviews this morning on the fiscal challenges facing the new government if, as seems likely from other reports, the foreign buyers tax promised by National can’t be got across the line when the agreements with ACT and New Zealand First are reached. Preparing for those prompted me to refresh my memory of a few of the relevant numbers.
There are several relevant points:
if the work I was part of before the election was roughly right (and we may never know if the tax is indeed stillborn), the fiscal challenges with the tax would not have been a lot less than they will be without it. National’s costings assumed revenue of about $735m a year, and our work (and the experiences in places like Vancouver) suggested that something not much above $200m was more likely.
since total government revenue this year is forecast to be $134bn and GDP to be $417bn, the estimated annual revenue from the foreign buyers tax (on National’s own numbers) was always fairly modest in macroeconomic terms (under 0.2 per cent of GDP, when the fiscal deficit this year is forecast by The Treasury to be 2.7 per cent of GDP).
National, like Labour, has suggested it will deliver operating balance surpluses from 2026/27, without being at all specific as to how they would get from here to there (structural deficits do not simply fix themselves), and was inclined during the campaign to play down the severity of the deficit, in favour of an emphasis (like Labour’s) on new shiny baubles to lure in the voters. These two charts (using the recent IMF numbers for comparison) were from a post the day before the election.
All of which is to say that there were pressing fiscal challenges whether or not the foreign buyers tax went ahead, and the scale of those challenges isn’t much changed if it can’t be proceeded with. There might be a larger political challenge – remember the emphasis National put on everything being fully-costed and funded – but then again in MMP any pre-election programme is to some extent only an opening bid in post-election government-formation discussions.
This is the summary table from National’s fiscal plan document.
You’ll see that in the first full year (24/25) the plan envisaged being modestly net positive fiscally (that $537m in the bottom line), mostly because the promised interest deductibility changes would be phased in.
So the new government – or National more specifically- could just argue that for the first year anyway the loss of the foreign buyers tax still left their numbers for that year – the next year’s Budget – looking okay (lose $700m, but they already have a margin of $500m). And if they wanted to change tack and accept that argument I and others had made that the foreign buyers tax revenue wasn’t going to be disinflationary (since it was mostly coming from people outside the economy, so wasn’t reducing domestic private spending) they could even argue that scrapping it wouldn’t materially complicate the fight against inflation.
Or they could delay/rephase any of a number of the other specific items in that table. Delay the income tax cuts by a quarter and you save $500m in the first year, and push back the interest deductibility changes and childcare subsidies by a year and you save another $500m in the first year (perhaps a little more to the extent interest rates are a bit higher now than was allowed for in the costings). Rejigging the first year on the table – 24/25 – really isn’t a particular problem (at least if the foreign buyers tax were the only material change to National’s plan).
But it would further increase the challenges – which will already be severe – on both the 2024 and 2025 Budgets, which will mainly determine whether there is a serious chance that in election year 2026 the Minister of Finance will be able to produce a budget that year with a credible prospect of an operating surplus for 2026/27. It isn’t impossible that the extent of the increased pressure might be small – there are several more rounds of Treasury fiscal and economic forecasts to come (including one next month) and the outlook could be a little less unfavourable than it has been (although things could go the other way too) – but it wouldn’t be a promising start after the last few years of fiscal incontinence.
One way of covering any gap over time is, of course, fiscal drag. Recall that National was very non-committal on future adjustments to tax brackets for inflation.
The more government formation locks in fiscal pressures now the less likely any future band adjustments become.
My bottom line in all this is that on its own the loss of the foreign buyers tax isn’t critical or determinative, but it should simply sharpen the focus on the key questions that were there all along even just on National’s own programme: are they willing and able to make hard choices across successive budgets to get the government accounts back to surplus, and can they do it (as they promised, with all the options they ruled out) without cutting into programmes, or taking some of their own promises off the table. I’m somewhat sceptical – and there are some easy, low-value, programmes they should not have committed to keep (eg fees-free, winter energy payments, Kiwisaver subsidies) – but at present we really don’t have a lot to go on (eg all the attention has been on a possible NZ First win around the foreign buyers tax, and not at all on what ACT might succeed in securing). But National might have been on stronger ground had it spent more time in the campaign highlighting the fiscal mess Labour was leaving and less on shiny new baubles it was offering.
2.5 months ago, when National’s Back Pocket Boost plan was released I made a quick comment on Twitter that promising tax cuts in the current climate was almost a definition of fiscal irresponsibility. The deficits they’ve inherited aren’t National’s fault but they will very shortly be its responsibility (shared with partners, but National is the biggest party and Willis is to be the Minister of Finance), and the focus should have been first on closing those structural deficits, not on upfront tax cuts and vapourware commitments to surplus one day, but not yet.
I’ve written a few posts in the last few months about the strange approach that the Reserve Bank has been taking to thinking and talking about the impact of fiscal policy on demand since May’s Budget. Background to the material in this post is here (second half, from July), here (mid-section, commenting on the August MPS), and here (September, in the wake of PREFU.
Up to and including the February MPS the Reserve Bank’s approach to fiscal issues was pretty much entirely conventional. What mattered mostly for them – and for the outlook for pressure on demand and inflation – was not the level of spending or the level of revenue or the makeup of either spending or revenue, but discretionary changes in the overall fiscal balance. Adjust the headline numbers for purely cyclical effects (eg tax revenue falls in economic downturns) and from the change in the resulting cyclically-adjusted surplus/deficit from one year to the next you get a “fiscal impulse”. That is/was an estimate of the pressure discretionary fiscal choices were putting on demand and inflation. For a long time, The Treasury routinely reported fiscal impulse estimates – and estimates they always are – along these lines, and had developed the indicator specifically for Reserve Bank purposes twenty years ago.
If the cyclically-adjusted deficit (surplus) is much the same from year to year the fiscal impulse will be roughly zero. A central bank typically isn’t interested that much in whether the budget is in surplus or deficit, simply in those discretionary changes. Back in the day, for example, we upset Michael Cullen late in his term when he was still running surpluses, but shrinking ones, when we pointed out that the resulting fiscal impulse (from discretionarily reducing the surplus) was putting additional pressure on demand and inflation, at a time when inflation was at or above the top of the target range. Whether or not what he was doing made sense as fiscal policy, it nonetheless had implications for the extent of monetary policy pressure required, and it was natural for us to point this out (as with any other major source of demand pressure).
Among mainstream economists none of this is or was contentious. International agencies, for example, routinely produce estimates of cyclically-adjusted fiscal balances, partly to help readers see the direction of discretionary fiscal policy choices. Plenty of past Reserve Bank documents will have enunciated this sort of approach.
It was also this sort of thinking that led to an amendment to the Public Finance Act in 2013
(NB: The Treasury has made analysis of this sort harder in recent years, as in 2021 they changed the way they calculate and report the fiscal impulse, in ways that make little sense and reduce (but don’t eliminate) the usefulness of the measure as they report it. These changes further undermined the usefulness of New Zealand official fiscal indicators – already generally not internationally comparable – but do not change the fundamental economics, which is the focus in this post.)
But suddenly, in the May Monetary Policy Statement – a document released just a few days after the government’s election-year Budget – there was a really major change in the approach the Bank and the MPC were taking to fiscal policy.
No one much doubts that the Budget was expansionary. Here, for example, was the IMF’s take in their Article IV review of New Zealand, published in August but finalised just 6-8 weeks after the Budget
There also wasn’t much doubt that the Budget (and thus demand pressures over the following 12-18 months – typically the focus of monetary policy interest) was more expansionary than had been flagged in the HYEFU at the end of last year. As I’d noted in the first post linked to above
For the key year – the one for which this Budget directly related – the estimated fiscal impulse had shifted from something moderately negative [in HYEFU] to something reasonably materially positive [in the Budget]. The difference is exactly 2.5 percentage points of GDP. That is a big shift in an important influence on the inflation outlook – which in turn should influence the monetary policy outlook – concentrated right in the policy window.
But how did the Reserve Bank treat the issue?
They were at it again in the August MPS, and in the next day’s appearance at FEC.
These sorts of lines – including one of the Governor’s favourites that fiscal policy was being “more friend than foe” – helped provide cover for the Minister of Finance, who was fond of suggesting to reporters that after all the Reserve Bank wasn’t raising any issues.
Some mix mystified and frustrated, I lodged an OIA request with the Bank seeking
If they really did have a thoughtful and well-researched new approach to thinking about fiscal policy and the impact on demand pressures, surely they’d be keen to get it out there. It didn’t seem likely there was anything – there were no footnoted references to forthcoming research papers etc – but….you never know.
But we do now. The Bank responded last month (I was away, and then distracted by election things so only came back to it last week). Their full response is here
They withheld in full the relevant sections of the forecast papers that go to the MPC prior to each OCR review. This is a point of principle with the Bank whereby they assert that to release any forecast papers from recent history would “prejudice the substantial economic interests of New Zealand” (I did once get them to release to me 10 year old papers, from my side as point of principle too). It is a preposterous claim – and needs to be fought again with the Ombudsman (or perhaps a Minister of Finance seriously committed to an open and accountable central bank) – in respect of documents that are many months old, but for now it is what it is.
That said, it would be very surprising if there was anything at all enlightening on the Governor’s change of tack in those withheld papers. The Bank’s economic forecasters rarely did fiscal analysis very well and those sections of the forecast papers were often fairly perfunctory (recall that the Bank takes fiscal policy as conveyed to them by the Treasury, just adjusting the bottom line deficit/surplus numbers for differences in macroeconomic forecasts (eg affecting expected revenue for any given set of tax rates)). More importantly, in the documents released there is nothing else from prior to this change of official approach in May – no internal discussion papers, no draft research papers, no market commentaries circulated approvingly, no overseas academic pieces, just nothing.
In fact, the first document dates from 31 July this year, a 14 page note from analysts from a couple of teams in the Economics Department with the heading “Fiscal policy – seeking a common understanding”. Had there been a serious analytically-grounded push for a new approach, you might have expected such a paper to have been prepared and presented to internal groups and to the MPC well before such a change featured in the MPS. But that change was in May…..and the document dates from the end of July (may have been prepared with the then-forthcoming August MPS in mind). It has a distinct back-filling feel to it.
Here is the paper’s summary
You notice that again they are invoking alleged potential jeopardy to New Zealand “substantial economic interests” to tell us which fiscal indicators these two analysts favour – rather weirdly given that the Governor has already told us (in MPSs) and told Parliament’s FEC which ones he thinks matter most.
But that withholding quibble aside, there isn’t anything really to argue about in that summary. I’m not entirely convinced that a fiscal multipliers approach is the best way of tackling the issue, but having done so they report nothing – not a thing – suggesting that what matters for monetary policy is primarily government consumption and investment spending (as distinct from transfers, taxes, or overall fiscal balances). It is an entirely orthodox position, but quite at odds with the line the Governor and the MPSs had been spinning.
(The paper does have a short box noting in the Bank’s economic model – NZSIM – government consumption and investment are identified separately, while the model itself does not have explicit components for tax rates or transfers but – sensibly enough – this gets no further comment in the paper, and does not mean that changes in tax or transfer policy make no difference to the projections the MPC is considering).
There isn’t very much in the paper on the interaction with monetary policy, but there is this
which is all fine and shouldn’t be at all contentious, but none of its suggest that changes in fiscal deficits don’t matter for the extent of monetary policy pressure and that – as the Governor took to claiming in the wake of the expansionary Budget – that all that mattered was government consumption and investment.
At the back of the paper there is a five page Appendix on all the Treasury measures of fiscal policy. Each appears to have been scored for “usefulness for monetary policy purposes” and while the comments have been released they appear to have withheld – jeopardising those substantial economic interests again apparently – scores or rankings of each item.
They do have items for Government Consumption and Government Investment. Under “usefulness for monetary policy purposes” the comment – on both – is simply “Government consumption [investment] provides information about the type and size of government activity”. Quite so, but…..not really about monetary policy.
But then we come to the item “Total Fiscal Impulse”. Here is what they say
These analysts from the Bank’s Economics Department are entirely orthodox. I would qualify their comments slightly because – as alluded to above – this new “Total Fiscal Impulse” measure is clearly inferior for purpose than the previous Fiscal Impulse, but they are clearly on the right track. They recognise that changes in fiscal balances can affect the outlook for demand and inflation (and hence monetary policy pressure). They go on to briefly note that the impulse was estimated to be strongly positive in the 2023/24 fiscal year (the primary focus for monetary policy at the time).
It isn’t a startlingly insightful paper, but that is fine. It is largely rehearsing long-established conventional perspectives, and if it was at odds with anyone……well, it was only with the Governor and the MPC. And I guess one can’t really expect junior analysts to take on the powers that be. But it is still just a little surprising perhaps that this 31 July paper contains no reference – not one – to the strange new Orr model that had suddenly overtaken the MPS. One might, for example, have hoped that the Chief Economist might have provided a lead, and even perhaps affixed his name to the paper…..but then he is an Orr-appointee and must have signed up to the weird MPS approach too.
There is one more document in what the Bank has released to me. It is undated, has no identified author, and is headed “Fiscal policy in the August 2023 MPS”, suggesting that there is a reasonable chance it was written specifically for the purposes of responding to my OIA.
There are two parts to this 1.5 page document. The first page lists four statements on matters fiscal from the August MPS and outlines “supporting evidence”. Of those, three are simply irrelevant: there has never been any dispute about the fact that in the 2023 Budget real government consumption and investment was expected to fall as a share of GDP over the next few years (although note that for setting monetary policy in mid 2023, what might or might not happen to some components of the budget in 2026 is simply irrelevant – monetary policy lags are shorter than that).
The fourth is “interesting”
You might have supposed that this statement had appeared in the August MPS. It doesn’t. “Fiscal policy” hardly appears at all (and nothing about what it will be doing over the period monetary policy is focused on) and “discretionary fiscal policy” doesn’t appear at all.
But beyond that it is still just spin. What happens by 2027 is (again) irrelevant to today’s monetary policy, and even if the cyclically-adjusted deficit is still forecast to narrow in the shorter-term the extent of that narrowing by Budget 2023 was materially less than what had been envisaged – and included in the RB forecasts – at HYEFU 2022. Fiscal policy is putting more pressure on inflation and demand than had been envisaged at the end of last year, exacerbating pressures on monetary policy. That was – and apparently is – the point the Governor still prefers to avoid acknowledging…..something Robertson was probably grateful for.
The second half of this little note is headed “Why haven’t we referred to other measures of fiscal policy?”
Of the four bullets, again there is no real argument with three of them
To which one can mostly only say “indeed”, but then no one suggested the central bank should look at either of the allowances – which in any case are only on the spending side of the balance. As for the operating balance, I’m not going to disagree, but……mentioning it would be typically less bad than the highly political mention of only one bit of the overall fiscal balance (direct government consumption and investment).
What of the fourth?
That is just weird. Take that penultimate sentence: it is a change measure that you want when it is monetary policy and inflation you are responsible for. The change is what changes the outlook for demand and inflation. But then there is the rank dishonesty of the final sentence. They prefer to “supplement the total fiscal impulse” do they? But there was no reference to it – or to words/idea cognate to it – in either the May or August MPS. And the claim that they can somehow sensibly supplement as fiscal balance based measure – which already includes taxes, transfers, and real spending – with “real government spending” is, it seems, simply plucked from thin air. It doesn’t describe what they’ve actually done these last two MPSs, it isn’t an approach even mentioned in the Economics Department’s July note (see above), and as far as I can see it has no theoretical or practical basis whatever.
It is just making stuff up.
We’ve had several previous attempts by Orr to actively mislead (Parliament or public) or make claims that prove to have no factual analytical foundations. There was the claim to FEC that the Bank had done its own research on climate change threats to financial stability, claims trying to minimise the extent of turnover of senior managers, claims regarding the impact of this year’s storms on inflation, claims that inflation was mostly other people’s fault (notably Vladimir Putin). Each of these has been unpicked in one way or another – the first via the OIA, the second via a leak, the third via one of his own staff piping up to correct things in FEC, the fourth simply be patiently setting down the numbers and timing. There have also been entirely tendentious claims around the LSAP, including his attempt – repeated in the recent Annual Report – to assert that the LSAP made money for taxpayers, despite the simplest review of the exercise he used in support of this claim showing that it simply didn’t provide any serious support for his view.
Every single one of those was bad, and should have been considered unacceptable, by both the Minister of Finance and the Bank’s Board. A decent and honourable Governor would simply never have done them. But bad as they were, those were self-serving misrepresentations.
What has gone on around fiscal policy this election year seems materially worse. We make central banks operationally independent in the hope that they will do their job without fear or favour, and without even hint of partisan interest. But faced with a Budget that complicated the task of getting inflation down, that was materially more expansionary than had been envisaged just a few months previously, Orr (and his MPC colleagues, reluctantly or otherwise) chose to completely upend the traditional approach to thinking about fiscal impacts on demand and inflation pressures, and tell a story – and a story it was – that tried to gloss over what the Minister of Finance had done, ignoring what mattered in favour of what was at best peripheral. Whether that was for overt partisan purposes is probably unknowable from any documents likely to exist, but it is hard to think of any other good explanation for what was done, espeically when – as this release shows – it was all based on no supporting analysis or research whatever.
The Official Information Act plays a vital role in helping expose events like this. It was never likely there was anything of substance behind Orr’s fiscal spin. But now we know.
(As to the attitudes of other MPC members, who clearly all went along since not a hint of a conventional perspective is in the minutes of the meetings around either MPS, there is a tantalising bit that was also withheld
Only one of the three relevant MPC meetings during this period, but the most recent. Was there some gentle unease from perhaps one member? We may never know, but at least this withholding appears to confirm that there are fuller minutes of MPC meeting, not just the bland summary published with each OCR announcement.)
PS. It is perhaps no surprise that the Reserve Bank has chosen not to put this OIA release out on their OIA releases page, even though that page was updated just a couple of weeks ago. It does not put the Bank in a good light.
In my post last week on ANZ’s note on the balance of payments, I included this chart from the latest IMF WEO (numbers finalised late last month). On the IMF’s read we had the most overheated advanced economy this year taken as a whole.
ANZ themselves followed up with this chart
In its October World Economic Outlook the IMF estimated that NZ was the most overheated advanced economy in both 2022 and this year, a conclusion that is certainly consistent with observed stubborn non-tradeable inflation. https://t.co/N2PIDOTP5Wpic.twitter.com/ITlQo8SqE9
So as they see things now, New Zealand had the most overheated of any of the advanced economies for two years in succession.
(As a reminder, the output gap is the difference between actual GDP in a period and the analyst’s estimate of potential GDP – loosely, the level of GDP in a particular period consistent with avoiding imbalances emerging (be it inflation pressures or current account ones). Since potential GDP is unobservable (and actual GDP is forecast and subject to revisions), “the output gap” isn’t directly observable, even well after the event. But the numbers that forecasters put in their tables are still useful, because they tell us how those forecasters, and the organisations that employ them, are seeing capacity pressures in the economy. They might prove to be right, or be proved wrong, but it is the view they are signing on to. And the great thing about a collection of national forecasts like those in the IMF WEO is that it is a single organisation with a single broad methodology at a single point in time.)
When there is a large output gap (positive or negative) it is reasonable to start asking questions about the performance of the central bank. The reason we set up central banks with discretionary monetary policy is to reduce the extent or duration of those imbalances, while keeping inflation in check. Sometimes there can be tensions between those goals but in the presence of demand surprises one tends to see both positive (negative) output gaps and high or rising (falling) core inflation at much the same times. A large output gap and inflation well away from target in such circumstances is a mark that the central bank has not done its monetary policy job well.
But it was all very well to spot that the IMF now believed the New Zealand economy to have been more overstretched than any other advanced economy for which they run these numbers – not that the IMF itself made this point in their recent Article IV report on New Zealand – but I was curious to see how their own thinking had evolved. Was this a new take on New Zealand’s relative position or not? And so I dug out the IMF output gap estimates/forecasts back to those published in April 2021.
And from here on I’m mostly going to concentrate, and illustrate, only the 10 countries/regions for which there is an output gap estimate and where there is a central bank with its own monetary policy. Most of those European countries in the earlier charts are subsumed in the euro-area estimate.
It is also important to mention that IMF projections are done on a current policy basis, so each of these charts is showing how the Fund thought economies would behave if the policy rate was left as it was at the point the forecasts were finalised.
Here is what the output gap estimates as at April 2021 looked like
New Zealand didn’t stand out, and if anything the Fund thought our output gaps for both 2021 and 2022 would be more negative than for most other countries. Recall that as this time, our domestic economy was recovering quite strongly, but perhaps the Fund was influenced by the likelihood of prolonged border closure (recalling that New Zealand has been a much bigger exporter than importer of both tourism and export education services). Locally, the Reserve Bank estimated in both its February and May 2021 MPSs that we’d have a negative output gap in 2021, but they expected – using endogenous policy rate forecasts – a positive output gap in 2022.
By the next WEO, the IMF’s view on New Zealand had changed quite sharply
By then – still amid the extended lockdown of Auckland – New Zealand was standing out as having, in both years, the second largest positive output gaps, behind only the US. (The Reserve Bank’s forecasts for New Zealand – which included some policy adjustment effect on the 2022 numbers – were pretty similar.)
I’m not going to show you the individual charts for the April and October 2022 and April 2023 WEOs because…..in all of them New Zealand is shown as having the largest positive output gap in both years (eg by 2022 forecasts for 2022 and 2023) of any of those any of these central banks were facing. Here is the October 2023 version though.
Here is how their New Zealand forecasts/estimates have evolved
Recall that all of these numbers were done on policy rates as they stood at the time (0.25 per cent in April 2021, 5.5 per cent in the latest forecasts), and yet the estimates of 2022’s output gap have just kept being revised up and there is no sign yet of their estimates for 2023 (or the few observations for 2024) being revised down, as one should have hoped.
So on the IMF’s telling all last year and this not only have we had consistently the most overheated economy in this set of advanced countries, but if anything the extent of the overheating has been revised upwards. If that was even close to being an accurate description of how things are it would add to the case (already evident in core inflation itself) that the Reserve Bank MPC has done a poor job, both absolutely and relative to its advanced country peers.
Here is the Reserve Bank’s own take over successive MPSs since the start of 2021.
It is telling that as early as February 2021 – eight months before they actually started raising the OCR – the Reserve Bank thought the economy would be stretched beyond capacity (which is basically what the output gap is) for each of the following three years.
It is also worth noting how stable their estimates for 2022 have been for a couple of years now, even as it passed from prospect to history. It isn’t a perspective you hear about from the MPC – a severely overstretched economy, and stretched to a magnitude that (on IMF reckoning) hadn’t been seen in any of these other advanced countries. As time has gone on they’ve increasingly revised up their view of how stretched things were in 2021 as well. None of these advanced economies are thought to have had 2 per cent positive output gaps two years in succession. But New Zealand did.
When we come to 2023 there is a big difference between the IMF view and the Reserve Bank view. Believe the IMF and 2023 as a whole still looks pretty bad – yet another 2 per cent plus output gap. But if you believe the Reserve Bank, for this year as a whole the output gap will have been almost zero (0.2 per cent on average), before the output gap goes deeply negative next year. The IMF of course does not agree with the Reserve Bank – there is a radical difference between the Fund’s view (0.7 per cent positive) and the negative output gap of 1.7 per cent of GDP the Reserve Bank expects for next year. If we simply slotted the Reserve Bank’s number into the IMF table/chart, the New Zealand output gap next year would be more deeply negative than those for any of the other advanced economies.
Now you might be thinking, “well, even if they got things wrong initially, hasn’t the Reserve Bank done a lot since?”
This chart shows the policy rate adjustments for all the OECD central banks in the BIS policy rates database, shown both relative to the Covid trough and relative to the immediately pre-Covid starting level in January 2020
Unfortunately we do not have IMF output gap estimates for the six countries furthest to the right on this chart, but even if we set them to one side there is nothing very startling about the extent of the Reserve Bank’s policy rate adjustment, even though – on its own numbers and those of the IMF – it was dealing with a really severely overheated economy, both in absolute terms and relative to advanced country peers. For what it is worth, in past cycles New Zealand has typically had policy rates quite a bit higher at peak than places like the US, Canada, and the UK. Thus far – and despite the severely stretched economy – that hasn’t proved to be the case this time.
Looking ahead, it is an open question whether the Reserve Bank’s (now-dated) August outlook will prove nearer to the mark than the IMF’s. We (and they) must hope so, given that inflation is still such a long way now from the 2 per cent target midpoint the MPC is supposed to be focused on. This week’s labour market data may provide some helpful hints. If we took the unemployment rate as it has been over the last couple of years and added in the consensus estimate for the September quarter (out on Wednesday) you’d certainly take the view that capacity pressures in 2023 will have been less than those in 2022. But even the IMF numbers tell such a story. But is it plausible to suppose that for 2023 as a whole the output gap will have closed almost completely as the Reserve Bank reckons? It seems a stretch to me, since no one much believes that an unemployment rate averaging below 4 per cent – which now seems almost certain for 2023 – is anywhere near a New Zealand NAIRU. We’ll see, and we’ll see what the Reserve Bank has to say later this month, before the MPC shuts down for their long summer holidays.
Finally, it is worth reflecting a little on quite why New Zealand might have had the most overstretched economy in the advanced world in 2022 and 2023. There were some positive factors, eg we weren’t in the Ukrainian war zone or directly affected by gas supply/price issues. But, on the other hand, despite the reopening of our borders, net services exports have remained pretty weak, acting as a drag on demand.
A good candidate hypothesis for what went on here was fiscal policy. I’ve pointed previously how unusual discretionary fiscal policy has been here in the last couple of years. Most countries ran quite big deficits in 2020 in particular around providing Covid support. We did too. But the median advanced economy also then saw deficits closing quite a lot (the IMF median projection for next year is getting close to primary balance).
By contrast, the (now) outgoing government here chose to run to materially expansionary budgets in both 2022 and 2023. That compounded the challenges facing the Reserve Bank’s MPC, since even if the direction of policy was reasonably signalled, the magnitudes were not. Expansionary fiscal policy puts more pressure on demand (showing up in output gaps and current account deficits) and inflation, which proved very unhelpful when the Bank itself was still realising how badly it had earlier misread underlying pressures anyway.
One might have more sympathy with the Reserve Bank had they beeen upfront about these pressures. But this year in particular they have repeatedly sought to minimise the role of fiscal pressures and fiscal surprises, to the point of attempting to reinvent macroeconomics in apparent service of the political interests of themselves and their masters. But that is topic for another post.
That was the title of a ten page piece published last week by the ANZ economics team (chief economist Sharon Zollner and one of her offsiders, who appears to be a temporary secondee from the Reserve Bank). You can find a link to the paper here.
The gist is captured in the paper’s summary
I found the first line of that final bullet rather jarring – the balance of payments not having been any sort of policy focus for decades now (really since the shift to a floating exchange rate) in 1985.
But what really puzzled me about the note was how little macroeconomics there seemed to be in it, or behind it. It isn’t that there was no interesting material in it; in fact there were a variety of interesting charts on developments and issues in individual sub-sectors, and for anyone interested in these issues it is worth a read. But I thought I’d throw in a few macro perspectives.
The paper starts with this chart
which is a rather different picture than the one (for the current account) we usually look at. The current deficit as a share of GDP got to about current levels in 2007, but looking just at the goods and services balance what we’ve seen in the last couple of years is without precedent for many decades. Here is the same chart with the longer run of annual data.
I’m not entirely sure why ANZ chose to focus on the good and services balance. It is akin to the primary balance in a fiscal context, which I argued here a few weeks ago it made sense to give more prominence than is often done in New Zealand for a number of reasons. If as a country you are running a goods and services balance (or surplus) it is unlikely that the NIIP position (as a share of GDP) is going to get away on you. (Of course, there isn’t anything necessarily wrong with a widening negative NIIP position – as so often, it depends what is causing the change.)
But one other positive feature of focusing on the good and services balance is that it helps to make clear that the recent sharp widening in the current account deficit – to one of the widest among OECD countries – is down to the spending choices of New Zealanders. The other big component of the current account is the income deficit (primarily in New Zealand, investment income – interest and profits). Interest rates have risen a lot in the last couple of years. But I’d have to confess I hadn’t really noticed that, thus far, the income deficit has not widened much at all as a share of GDP. If interest rates stay around current levels for long that will probably change.
So if it is spending choices that – compositionally – explain the sharp widening of the current account, where do we see that.
Well, the badly mis-forecast sharp increase in core inflation is one place. But step back a little further.
Here, from the IMF WEO database, are investment and (gross) national saving as a per cent of GDP, in annual terms included estimates for calendar 2023.
Another way of looking at the current account deficit is as the difference between saving and investment. And here you see that investment as a share of GDP last year and this has been at the highest we’ve experienced in decades (since the days of Think Big), and while the savings rate isn’t at any sort of record level it has been quite a bit lower than what we’d seen in New Zealand over half decade or so pre-Covid. Saving here is national savings – household, business, government – and we know that government dissaving – substantial operating deficits – has been a feature of the last few years, never more so than in 2022 and 2023 by when the economy was already running beyond capacity.
Beyond capacity? Well, we know the labour market has been stretched beyond sustainable (in the RB Governor’s own words) and both the Reserve Bank and Treasury have talked of positive output gaps.
But absolute numbers for local output gaps don’t get much coverage or grab the imagination. But this chart is from the IMF’s World Economic Outlook a couple of weeks back. The good thing about the IMF numbers isn’t that they are right – few forecasters consistently are – but that they take a fair common approach across a whole bunch of countries. And on their reckoning even this year on average the New Zealand economy is seen as the most overheated – “overheated” means prone to larger than usual balance of payments deficits and higher than usual inflation – of any of the advanced countries they do such estimates for. And that without any surge upwards in the terms of trade of the sort we were enjoying when the economy was last this stretched – in output gap terms – in 2007.
And then here is another chart I’ve shown before to highlight just how unusual domestic demand has been here in recent years.
Domestic demand needed to increase to some extent to fill a void left by the slump in net exports (most notably net services exports) if the economy was to remain fairly-fully employed, but policy (mostly monetary policy, which takes fiscal policy as given) was set so badly that we’ve ended up with astonishing levels of domestic spending, and with it……high core inflation, and a really marked widening in the balance of payments current account and goods and services deficits.
But, and here’s the thing, we still do not need specific balance of payments. Not from government, and not even from you and me thinking we’d best do our bit for the nation. Rather, as the government (eventually) gets the deficit back down again, and as the Reserve Bank eventually does its job, we can expect these imbalances largely to sort themselves out, and certainly not to end up posing severe risks to anything much. And if perhaps Chinese tourism exports never fully recover, we can expect private domestic spending to adjust, as it tends to when (for example) the terms of trade fall and people find themselves less well off than they had thought.
Of course, we shouldn’t rule out an exchange rate adjustment at some point, but we’ve come to forget how common they used to be in New Zealand – common, without being highly disruptive or prompting higher interest rates again. For a couple of decades at the RB we used to spend huge amounts of time trying to make sense of some of the biggest real exchange rate swings in the advanced world…..and then they just stopped (the reasons for that aren’t, I think, well understood or even extensively studied).
The ANZ paper ends with this line
The bottom line is, ‘something’s gotta give’, as the saying goes. We can either be the collective architects of that change or we can wait for changes to be imposed on us by foreign creditors and financial markets.
That seems overwrought, but we should expect our macro policymakers to do their jobs rather better than they have in the last 3 years or so. But perhaps it isn’t the done thing for market economists to call out policymakers too vocally?
UPDATE: Oh, forgot to include this chart, which does put the last couple of years’ external imbalances in some perspective.
The rest of the world’s net claims on New Zealand residents have, if anything, shrunk a little further as a share of a GDP over the Covid years. It seems unlikely the creditors will be dunning “us” any time soon……which is not to say that if our interest rates end up lowish relative to the rest of the world there might not be some fall in the exchange rate.
A few weeks ago I wrote a post surveying the range of fiscal indicators (local ones and IMF/OECD metrics) to look at recent New Zealand fiscal policy across time and across countries.
I included in that post this chart, which I had cobbled together using IMF April data for other countries and their estimates for New Zealand reported in the recent Article IV review (it was the indicator they specifically cited in suggesting a need for “frontloaded fiscal consolidation” in New Zealand.
A new IMF Fiscal Monitor has been released in the last few days. We now have consistent cross-country estimates, including numbers for New Zealand which will have taken account of the government’s sudden “get religion” line-on-a-chart cuts of a few weeks ago.
With those updates all round New Zealand is now “only” projected to be third-worst among the advanced economies next year, on current policy (ie assuming the government’s top down cuts are effectively implemented).
And how about over time?
We used to be better than the pack. But now we are a lot worse.
You can see that New Zealand’s primary deficit are barely smaller than those at the height of the Covid spend, a quite different picture than the median country. Out of curiosity I wondered where we ranked.
Most countries have very substantially improved their cyclically-adjusted primary deficits/surpluses. New Zealand, by contrast, is way to the right of the chart.
But what of The Netherlands and Denmark? They seemed a little puzzling. I wasn’t aware they had recent fiscally reckless governments. It turns out that Denmark ran primary surpluses right through the Covid – look at just a fiscal chart and you’d barely know there had been a pandemic – and is now running a roughly zero primary balance (cyclically adjusted). The Netherlands has gone from primary surplus pre-Covid to deficit in Covid and subsequently. But the IMF estimates that next year they will have a cyclically-adjusted primary deficit of 1.8 per cent of GDP. Not great, but nothing like as bad as New Zealand’s projected 3.4 per cent of GDP deficit.
Whichever party leads the next government there is a huge amount of fiscal work to do – including making real the “cuts” already included in the IMF numbers – all thanks to the extravagant fiscal choices of the current government in the last two (post big Covid spend) budgets.
The IMF released its latest World Economic Outlook and associated forecast tables overnight. There is no reason to think the IMF is any better as a forecaster than anyone else (ie not very good at all) but they do look at a bunch of advanced countries all at the same time, against a common global backdrop, so it is still worth looking at how they see things here relative to those other advanced countries. A few charts follow.
(Here, as in various recent posts, I remove from the IMF advanced countries Andorra and San Marino (as too small to matter) and Hong Kong, Macao, and Puerto Rico (as not countries at all), and add in Poland and Hungary, both of which are OECD member countries and performing similarly economically to various central and eastern European countries the IMF includes in their advanced country grouping. That leaves a group of 38 countries, including New Zealand.)
First, we look at the Fund’s forecasts for real per capita GDP growth.
In calendar 2023
and calendar 2024 (I can’t highlight New Zealand – zero growth – but we are fifth from the right)
What about fiscal policy? The IMF has actuals and forecasts for the general government structural balance. We used to be better than most advanced countries. But that was then.
For calendar 2024 alone (for 2023 we are a couple of places less bad). These numbers seem very consistent with the IMF cyclically-adjusted primary deficit estimates in their recent Article IV review of New Zealand.
What of net general government debt?
We do still have government debt as a share of GDP less than the median advanced country, but that gap is closing fast. You’ve heard a lot in this election campaign about the pandemic: other countries had one too.
And what of the current account deficit? There is no right or wrong number for a current account deficit. Huge surpluses or huge deficits can both be symptoms of things going right or wrong. Context matters. In a country with rapid productivity growth and lots of business investment, catching up with the rest of world, really large deficits make sense. That was Singapore and South Korea in their earlier development phases, or 19th century New Zealand.
In 2023, New Zealand doesn’t have the largest deficit as a share of GDP, but it is close. (We had the third largest deficit last year and are still forecast to be second largest next year.)
All in all, it didn’t really make encouraging reading.
Probably like most people I’d got a bit tired of the foreign buyers’ tax revenue estimates issue. At best I can tell, something like the estimates we produced seem more plausible than National’s numbers. In the grand macroeconomic scheme of things, the differences are fairly second order (0.1 per cent of GDP vs the 2.7 per cent of GDP gap between revenue and expenses this year in the PREFU). But it has not been reassuring that National has simply refused to release their modelling/calculations or authorise the release of the modelling said to have been done for them by Castalia. It is an evasiveness that doesn’t speak well of a party that has come out in support of a state Policy Costing Office, and whose leader just this morning is reported to have championed an overhaul of the OIA (presumably to encourage more transparency/accessibility). No one can make them publish, but if they don’t we can draw our own conclusions. As a straw in the wind on that point, I saw National’s recent responses to questions on this issue from one media organisation, in which Willis seemed more interested in casting doubt on our independence, than in elaborating on their own work. (My earlier two posts are here (including the underlying paper) and here.)
Much as I quite liked the modelling exercise we did, in some ways I took at least as much comfort from what I could learn of the Canadian experience, most notably the revenue numbers from their foreign buyers’ tax in British Columbia – Vancouver having been a magnet for (in particular) Chinese purchases, and the tax having been applied at all price points. But I hadn’t made much effort to look more broadly, not really being that familiar with the data sources in other countries.
But this afternoon someone sent me a link to an Australian Tax Office insight note, with data, on foreign purchases and sales of residential real estate. Under the Australian system (accessible summary here) foreigners other than New Zealand citizens need FIRB approval to buy a house in Australia (this includes people on temporary work visas, but not permanent residents).
The report has data for four (June) years, to June 2021. The numbers appear to be for those classes of people who require FIRB (ie ex NZ purchases).
You might be inclined to discount 2019/20 and 2020/21 a bit, having been disrupted by Covid, including the border closures for much of those periods. But even if one starts from the 2018/19 numbers, it is a total of 7679 sales of dwelling (new and existing) in a full year, at all price points. Around 80 per cent of all sales (by number) were at price points under A$1m (this will include the vacant land sales, but they only make up about 20 per cent of the total).
The total value of foreign purchases in 2020/21 was A$4.2 billion. In 2018/19 – when the volume was higher – the value of sales in total was A$7.5bn. (Interestingly, whereas foreign purchases have been dropping, sales of such properties by foreigners – a much smaller number – were rising over this period.)
Had a 15 per cent tax been applied to that 2018/19 higher level of sales it would have raised only just over A$1.1bn even in 2018/19. Australia is, of course, five times the size of New Zealand (and the proposed tax here will exclude Australian – and Singaporean – buyers, as New Zealand buyers are excluded from the Australia numbers), so if it were really a like for like comparison this would be consistent with not much more than about $200m of annual revenue here. On the assumption that – unlike National’s proposal – purchases at all price points were covered.
However, this is not a clean comparison. The Australian land transfer market is riddled with complexity and costs. Not only does the FIRB process appear more constraining (especially on non-resident purchasers of other than investment properties – as distinct, say, from people living in Australia on work and study visas) than what National is proposing for properties selling for more than $2m, but there are stamp duties and the like. In Victoria, for example, foreign buyers in this period faced this additional transfer duty
All of which means I would not put too much weight on this report – comprehensive as it is in the Australian context – for insights on prospects for New Zealand if National’s policy were to be implemented. But in the grand scheme of things, Sydney and Melbourne are rather more “global cities” than Auckland (and about as expensive, in price/income terms), and Australia has – per capita – about as many migrants as we do. And what none of us know with any certainty is how many of the houses being bought by foreigners before our ban – outside Queenstown, small in the overall scheme of things for non-Australian buyers – were bought by people living here at least part of the time, as distinct from holiday homes
The most I would say is that it is just one more straw in the wind – but no more – that the National revenue estimates still seem implausibly high.
But perhaps things would look different if we saw National’s own or Castalia’s modelling.
croaking cassandra 