No plan, but not much sign of aspiration either

There was a not overly good article in the Financial Times yesterday marking the first anniversary of the Labour/New Zealand First (and Greens) government.   Among its odd features was the final sentence which reported the suggestion from political scientist Bryce Edwards that the Prime Minister “is now seen as an icon of good family values”.   Really?  By whom?  The FT’s journalist also claimed that the Prime Minister had achieved “near-celebrity status” abroad.   If that were true I’m not even sure it would be a good thing, but is it?  I read pretty widely internationally and I don’t see much sign of it.

But the primary focus of this blog is still economics, and what really caught my eye was this comment from a former ANZ chief economist:

“I’d give the coalition an A grade for aspiration due to their ambitious reform agenda,” said Cameron Bagrie, founder of Bagrie Economics. “But the problem is they haven’t got an economic plan in place yet.

I’d certainly agree with the second sentence (no plan).  But Cameron Bagrie seems to be far too charitable is his talk of an “A for aspiration”, let alone the puzzling talk of an “ambitious reform agenda”.

Sure, ministers occasionally run the line about building a more productive and sustainable economy, with occasional suggestions of shifting the “growth engines” of the New Zealand economy.  But after only a year it has already become nothing more than a cliche, recycled in speeches and press releases, signifying almost nothing, and with no sign of any passion or serious aspiration underpinning it.

And it really doesn’t mark them out from most of the decades of governments that have gone before them, since the problems  –  and underperformance – of the New Zealand economy first started to become apparent, back in the 1960s.  All of them talk about producing something better and then, after they’ve been in office long enough, start pretending that there really isn’t a problem after all (John Key, you may recall, resorted to talk of “quality problems” –  dreadful congestion, and unaffordable house prices.)   There is talk of a more outward-orientation to the New Zealand economy, of a stronger productivity performance, of closing the large gaps that have opened with the older OECD countries.  And then, in most cases, almost nothing happens.  Governments occupy office, and then leave it, and the fundamental failures aren’t addressed.   Housing is a more recent utter failure than productivity –  only really dating back 25 to 30 years –  and again governments talk about how things will be different, but do little of much substance, and never show any evidence that they care much.  To date, the current government doesn’t look materially different on that count.

Has anyone heard rhetoric from the Prime Minister or her ministers about getting house prices back down again –  to perhaps three times income that looks to have been a longer-term norm?   They won’t even say the words, let alone suggest that have a well-researched carefully thought out plan (economic and political) to make it happen.   There is nothing specific either to their talk of a more productive economy –  no benchmarks to which we can hold them to account, no nothing (and indeed things like the oil and gas exploration ban, and net-zero targets that will likely make it much harder to pursue such goals –  if the government were actually serious about them).   There is no sense of open alarm (which a new government could afford, responsibility for those outcomes not yet resting with them) at five years of very little productivity growth –  even though productivity growth almost alone underpins prospective improvements in material living standards –  let alone the decades of relative underperformance that has helped give the outcomes the government probably does care about more (eg child poverty), and the decades-long exodus of New Zealanders to Australia.  If there is “aspiration” –  as Bagrie suggests –  around economics it seems to involve using just enough of the right words to get and hold office.

I wrote the other day about the vacuous nature of the new Business Advisory Council (and a Herald columnist had some other criticisms which mostly rang true). The Prime Minister talked up the Council when she first launched it, but which seems more likely to be a sop to the (upper end) business community than a sign of, or source of serious ideas for, any serious commitment to a much better economic future.  There isn’t a plan –  that much is obvious.  But there is also no sign of a serious aspiration –  the sort that shapes how the government operates in its determination to give concrete form to a better future –  either.  Sadly, that doesn’t mark them out from their predecessors.

What if they really were serious?  Well, of course, then they’d have used the long years in Opposition rather better.  That is water under the bridge now.   But even now they could be looking seriously for some better, more compelling, answers.

Business leaders aren’t typically the place you would be looking to find those sorts of answers –  an economy is, in crucial ways, not like a company.   Economists, for all their faults, are much more likely to be able to help in getting to the bottom of the problem, and identifying policy measures that have a serious prospect of making a real difference.  There are stories and proposed solutions around.  I’ve been developing one, and arguing it here, for some years, but I’m not alone.  Paul Conway at the Productivity Commission has also developed sustained analysis and arguments about the productivity failure –  in some areas, his analysis overlaps with mine and in others not.  If the leadership of the key government  agencies –  Treasury and MBIE –  is beyond hope, there are still individuals in Treasury (in particular) who have thought hard about, and written on, some of these issues.  There are people like David Skilling, now based offshore but formerly at Treasury and the New Zealand Institute, and the academic Phil McCann.  There would, no doubt, be others who would invest in the hard thinking and analysis if a government were to show signs that it was really serious about New Zealand doing better.

I’ve argued for years that what is needed is a serious contest of competing narratives –  credible, well-documented, stories, well-grounded in the specifics of New Zealand’s situation and experience that explain New Zealand’s underperformance and how any policy proposals fit in to such a narrative.   Probably no one story or set of proposals will get everything right, but the active contest of ideas and arguments is a big part of the way in which we could make progress towards a deeper, and shared, sense of what has gone wrong and what could –  and should – be done in response.

But, of course, there is no sign that the Prime Minister or the Minister of Finance, or the leaders of her coalition/support parties, care.  There is no sign that they have anything like the sort of aspiration –  on matters economic (including housing) –  that the Financial Times reports Cameron Bagrie suggesting they have.   That is beyond a shame, and more like a disgrace –  like their predecessors, people who hold office and yet do little or nothing, presiding over a continued relative decline of a country once the most prosperous on earth, that once –  and not that long ago –  had affordable housing for its people.

Automation, future of work, and other distractions

The Labour Party, led by the now Minister of Finance, has made great play in recent years of the looming “threat” of automation, and the claimed need to think hard about the Future of Work.  There was a taskforce in Opposition, repeated references in ministerial speeches, and now even a Future of Work Forum.  I’ve always been a little sceptical: the application of new technology has been a key part of how living standards have improved over the last few hundred years, and I’m sure most people are hoping for further improvements for themselves and their children/grandchildren.   And employment rates seemed to be about as high as they’ve been for decades.

And so I was interested this afternoon flicking through today’s online Financial Times to find an article citing some new OECD work suggestiong that New Zealand is among the advanced countries with some of the lower propotions of jobs at significant risk of automation.  Here is the key chart from the OECD paper.

automation2

New Zealand fourth lowest share of jobs at high risk of being automated, and lowest in the OECD for the combined high and significant risks.

For the geeks, here is some text from the paper on how OECD researchers have been revising down their estimates.

automation 4

Automation will, no doubt, continue to happen.  It should.  We’ll generally be better off for it (even if some individuals will face difficult adjustments, as they did in every phase of activity –  indeed every business cycle – since the Industrial Revolution).  But particularly if this methodology is even approximately right, it reinforces my sense that the Labour Party – and now the government –  (probably with good intentions) use the Future of Work issue, and automation risks/possibilities, as a distraction from, and substitute for, their lack of interest/ideas in addressing the real economic elephant in the room: decades of underperforming productivity growth that mean we would now need a two-thirds lift in productivity (all else equal) to once again match the leading countries, most of whom we used to consistently outstrip.

As Morning Report reminded us today on the anniversary of women’s suffrage, we should celebrate the automatic washing machine, for all the time it freed up, and opportunities it allowed people (then largely women) to pursue.  It is only one of a myriad of such innnovations, past, present and future.

But New Zealanders get fewer of the gains than most advanced country citizens, as successive governments have done nothing to reverse the productivity failure.

 

Scattered thoughts on Budget 2018

The possible new fiscal institution first, and them some comments on some of the numbers.

It was interesting to see the joint statement from James Shaw and Grant Robertson that the government is looking to move ahead with some sort of independent fiscal institution.   This had been a Greens cause more than a Labour one –  former leader Metiria Turei had openly called for a new body –  and although the pledge had formed part of the pre-election Budget Responsibility Rules, I’d been beginning to wonder whether the government would follow through.  After all, Treasury has never been keen on a potential alternative source of fiscal advice/analysis, even though the independent review of their fiscal advice and analysis a few years ago by the former head of the IMF Fiscal Affairs Department had been positive on the idea that New Zealand establish a Fiscal Council (and the OECD had also recommended it).

There were few specifics in yesterday’s statement

Public consultation will be launched in August on establishing an independent body to better inform public debate in our democracy, Associate Finance Minister James Shaw announced today.

“We are pleased to take forward a Green Party idea developed before the last election to see a body formed which could provide all political parties with independent, non-partisan costings on their policies,” says James Shaw.

“That way we can reduce political point-scoring and attempts to create unreasonable doubt about a party’s policy figures. That will mean better debate about the ideas being put forward.

“We are proposing a new institution independent of Ministers that would provide the public with an assessment of government forecasts and cost political parties’ policies,” says Grant Robertson.

“This independent fiscal institution (IFI) would crunch the numbers on political parties’ election policies in a credible and consistent way,” says James Shaw.

Indeed, the statement is a reminder that there are two very different roles being discussed here:

  • costing political parties’ election promises, and
  • monitoring and assessing government (Treasury surely?) fiscal forecasts, and perhaps government fiscal strategy.

As I’ve written previously, I am generally positive on the second of those roles, but am sceptical of the former.  Notwithstanding last year’s debates about “fiscal holes”, I don’t see a gap in the market (after all, surely “pointscoring” is part of the point of election campaigns?), and I suspect any such costings office would tend to become an additional research service for small parties (the Australian office seems to have been used mainly by the Greens), and not much used either by the main parties (with more resources, including in the form of supporters’ own expertise), or by any right-wing parties (given the social democratic leanings of those likely to be doing this sort of work, probably on rotation or secondment from The Treasury).

Of the second leg, these were some of my earlier comments

A Fiscal Council seems more likely to add value if it is positioned (normally) at one remove from the detailed forecasting business, offering advice and analysis on the fiscal rules themselves (design and implementation) and how best to think about the appropriate fiscal policy rules.  The Council might also, for example, be able to provide some useful advice on what material might usefully be included in the PREFU  (before the election, I noted that routine publication of a baseline scenario that projected expenditure using the inflation and population pressures used in the Treasury economic forecasts would be a helpful step forward).

There is unlikely to be a simple-to-replicate off-the-shelf model that can quickly be adopted here, and some work will be needed on devising a cost-effective sustainable model, relevant to New Zealand’s specific circumstances.  That is partly about the details of the legislation (mandate, resourcing etc), but also partly about identifying the right sort of mix of people –  some mix of specific professional expertise, an independent cast of mind, communications skills, and so on.  A useful Fiscal Council won’t be constantly disagreeing with Treasury or the Minister of Finance (but won’t be afraid to do so when required), but will be bringing different perspectives to bear on the issues, to inform a better quality independent debate on fiscal issues.

I hope to offer some more-detailed thoughts when the public consultation phase of the policy development occurs.  In the meantime, I’d continue to urge ministers (and Treasury) to think about broadening the ambit of any new council, to include external monitoring analysis of monetary policy and perhaps the other responsibilities of the Reserve Bank.

…it wouldn’t be about second-guessing individual OCR decisions or specific sets of forecasts, but offering perspectives on the framework and rules, and some periodic ex-post assessment.    In a small country, it would also have the appeal of offering some critical mass to any new Council.

What of this year’s numbers?

I’m not someone who champions big government.  In fact, I think we could do the things the state should be doing, and do them well –  better than they are being done now – with a smaller share of GDP devoted to government spending.

But as outside observer of left-wing politics in government, I continue to find charts like this a bit surprising.

core crown expensese 2018 budget

Not only is government spending over the next four fiscal years planned/projected to be a smaller share of GDP than in the last four years under the previous government, but that government spending share averages less than in every single year of the Clark/Cullen government.   In the interim, nothing has been done to raise the NZS eligibility age, so that that particular fiscal outlay is becoming more burdensome every year.  And all the campaign rhetoric –  and actually the rhetoric in government –  is about rebuilds, past underfunding etc etc.   Something doesn’t seem to add up.  I suspect, as I’ve argued previously, that the aggregate spending line can’t, and won’t, be held over the next few years.

And you will recall that the Labour-Greens pledge around government spending was (as it first appeared last May)

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

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

In the separate release on the rules yesterday, that second paragraph now reads

Core Crown spending has averaged around 30% of GDP for the past 20 years. The Treasury forecasts show we are staying below this – peaking at 28.5% of GDP in 2018/19.

It is as if 30 per cent has become a ceiling –  staying below it a badge of honour for the government –  rather than something to fluctuate around.

Perhaps the Minister would defend himself by noting that over the forecast period the economy is running at capacity, and he needs to allow for the inevitable next recession at some point.   But with planned spending averaging 28.5 per cent of forecast GDP, it would take an unexpected 8 per cent fall in nominal GDP (relative to the current forecast path), with no change at all in government spending (say, wage settlements being lower etc) for government spending to equal 31 per cent of GDP, even in a single year in the depths of such a recession.  And even 31 per cent wouldn’t be out of the recent historical range of the spending to GDP ratio.   Again, relative to the political rhetoric, something doesn’t compute.

There are also some puzzling things in the Treasury macro forecasts –  which are Treasury’s responsibility, not that of the Minister of Finance.    Here is the difference in the interest rate projections of the Reserve Bank and The Treasury.  The Bank forecasts the OCR directly, while The Treasury forecasts the 90 day bill rate, but you can easily see the difference.

rb and tsy int rates

Only last week, the new Governor (over)confidently told us that official interest rates “will” remain on hold for some time to come.  The Treasury clearly doesn’t believe him, reckoning that by this time next year we’ll already have had 50 to 75 basis points on OCR increases, with lots more increases in the following two years.

Even though I think the Governor was expressing himself too strongly, I just don’t believe the Treasury numbers at all.    They imply a lot of pent-up inflation pressures building up now that can only be nipped in the bud if the Bank gets on with the job and tightens policy.    And yet, on Treasury’s own numbers, the output gap has increased from around -1.5 per cent of GDP (for several years) to around zero now, and there has been only a very modest increase in core inflation.  It is hard to see how the quite small projected increase in capacity pressures will now finally get core inflation back to 2 per cent –  requiring quite a lift in the inflation rate from here –  and how those pressures are likely to appear if people really thought such a significant tightening of the OCR was in prospect.   As it is, on these Treasury numbers, it is another three years until inflation gts back to 2 per cent.  That is even slower than in the Reserve Bank projections.

Also a bit sobering were the Treasury export forecasts.  From time to time the government talks –  as its predecessor did – about lifting exports (and imports presumably) as part of a successful reorientation of the economy.  Treasury clearly doesn’t believe that any such reorientation is underway.

exports to gdp budget 2018

Just some more of the same dismal picture.  But I guess that is what one would expect when the two parties just keep on with much the same policies that got us where we are today, with the economy less open (as measured by trade shares) than it was averaging 25 years ago).

I mentioned earlier the uncertain timing of the next recession.  If the Treasury projections come to pass we’ll have gone 12 years (since the 2010 double-dip recession) without a recession.  That is possible, but it probably isn’t an outcome people should be planning on.  I noticed last night this chart from a recent survey of US fund managers.

next recession

Quite possibly, like economists, fund managers picked six of the last three recessions.  Nonetheless, it is a salutary reminder of where things can go wrong.  For example:

  • The Fed could end up overtightening (often a contributor to past downturns),
  • Emerging market stresses (eg Turkey and Argentina) could foreshadow something more widespreads,
  • Economic data in the euro-area seems to be weakening, and the likely new Italian government doesn’t look like a force to increase confidence and resilience in the euro,
  • and of the course there are risks around China, and in the Middle East –  trade wars and other aspects of geopolitics.

Nearer to home, some straws in the wind are also starting to pile up.

I don’t do medium-term economic forecasts –  nor does any wise person – but with the terms of trade assumed to hold at near-record highs, there is a sense that the macro picture the government is using, and selling, is a little too good to last.  In that respect –  but probably only –  it is eerily reminiscent of the start of 2008 when The Treasury revised its advice and confirmed to the then government of the day that it thought the higher revenue levels were likely to be permanent. Little did they realise…….

Of course, our government debt levels are very low –  net debt is only 7.3 per cent of GDP –  so these risks aren’t some sort of existential threat (although any new global downturn will greatly exacerbate fiscal problems elsewhere, and further constrain policy freedom of action and limit the ability of the advanced world to bounce back quickly).  But our authorities do need to be more actively planning for the next downturn: it will come, and when it does it appears that the government and the Reserve Bank have not yet done anything much to assure that they have anything the freedom of monetary policy action we can usually count on.  (Perhaps instead of offering his unsolicited thoughts on all and sundry political issues, the Governor could substantively address that issue, which is core to his remit.)

 

 

Labour’s fiscal commitments

There has been plenty of talk in the last few days about the fiscal pressures the government finds itself facing.   There are echoes of the great “fiscal hole” controversy from last year’s election campaign.   And so it seemed like a good time to revisit a post I did back then on these issues.

In that post I first explained what Labour had done

Labour has laid out their numbers in a series of summary tables.  They have explicitly identified numbers for each of their (revenue and expenditure) major policy initiatives, and made explicit summary provision for the cost of a group of less expensive policies.  And they identified how much (or little) still unallocated money they would plan to have available.   The resulting operating surplus numbers are almost identical to those in PREFU, but where they do take on a bit more debt –  to fund NZSF contributions and the Kiwibuild programme – they also allow for additional financing costs.

And then they had BERL go through the numbers.    People on the right are inclined to scoff at BERL and note that they are ideologically inclined to the left.  No doubt.  But all they’ve done on this occasion is a fairly narrow technical exercise.  They haven’t taken a view on the merits of any specific policy promises or even (as far I can see) on the line item costings Labour uses.  And they haven’t taken a view on the ability of a Labour-led government to control spending more broadly.   They’ve taken the Labour numbers, and the PREFU economic assumptions and spending/revenue baselines, and checked that when Labour’s spending and revenue assumptions are added into that mix that the bottom line numbers are

“consistent with their stated Budget Responsibility Rules and, in particular

  • The OBEGAL remains in surplus throughout the period to 2022
  • Net Core Crown debt is reduced to 20% of GDP by June 2022
  • Core Crown expenses remain comfortably under 30% throughout the period to 2022.”

An economics consultancy with a right wing orientation would have happily signed off on the same conclusion.

But, so I argued, that wasn’t the real issue.   I won’t blockquote all this, but what follows is just lifted from the earlier post.

But where there is more of an issue is that Labour’s spending plans on the things they are [explicitly] promising mean that to meet these surplus and debt objectives, on these [PREFU] macro numbers, there is very little new money left over in the next few years.     That might not sound like a problem –  after all, why do they need much “new money” in the next few years when the things they want to do are already specifically identified and included in the allocated money in the Labour fiscal plan?      The answer to that reflects the specifics of how the fiscal numbers are laid out, and how fiscal management is done.   Government departments do not get routine adjustments to their future spending allowances to cope with, say, the rising demands for a rising population, or the increased costs from ongoing inflation (recall that the target is 2 per cent inflation annually).   Rather, they are given a number to manage to, and only when the pips really start squeaking might a discretionary adjustment to the department’s baseline spending be made.  Any such discretionary adjustments comes from the “operating allowance” –  which thus isn’t just available for new policies.

You can see in the PREFU numbers.   Health spending rose around $600 million last year, and is budgeted to rise by around $700 million this year (2017/18).  And then….

$m
2017/18 16432
2018/19 16449
2019/20 16481
2020/21 16396

No one expects health spending to remain constant in nominal terms for the next three fiscal years.  But there will need to be conscious decisions made in each successive Budget to allocate some of the operating allowance to health –  some presumably to cover new policies, and much to cover cost increases (wages, drugs, property etc, and more people), all offset by whatever productivity gains the sector can generate.

And here is why I think there are questions about Labour’s numbers.  By 2021, they expect to be spending $2361 million more on health than is reflected in these PREFU numbers.     About 10 per cent of that increase is described as “Paying back National’s underfunding” and the rest is labelled as “Delivering a Modern Health System”.

This is how they describe their first term health policies

Reverse National’s health cuts and begin the process of making up for the years of underfunding that have occurred. This extra funding will allow us to invest in mental health services, reduce the cost of going to the doctor, carry out more operations, provide the latest medicines, invest in Māori health initiatives including supporting Whānau Ora, and start the rebuild of Dunedin Hospital.

That sounds like an intention to deliver materially more health outputs/outcomes (ie volume gains, or reduced prices to users).

In response to Steven Joyce’s attack, Grant Robertson is reported as having told several journalists that Labour’s health (and education) numbers include allowances for increased costs (eg rising population and inflation  –  and inflation in the PREFU is forecast to pick up) as well as the costs of the new initiatives.   Perhaps, and if so perhaps a pardonable effort to put a favourable gloss on the proposed health (and education) spends –  ie sell as new initiatives what are in significant part really just keeping with cost and population pressures.  I say “pardonable” because governments do it all the time.

In this chart, I’ve shown core Crown health expenditure as a share of GDP since 2000, and including Labour’s plans for the next three budgets.  (Labour show total Crown numbers, but I’ve taken their policy initiative numbers –  ie changes from PREFU –  and applied them to the core Crown data, which Treasury has a readily accessible time series for.  The differences between core and total Crown in this sector are small.)

Labour health

In other words, on these numbers health as a share of GDP over the next three years would be less than it was for most of the current government’s term, and virtually identical to what it was in Labour’s last full year in government, 2007/08.    Some of the peaks a few years ago were understandable –  the economy was weak, and recessions don’t reduce health spending demands.  But even so, we know that there are strong pressures for the health share of GDP to increase, as a result of improving technology (more options) and an ageing population.  Treasury’s “historical spending patterns” analysis in their Long-term Fiscal Statement last year had health spending rising from 6.2 per cent of GDP in 2015 to 6.8 per cent in 2030.

Without seeing more detail than Labour has released there really only seem to be two possible interpretations.  Either Labour hasn’t allowed for the ongoing (ie from here) population and cost increases in their health sector spending numbers, or there must be much less in the way of increases in health outputs than the documents seem to want to have us believe (eg “reversing years of underfunding”).  One has potential fiscal implications.  The other perhaps political ones.    Glancing through Labour’s health policy, which seems quite specific, I’m more inclined to the former possibility (ie not allowing for population and cost pressures), but I’d be happy to shown otherwise.

Eyeballing that chart –  and as someone with no expertise in health –  it would look more reasonable to expect that health spending might be more like 6.5 per cent of GDP by the end of the decade, in a climate where a party is promising more stuff not less, and with no strategy to (say) shift more of the burden back onto upper income citizens.

2018 commentary resumes here:  in other words, despite all the talk in their own campaign documents and rhetoric about systematic underfunding of health, Labour’s proposed spending on health –  carefully laid out numbers – as a share of GDP just wasn’t consistent with the rhetoric.   They – and perhaps even the previous government –  may not have been specifically aware of, say, the Middlemore problems, and perhaps more generally things really are worse than they could have realised in Opposition.   But it seems implausible to think that a party talking up underfunding –  and well aware, for example, of the constant pressure on DHBs to produce surpluses come what may –  could have supposed that, on their proposed delivery models and views on entitlements, operating spending on health of only 6 per cent of GDP could have been enough.     That was stuff they should have recognised and acknowledged going into the election.

As I noted in last year’s post, one could do the same exercise for education.  This is another quote from that post:

One could do much the same exercise for education.  Labour has seven line items in its “new investments” table.  Most of them are very specific (including increased student allowances and the transitions towards zero-fees tertiary education).     There is a general (large) item labelled “Delivering a Modern Education System” but in the manifesto there are a lot of things that look like they are covered by that.    There isn’t any suggestion that general inflation and population cost increases are included, but perhaps they are.  But again, here is the chart of education spending as a share of GDP, including Labour’s numbers for the next three years.

labour education.png

I’m not altogether sure what some of those earlier spikes were (perhaps something to do with interest-free student loans), but again what is striking is that Labour’s plans appear to involve spending slightly less on education as a share of GDP than when they were last in government.  And that more or less flat track from here doesn’t suggest a party responding to this stuff

National has chosen to undermine quality as a cost-saving measure. After nine years of being under resourced and overstretched, our education sector is under immense pressure and the quality of education is suffering. The result is a narrowing of the curriculum, more burnt out teachers, and falling tertiary education participation.

and at the same time committing to flagship policies around things like student allowances and fee-free tertiary study.

Again, it begins to look as though Labour has included in its education numbers the ongoing multi-year costs of its own new policies, but not the ongoing cost increases resulting from wage and price inflation and population increases.  Again, I’d happily be shown otherwise.

Of course, there is some unallocated spending in Labour’s numbers, but the amounts are very small for the next few years, and some of these sectors are very large.  And although population growth pressures are forecast to ease a little in the next few years, inflation is forecast to pick up and settle around the middle of the target range, so there are likely to be increased general cost pressures (including, for example, wage pressures if as Labour state in the fiscal plan document “by the end of our first term, we expect to see unemployment in New Zealand among the lowest in the OECD, from the current position of 13th”).

How much does it matter?  After all, we don’t know many specifics on the policy initiatives National (and/or its support partners) might fund in the next term, and there was the strong suggestion the other night of a new “families package” in 2020 (which would come from any operating allowance).  Quite probably the next few years will be tough, in budget terms, for whoever forms the government.  After all, the terms of trade isn’t expected to increase further, and inflation is.  And there is a sense that in a number of areas of government spending things have been run a bit too tight in recent years.      On the other hand, Labour participated in this ritual exercise and it looks as though they may have implied rather more fiscal degrees of freedom than were actually there, if –  critical point –  they happened to want to produce a surplus track very like National’s.

2018 commentary resumes again. But all that led me to wonder quite why Labour had made the commitments it had.  Here is a final, slightly shorter, quote

……perhaps the bigger question one might reasonably put to both sides is why the focus on (almost identical) rising surpluses?   These are the numbers.

labour surplusWhen net core Crown debt is already as low as 9.2 per cent of GDP –  not on the measure Treasury, the government and Labour all prefer, but the simple straightforward metric –  what is the economic case for material operating surpluses at all?   With the output gap around zero and unemployment above the NAIRU, it is not as if the economy is overheating (the other usual case for running surpluses).   Even just a balanced budget would slowly further lower the debt to GDP ratios.   One could mount quite a reasonable argument for somewhat lower taxes (if you were a party of the right) or somewhat higher targeted spending (if you were a party of the left, campaigning on structural underfunding of various key government spending areas).

Labour is promising to spend (and tax –  thus the surpluses are the same) more than National.  But their commitment (rule 4) was to keep core Crown expenditure “around 30% of GDP”, not “comfortably below 30 per cent”.

labour spending

28.5 per cent is quite a lot lower than 30 per cent (almost $5 billion in 2020/21 – not cumulatively, as GDP is forecast to to be about $323 billion). And 30 per cent wasn’t described as a ceiling. And in the last two years of the previous Labour government, core Crown spending was 30.6 per cent of GDP (06/07) and 30 per cent of GDP (07/08).

It is a curious spectacle to see a party campaigning on serious structural underfunding of various public services and yet proposing to cut government spending as a share of GDP.  It would be difficult to achieve –  given the various specific policy promises –  but you have to wonder, at least a little, why one would set out to try.     We simply aren’t in some highly-indebted extremely vulnerable place.

Here endeth the quotes from last year

I’m not one of those persuaded by the siren calls that the government should be borrowing heavily because interest rates are low.   For a start, our interest rates are still among the very highest in the OECD.   And interest rate outcomes aren’t the result of some random-number lottery: they are low for a reason (having to do in no small part with future expected rates of growth).   I’m also cautious about the lack of “policy space” to cope with the next serious recession.   But in the debate around this year’s Budget, or the next couple, most aren’t suggesting the government should rush out and adopt fiscal parameters that might deliver net debt of 50 or 70 per cent of GDP a decade hence.   Instead, Labour simply bound itself to the same, arbitrary, net debt target as National had run with, just achieved a couple of years later than National planned to do so.

I don’t agree with everything in this extract from Matthew Hooton’s Herald column the other day, but the gist seems about right.

Robertson has convinced himself that sticking to his commitment is essential to maintain the confidence of the business community and financial markets.

He remembers the Winter of Discontent of 2000 and is determined to avoid at all costs investors and business becoming actively hostile to the new regime.

But this just shows Robertson’s naivety about the business and finance communities and woeful ignorance of what drives confidence in either.

At a net 22 per cent of GDP, New Zealand’s debt is already low compared with the rest of the world. If carefully signalled and communicated by Robertson and his Treasury officials, it is implausible that a further extension of the 20 per cent debt target to, say, 2025, would provoke a materially adverse reaction from the business community or financial markets, especially if emphasis was placed on investments in infrastructure and human capital.

Moreover, the business and financial communities well understand and accept that the fundamental difference between Labour and National governments — at least theoretically — is that the former believes in bigger government than the latter.

And yet –  see the graph immediately above- Labour campaigned on continued reductions in government operating expenditure as a share of GDP, all the time claiming that core services were underfunded.   And in her press conference yesterday, the Prime Minister indicated that Labour would be sticking to its self-imposed Budget Responsibility Rules.  As I illustrated above, under the operating spending limb of those Rules there is plenty of slack, but the binding rule on this occasion is the net debt goal they have committed to.  And net debt isn’t just affected by any increase in operating spending, but also in any action the government takes to address claims of (previously unrecognised) backlogs in capital investment.

Labour seem to have first got themselves into this hole from (a) a desperate desire not to leave room to be painted as irresponsible potential economic managers, and (b) an inability to persuasively make an alternative case.  And all of this was laid down at a time when, perhaps, it seemed that the chances of having to actually deliver, in government, were slim.     But, in the old line, the first rule of holes is “stop digging”.  At present, Labour –  while claiming things are much worse than even they realised –  seem to be setting out to dig themselves even deeper in.   In a way, perhaps, it is admirable that they seem to want to follow through on a pre-election commitment.  But that narrative about fixing public services, and reversing what they regarded as severe underfunding in many areas (now worse, they claim, than they previously recognised) seemed quite like a pre-election commitment as well, even if it didn’t have precise numbers and dates on it.

(And yes, my natural inclinations are towards smaller government.  There are plenty of things I would cut back on, notably addressing NZS issues.  This post isn’t an unconditional advocacy for bigger government, or any sort of statement of faith in the likely quality of much government spending, just pointing to the tortured, almost indefensible, logic of the government’s own position.   And for those who worry about the interest rate consequences of higher net debt, I tackled that in another post last year.)

 

 

 

Reflecting on Jim Anderton

I have a pleasant memory of the only time I met Jim Anderton. One of his daughters was in the same class as me at Remuera Intermediate, and at the end of the year the Andertons hosted a class barbecue at their home just up the street from the school.   I was a youthful political junkie and Jim Anderton was running for Mayor of Auckland.  It was a pleasant evening and he seemed to be a lively and engaged parent (later struck by the awfulness of the suicide of another daughter).

Accounts suggest that Anderton did a good job of helping to revitalise the Labour Party organisation in the late 1970s and early 1980s.  He was, for the time, a moderniser, instrumental in helping reduce the direct influence of the trade unions in the party, and promoting the selection of some able candidates who hadn’t served time in the party (eg Geoffrey Palmer).  Various tributes talk of a personal, and practical, generosity.

I don’t suppose either that there was any doubt that he pursued causes he believed in, and that those causes were, more or less, what he regarded as being in the best interests of New Zealanders (perhaps especially “ordinary working New Zealanders”).   Probably most politicians do.  Sometimes they are mostly right about the merits of the causes they pursue, and sometimes not.    In Anderton’s case, even if one agreeed with the sort of outcomes he might have hoped for, his views on the best means seem –  perhaps even more so with hindsight than at the time –  to have been pretty consistently wrong.   And for all the public talk in the last few days about Anderton’s contribution to New Zealand, few (if any) of the things he opposed in the 1980s have been unwound/reversed, and few of the things he championed when he served later as an effective senior minister have done much for New Zealanders.

Take the 1980s when, upon entering Parliament in 1984, Anderton quickly isolated himself in caucus.  Even before that election, he’d opposed the CER agreement with Australia, and opposed Roger Douglas’s talk of a need for a devaluation and a reduction in the real exchange rate.  Even after the 1984 election, in circumstances of quasi-crisis, Anderton still opposed the by-then inevitable devaluation –  and in league with Sir Robert Muldoon sought to use a select committee to run a kangaroo-court inquiry, to undermine the choices his own government had made.   He was opposed to GST, and he was opposed to creating SOEs for state-trading operations.   He opposed privatisations, whether small or large.   Of the large, there was vocal opposition to the sale of the BNZ and of Telecom.  I suspect the list of reform measures, not subsequently unwound, that Anderton did enthusiastically support would be considerably shorter –  perhaps vanishingly so –  than the list of those he opposed.

As a pure political achievement, to have survived resigning from the Labour Party – in a pre MMP period –  was worthy of note.  But then Winston Peters did much the same thing –  and he’d had the courage to resign his seat and win a by-election to return to Parliament.  And the distinctive Jim Anderton party has long since disappeared, as Anderton returned to the Labour fold.

And what causes did he champion as a senior minister (for a time, deputy prime minister, in the fifth Labour government).   Probably the institution that will be always associated with Anderton’s name is Kiwibank: it certainly wouldn’t have existed without him.  But to what end?   Has Kiwibank changed the shape of New Zealand banking?  Not in ways I can see.  It remains a pretty small player, operating in segments of the market where there has always been plenty of competition.  It hasn’t come to a sticky end –  as many state-owned banks have here and abroad –  but we’ve never had the data to know whether, even on strictly commercial grounds, the establishment of the bank was a good deal for taxpayers (but the fact that no private new entrant has tried something similar suggests probably not).   If simply promoting competition in banking had been the goal, perhaps it would have been preferable to have prevented the takeover of The National Bank by the ANZ?

There has been talk in the last few days of Anderton’s contribution to “revitalising the regions”.  I’m not sure what this can possibly mean –  even allowing for a few government offices being decentralised (at some cost) around regional centres.   Generally, the real exchange rate mattters much more for the economic health of the regions than direct stuff governments do.   Anderton was Minister of Economic Development.  In that role, he was keen on using taxpayer money to subsidise yacht-building (which didn’t end well), and a champion of film industry subsidies.   In tributes this week, there has also been the suggestion that Anderton was one of those responsible for the creation of the New Zealand Superannuation Fund, something I hadn’t heard before.   If so, I guess he deserves some partial credit for the fiscal restraint the then Labour government exercised in its first few years.  Beyond that, what was created was a leveraged speculative investment fund –  not a model followed, as far as I can tell, in other advanced economy –   with returns that over almost 15 years now really only seem to approximately compensate for the high risks the taxpayer is being exposed to.  No doubt Anderton opposed the decision in 1989 or 1990 to start raising the NZS eligibility age from 60 to 65, and the same opposition to any further increase in the age beyond 65 –  even though it is a step many other advanced countries have taken, as life expectancies improved –  was presumably behind any involvement he had in the creation of the NZSF.  In so doing, once again his hand was involved in holding back sensible gradual reforms, and keeping New Zealand a bit poorer than it need be.

I suspect many of the tributes of the last few days are mostly a reflection of Anderton’s part in the Labour reconcilation.  The prodigal son returned –  having been one of the leading figures in fomenting the civil wars in the first place, before walking out of the party.   They were tumultuous years, and few things are nastier than civil wars.  Anderton doesn’t ever seem to have been a team player, but by the end of his career he seem to have found his place back alongside the team he started with.

But from a whole-of-nation perspective, what did Anderton accomplish?     If the reforms of the 1980s and 1990s haven’t produced the results the advocates hoped for –  we still drift, more slowly, further behind other advanced countries – that wasn’t for the sorts of reasons Anderton advanced.  Had we followed his advice, we’d most likely now be poorer still –  and many of the issues around equality and social cohesion that he worried about might have been no more effectively addressed.     In the end, Anderton is perhaps best seen as a belated figure from the New Zealand of the 1950s and 60s.  There was a lot to like about the New Zealand of those years –  some of the best living standards in the world then – for all the increasingly costly distortions to our economy.   There are parallels to Muldoon –  who famously told a TV interviewer of his goal to leave New Zealand no worse than he found it –  both in the genuineness of their concerns, and the wrongness of too many of their policy stances.  Both seemed to back very reluctantly into the future, with all too much willingness to trust our fortunes to the state, and the possible winners identified by politicians and officials, rather than to the market.

Housing policy and prospects

I’ve been wary for some time of Labour’s approach to the disgrace that is the New Zealand housing and urban land market –  a mess created, and/or presided over, by successive National and Labour-led governments.

Eric Crampton and Oliver Hartwich at the New Zealand Initiative (bastion of quasi-libertarian public policy analysis) had been consistently pretty upbeat about Labour’s proposals, and particularly about the stated desire of (then housing spokesman, now Minister of Housing, Phil Twyford) to free up the urban land market and fix problems around infrastructure financing.  There was the famous joint op-ed in the Herald a couple of years ago.    I have never been sure how much the NZI people really believed Labour was committed to letting the market work, how much they simply wanted to reinforce that strand of Labour’s thinking with support from a business-funded body, and how much it was just about building relationships with a party that would, one day, no doubt be back in government.   Perhaps there was an element of all three?

As for me

I’ve liked the talk, but have been a bit sceptical that it will come to much.  In part, I’m sceptical because no other country (or even large area) I’m aware of that once got into the morass of planning and land use laws has successfully cut through the mess and re-established a well-functioning housing and urban land market.  In such a hypothetical country, we wouldn’t need multiple ministers for different dimensions of housing policy.  I’m also sceptical because there is a great deal local government could do to free up urban land markets, but even though our big cities all have Labour-affiliated mayors, there has been no sign of such liberalisation.    The Deputy Mayor of Wellington for example leads the Wellington City Council ‘housing taskforce”.  Paul Eagle is about to step into a safe Labour seat.   His taskforce seems keen on the council building more houses, and tossing more out subsidies, but nothing is heard of simply freeing up the market in land.  Or even of looking for innovative ways to allow local communities to both protect existing interests and respond, over time, to changing opportunities.

There was also the fact that any Labour government was likely to depend on Green votes in Parliament, and there was no sign the Greens were keen on land-use liberalisation.

And then there was little sign of leadership commitment.

Labour’s leader, Andrew Little, devoted the bulk of his election year conference speech to housing, complete with the sorts of personal touches audiences like.  Media reports say the speech went down well with the faithful…….

But in the entire speech –  and recall that most of it was devoted to housing –  there was not a single mention of freeing up the market in urban land, reforming the planning system etc.  Not even a hint.    I understand that giving landowners choice etc probably isn’t the sort of stuff that gets the Labour faithful to their feet with applause.   But to include not a single mention of the key distortion that has given us some of the most expensive (relative to income) house prices in the advanced world, doesn’t inspire much confidence.

It has been no different since Jacinda Ardern took over as leader.

Sure, as defenders point out, reform of the planning system does appear in Labour’s manifesto, and there was a brief mention in the Speech from the Throne.  But mostly what we hear about are the same, consistently emphasised, lines they’ve been running for at least the last year:

  • the ban on non-resident non-citizens buying existing residential property,
  • the extension of the brightline test (from two years to five years),
  • ringfencing, so that rental property losses can’t be offset by other income, and
  • Kiwibuild.

As well as measures to impose new higher standard on rental properties.  In practice, the new Tax Working Group also seems likely to be focused on housing-related tax issues (capital gains tax in particular).

Two things in the last few days reinforced my unease.

The first was the new “independent stocktake of the housing crisis” the Minister has commissioned.  Given that it was announced on 25 November, and is to report “before Christmas”, it is hard to believe that the group will come up with much new and different.  Probably, that isn’t even the point.

Here is how the Minister framed the work

“Shamubeel Eaqub, Philippa Howden-Chapman, and Alan Johnson are among New Zealand’s foremost experts on housing. Their insight will be invaluable.

“This report will provide an authoritative picture of the state of housing in New Zealand today, drawing on the best data available. It will put firm figures on homelessness, the state of the rental market, the decline of homeownership, and other factors in the housing crisis.

“The Labour-led Government is already pushing ahead quickly with initiatives to make housing more affordable and healthy, including banning overseas speculators, passing the Healthy Homes Guarantee Bill, cancelling the state house selloff, and setting up KiwiBuild. This report will help the Government refine and focus that work where it is most needed.

Each of the members has some expertise in aspects of housing, but none has any expertise  in –  or known sympathy with arguments for – freeing up land-use restrictions, and allowing the physical footprint of cities to grow readily as the population does.  And then there is the third paragraph –  the same old list of direct interventions, with nothing at all about liberalisation of the land market, even though it is vital if the long-term structural problems are to be effectively addressed.

Now perhaps the Minister will argue that planning reform is proceeding on a separate track, or even point to the responsibility of his colleague, the Minister for the Environment, David Parker.  But the fact remains that in all the talk about fixing the badly-distorted housing market there is little open emphasis on land-use law, nothing on reducing the price of urban land, and nothing on (finally) letting the market work effectively.

And then there was a substantial interview  the other day with Phil Twyford on interest.co.nz.   And it was much the same again.  There was plenty of talk of the coming tax changes and the proposed foreign ownership ban.  And there was great deal of talk about Kiwibuild.  There was reference to using Crown and Council-owned land in Auckland to build on.  But there was nothing at all, in the entire 23 minute interview, on reforming or freeing up the market in urban land.  There were defensive references –  it would be hard to produce ‘affordable” houses in the $500-600K range because land was ‘absurdly expensive” –  but nothing,  not a word,  about reforms that might effectively, and enduringly, lower land prices.

There was. of course, lots of talk of how “we have to build more houses”, but no attempt to seriously address the argument that, given land-use restrictions, there may not be any material unmet demand for houses at the prevailing price.   Talk about a shortage of 71000 houses –  or whatever the latest guess is –  is mostly nonsense unless the land market is fixed, and the price of land falls considerably.  At much lower land prices, I think there is little doubt that there would be more effective demand for housing –  and no obvious reason why the private sector would not meet that additional effective demand.  That would be a highly desirable outcome, but in his interview the Minister studiously avoided any suggestion of land prices falling.   And at current (very high, but currently stable) prices, there isn’t obviously any unmet effective demand in Auckland at present.

All the Minister’s talk seems to be of state-led projects to build more houses, including more ‘affordable’ houses, and more state houses.   In some cases, it seems, it will just involve the state participating in developments that were already planned.    But unless land prices are going to fall materially, it is really hard to see how any big increase in state-associated housebuilding isn’t going to largely displace private sector building that might otherwise have taken place.    For all the talk about building at different price points, and actually building more so-called “affordable houses”, houses are substitutable, to a greater or lesser extent.  A new small place on a tiny amount of land at, say, $600,000 (a price point which even the minister conceded would be a stretch) is going to be competing with existing houses in that price range in, say, Manurewa.  Perhaps additional state-led building can alter relative prices a bit but (a) if so, it seems likely too be only by use of government subsidies (the Minister indicated that the government will not be charging for the development risk, in a way that any private developer would need to), and (b) nothing about the underlying scarcity (regulation-induced) of land will change.

In their recent Monetary Policy Statement, the Reserve Bank indicated that it was assuming that half of the Kiwibuild activity displaced other construction.    They didn’t elaborate on that point, but I have an Official Information Act request in with them asking for the analysis they did in support of that assumption.

(Incidentally, while I am keen to see LVR restrictions come off –  since they never should have been put on –  it would be quite curious to see them beginning to be removed at just the sort of time when –  on government policy –  the risks around housing lending might increase quite considerably.   If the government is to be taken at its word, and we really are to see a massive increase in housebuilding, led by government initiatives rather than market forces – and at a time when many forecasters expect net immigration to be dropping away –  the risks of an oversupply of physical housing (as in Spain, Ireland and parts of the United States) would have to be considerably greater than they’ve been in recent decades.  Of course, weirdly, LVR restrictions have never applied to the most risky type of housing lending, that for houses being built.)

Two final points:

The Minister indicated, again, that one of the government’s motivations in its housing reforms is to “shift investment”, so that people don’t so much buy houses, as buy shares etc.  On this point, they seem as confused as ever.  If there really is a physical shortage of, say, 71000 houses and that is to be met over the next few years, there will have to be much more physical investment in building houses.  And someone will need to own those houses –  whether owner-occupiers, the state, or private rental businesses.  Real resources devoted to one use can’t be devoted to another use.  And, for any given stock of houses, it isn’t that evident that it is likely to make much difference to economic performance who (among New Zealand residents) owns those houses.  I’m all for home ownership, but if owner-occupiers buy houses (with large mortgages) it isn’t obvious why capital markets etc, or investment choices by businesses elsewhere in the economy, will be much different than if rental property owners buy houses (with large mortgages).

In his interview, the Minister was also lamenting large boom-bust cycles in residential construction, and suggesting that was part of the problem in New Zealand. I was a bit puzzled by that suggestion, and wondered if there was any evidence that the fluctuations in residential building activity were larger here than in other advanced economies.  It was possible they were –  after all, our population growth rates are quite variable, mostly because of swings in the flow of New Zealanders going to Australia.  So I dug out the data, for residential investment as a share of GDP, going back to 1995 (when complete data is available for most OECD countries).  This chart shows the coefficient of variation (ie the standard deviaton divided by the mean).

construction coeff of var

At least over this period, residential building activity (as a share of GDP) in New Zealand has been less variable than in the median OECD country, and far less variable than in the countries to the far right of the chart.  Over a longer period, back to 1970, there is no sign that New Zealand’s residential investment cycles have been larger or more variable than those in Australia or the United States.  Investment is variable –  typically the most variable component of GDP.  It is how market economies work.

Where does all this leave me?  With the new government’s apparent determination to continue to pursue a “big New Zealand” approach, without any material change to immigration policy, the need for additional housing will continue to grow largely unabated (tax changes and foreign ownership bans won’t make much more sustained difference here than they have abroad).   Perhaps the government has plans, currently kept quiet, for far-reaching land use reforms that will enable the market to meet changing demands, at genuinely affordable prices –  as happens in much of the US.  But at present it looks disconcertingly as though the centrepiece is going to be a government-led house building programme that (a) never gets to grips with the land issues, (b) will substantially displace private sector building, and (c) runs all the sorts of risks that government-led investment projects are often prone to.

Perhaps it will work. But it is hard to be optimistic at present.

 

UPDATE: An interesting piece from today’s Herald on the way land prices render even moderate intensification not really consistent with more “affordable” house prices in Auckland.

UPDATE (Friday):  Twyford speech on the government’s housing policy does nothing to allay any of the concerns in this post.   Land use reforms appear, a little cryptically, very briefly and near the end of the speech.

 

 

The new government’s immigration policy

It was confirmed yesterday that the new government’s immigration policy will be the policy the Labour Party campaigned on (albeit very quietly).  And so we learned that the new government will remain a fully signed-up adherent of the same flawed, increasingly misguided, “big New Zealand” approach that has guided immigration policy for at least the last 25 years.

If that is disappointing, it shouldn’t really be any surprise.     The Green Party approach to immigration is pretty open –  the “globalist” strand in their thought apparently outweighing either concern for New Zealand’s natural environment or any sort of hard-headed analysis of the economic costs and benefits to New Zealanders.  Only a few months ago, they were at one with the New Zealand Initiative, tarring as “xenophobic” any serious debate around the appropriate rate of immigration to New Zealand.  Never mind that population growth is driving up carbon and methane emissions, in a country where marginal abatement costs are larger than in other advanced economies, and yet where the same party is determined that New Zealand should reach net zero emissions only 33 years hence.

As for New Zealand First, they talk a good talk.  But that’s it.   As I noted a few months ago, reading the New Zealand First immigration policy (itself very light on specifics)

If one took this page of policy seriously, one could vote for NZ First safe in the expectation that nothing very much would change at all about the broad direction, or scale, of our immigration policy.     Of course, there would be precedent for that.  The last times New Zealand First was part of a government, nothing happened about immigration either.

Even so, I was just slightly surprised that there wasn’t even a token departure from the Labour Party’s immigration policy that New Zealand First could claim credit for.   The New Zealand Initiative’s report on immigration policy earlier in the year was largely (and explicitly) motivated by concerns about what New Zealand First might mean for immigration policy.

Six months ago, when we started scoping the Initiative’s immigration report, we had a very specific audience in mind: Winston Peters. Our aim was to assemble all the available research and have a fact-based conversation with New Zealand’s most prominent immigration sceptic.

Turns out that, perhaps not surprisingly based on the past track record, that they needn’t have bothered.

And so Labour’s election policy will be the immigration policy of the new government.    The policy documents themselves are here and here.   I wrote about the policy here at the time it was released in June, before the Ardern ascendancy.   It was notable how little attention Labour gave to immigration policy during the campaign –  perhaps it didn’t fit easily with the “relentlessly positive” theme –  and I understand there was a conscious decision by the new leadership to downplay the subject.    It will be interesting to see now whether they follow through on their manifesto, but very little about immigration policy requires legislative change so, in principle, the changes should be able to be done quite quickly.  In fact, as the biggest proposed changes affect international students one would assume they will be wanting to have those measures in places in time for the new academic year.

What also remains quite remarkable is the extent to which Labour’s policy has been taken as a substantial change.  Serious overseas media and intelligent commentators have presented Labour’s proposals as some sort of major sustained change in New Zealand approach to immigration, and thus to expected immigrant numbers.    To read some of the Australian and American commentary you might have supposed, say, that in future New Zealand’s immigration approvals might be cut towards, say, the sorts of levels (per capita) that prevailed in the United States under Bush and Obama.

Labour’s policy is, of course, nothing of the sort.  Under the proposed policy, New Zealand will remain –  by international standards –  extraordinarily open to non-citizen migrants, with expected inflows three times (per capita) those of the United States, and exceeded only (among OECD countries) by Israel in a good year (for them).

What determines how many people from abroad get to settle permanently in New Zealand is the residence approvals programme.   Under that programme, at present the aim is to grant around 45000 approvals to non-citizens each year (Australians aren’t subject to visa requirements, but in most years the net inflow of Australians is very small).  The outgoing government reduced that target (from 47500) last year.   Labour’s immigration policy document does not, even once, mention the residence approvals programme.  That was, no doubt, a conscious choice.  They are quite happy with the baseline rate of non-citizen immigration we’ve had for the last 20 years; quite happy to have the highest planned rate of non-citizen immigration anywhere in the OECD.  Medium-term forecasts of the net non-citizen immigration inflow will not change, one iota, if Labour proceeds with their policy.  For some of course, that will be a desirable feature.  For others it is a serious flaw, that results from failing to come to grips with the damage large scale immigration is doing to the economic fortunes of New Zealanders.

Of course, there are planned policy changes.    There are various small things:

  • an increased refugee quota,
  • steps to increase the utilisation of the existing Pacific quotas,
  • more onerous requirements for investor visas (including requiring investment in new “government-issued infrastructure bonds”),
  • a new Exceptional Skills visa,
  • a KiwiBuild visa

Taken together, these won’t affect total numbers to any material extent.

There is also a (welcome) change under which they will

Remove the Skilled Migrant Category bonus points currently gained by studying or working in New Zealand and standardise the age points to 30 for everyone under 45.

All else equal, these changes won’t affect the number of people getting residence, or materially affect the average quality (skill level) of those getting residence.   That is a shame: at present, too many migrants aren’t that skilled at all, and maintaining such a large approvals target (in such a remote, not very prosperous, country) makes it hard to lift the average quality.

The bigger changes are under two headings.    The first is around temporary work visas.   Here is what they say they will do.

Labour will:

• Actively manage the essential skills in demand lists with a view to reducing the number of occupations included on those lists

• Develop regional skill shortage lists in consultation with regional councils and issue visas that require the visa holder to live and work within a region that is relevant to their identified skill

• For jobs outside of skills shortages lists, Labour will ensure visas are only issued when a genuine effort has been made to find Kiwi workers

• Strengthen the labour market test for Essential Skills Work Visas to require employers to have offered rates of pay and working conditions that are at least the market rate

• Require industries with occupations on the Essential Skills in Demand lists to have a plan for training people to have the skills they require developed together with Industry Training Organisations

• Review the accredited employers system to make sure it is operating properly.

The broad direction seems sensible enough –  after all, the rhetoric has been about lifting the average skill level of the people we take.   But as I noted in my comments in June, the policy is notable for its touching faith in the ability of bureaucrats to get things right, juggling and managing skills lists, and now extending that to a regional differentiation.   There is no suggestion, for example, of letting markets work, whether by (as I’ve proposed) imposing a flat (quite high) fee for work visas and then letting the market work out which jobs need temporary immigrant labour, or by requiring evidence that market wages for the skill concerned have already risen quite a lot.  The latter would have seemed an obvious consideration for a party with trade union affiliates.

On Labour’s own estimates, these changes won’t have a large effect on the number of people here on work visas at any one time, although in the year or so after any changes are implemented, the net inflows that year will be lower than they otherwise would have been.

Much the same goes for the biggest area of change Labour is proposing, around international students.

Labour will:

• Continue to issue student visas and associated work rights to international students studying at Level 7 or higher – usually university levels and higher

• Stop issuing student visas for courses below a bachelor’s degree which are not independently assessed by the TEC and NZQA to be of high quality

• Limit the ability to work while studying to international students studying at Bachelor-level or higher. For those below that level, their course will have to have the ability to work approved as part of the course

• Limit the “Post Study Work Visa – Open” after graduating from a course of study in New Zealand to those who have studied at Bachelor-level or higher.

In general, I think these are changes in the right direction.  Here were some of the comments I made earlier

I’m a little uneasy about the line drawn between bachelor’s degree and other lines of study.  It seems to prioritise more academic courses of study over more vocational ones, and while the former will often require a higher level of skill, the potential for the system to be gamed, and for smart tertiary operators to further degrade some of the quality of their (very numerous) bachelor’s degree offerings can’t be ignored.  …… I’d probably have been happier if the right to work while studying had been withdrawn, or more tightly limited, for all courses.   And if open post-study work visas had been restricted to those completing post-graduate qualifications.

The proposals are some mix of protecting foreign students themselves, protecting the reputation of the better bits of our export education industry, and changes in the temporary work visas rules themselves.     In Labour’s telling –  and it seems a plausible story –  the changes are not designed to produce a particular numerical outcome, but to realign the rules in ways that better balance various interests.  The numbers will adjust of course, but that isn’t the primary goal.

Labour estimates that these changes will lower the number of visas granted annually by around 20000.   That is presented, in their documents, as a reduction in annual net migration of around that amount.   But that is true only in a transition, immediately after the changes are introduced.  The stock of people here on such student and related visas will fall, but after the initial transitional period there will be little or no expected change in the net inflow over time (which is as one would expect, since the residence approvals target is the key consideration there).

To see this consider a scenario in which 100000 new short-term visas are issued each year, and all those people stay for a year and a day (just long enough to get into the PLT numbers).  In a typical year, there will then be 100000 new arrivals and 100000 departures.

Now change the rules so that in future only 75000 short-term visas are issued each year.  In the first year, there will be 75000 arrivals and (still) 100000 departures (people whose visas were issued under the old rules and who were already here).  But in the next year, there will be 75000 arrivals and 75000 departures.    Measured net PLT migration will have been 25000 lower than otherwise in the first year, but is not different than otherwise in the years beyond that.

That doesn’t mean the policy changes have no effect.  They will lower the stock of short-term non-citizens working and studying in New Zealand.    They will ease, a little, demand for housing.  In some specific sectors, with lots of short-term immigrant labour, they may ease downward pressures on wages (although in general, immigrants add more to demand than to supply, and that applies to students too).   But it won’t change the expected medium-term migration inflow.

Oh, and the student visa changes will, all else equal, reduce exports

Selling education to foreign students is an export industry, and tighter rules will (on Labour’s own numbers) mean a reduction in the total sales of that industry.   Does that bother me?  No, not really.  When you subsidise an activity you tend to get more of it.  We saw that with subsidies to manufacturing exporters in the 1970s and 80s, and with subsidies to farmers at around the same time.  We see it with film subsidies today.  Export incentives simply distort the economy, and leave us with lower levels of productivity, and wealth/income, than we would otherwise have.   In export education, we haven’t been giving out government cash with the export sales, but the work rights (during study and post-study) and the preferential access to points in applying for residence are subsidies nonetheless.  If the industry can stand on its own feet, with good quality educational offerings pitched at a price the market can stand, then good luck to it.  If not, we shouldn’t be wanting it here any more than we want car assembly plants or TV manufacturing operations here.

I participated in a panel discussion on Radio New Zealand this morning on Labour’s proposed changes.  In that discussion I was surprised to hear Eric Crampton suggest that the changes would put material additional pressure on the finances of universities.    Perhaps, although (a) the changes are explicitly aimed at sub-degree level courses, and (b) to the extent that universities are getting students partly because of the residence points that have been on offer, it is just another form of “corporate welfare” or subsidy that one would typically expect the New Zealand Initiative to oppose.      Whether hidden or explicit, industry subsidies aren’t a desirable feature of economic policy.

Standing back, Labour’s proposal look as though they might make a big difference in only a small number of sectors, notably the lower end of the export education market.  If implemented, they will be likely to temporarily demand housing demand –  perhaps reinforcing the current weakness in the Auckland housing market, along with some of their other proposed legislation (eg the extension of the brightline test and the “healthy homes” bill).   But they aren’t any sort of solution to the house price problem either: after the single year adjustment, population growth projections will be as strong as ever, and in the face of those pressures only fixing the urban land market will solve that problem. Time will tell what Labour’s policy proposals in that area, which have sounded promising, will come to.

Two final thoughts.  One wonders if whatever heat there has been in the immigration issue –  and it didn’t figure hugely in the election –  will fade if the headline numbers start to turn down again anyway.   The net flow  of New Zealanders to Australia has not yet shown signs of picking up –  but it will resume as the Australian labour market recovers.  But in the latest numbers, there has been some sign of a downturn in the net inflow of non-citizens.

PLT non citizen

There is a long way to go to get back to the 11250 a quarter that is roughly consistent with the 45000 residence approvals planned for each year.  But, if sustained, this correction would provide at least some temporary relief on the housing and transport fronts.  As above, Labour’s changes will have a one-off effect on further reducing this net inflow in the next 12 or 18 months, but nothing material beyond that.

And in case this post is seen by the new Minister of Immigration, or that person’s advisers, could I make a case for two things:

  • first, better and more accessible data.  The readily useable migration approvals is published only once a year, with a lag even then of four or five months.  The latest Migration Trends and Outlook was released in November 2016, covering the year to June 2016.  It is inexcusably poor that we do not have this data readily, and easily useable, available monthly, within a few days of the end of the relevant month, and included (for example) as part of Statistics New Zealand’s Infoshare platform.  The monthly PLT data are useful for some things, but if you want a good quality discussion and debate around immigration policy, make the immigration approvals data more easily available.    As a comparison, building permits data is quickly and easily available, reported by SNZ.  Why not migration approvals?
  • second, considering referring the issue of the economics of New Zealand immigration to the Productivity Commission for an inquiry.   Perhaps the current policy, as Labour proposes to amend it, has all the net gains the advocates say it does.  If so, the Productivity Commission could helpfully, and in a non-partisan way, demonstrate that.  But there are still serious issues around New Zealand’s unusually liberal immigration policy, in a country so remote and with such a poor track record in increasing its international trade share.  Whatever the economic merits of immigration in some places, it is by no means sure that large scale immigration here is doing anything to improve the fortunes of most New Zealanders.  It may, in fact, be holding us back, being one part of the story as to why we’ve failed to make any progress in closing the productivity gaps with other advanced economies.  It would seem an obvious topic for the Productivity Commission, and a good way of lifting the quality of the policy debate around this really substantial policy intervention.