At least 60 per cent

Dating back to before they took office in 2017, Labour’s stance on New Zealand immigration policy hasn’t been particularly clear. There was the 2017 policy, announced under then-leader Andrew Little, that was sold as being likely to make a big difference, but once one looked into the details (see link earlier in the sentence) it was clear it was designed not to do so. But then the leader changed, and little was heard of the policy on the campaign trail (people close to Labour told me that Ardern had made clear that she wasn’t that keen on the policy). Labour and New Zealand First then became government, explicitly agreeing to operate on Labour’s immigration policy, but apparently – so a NZ First minister told me – with an agreement to revisit the policy mid-term. If so, not that much of substance ever seemed to flow from that, although in early 2019 there was (ill-advertised) agreement in principle to changes down the track in how the residence programme was designed and run.

Then, of course, Covid intervened. There hasn’t been much non-citizen immigration at all since then, but no one envisaged that as a permanent model. And, of course, Labour secured an absolute majority at the last election, and selected a new Minister of Immigration.

Last month, the government finally got round to asking the Productivity Commission to do an inquiry into immigration policy. (I say “finally” because whether or not one approves of something like the current approach to immigration policy, that policy has clearly been one of the largest government economic policy interventions over several decades now, and the evidence-base around the economic effects of this large intervention, in the specific circumstances of the New Zealand economy, is disconcertingly light.) But then we are given to understand that the government has made up its mind anyway (which is, of course, their right as the elected government, but seems an odd ordering, when you’ve been in government for getting on for four years).

Here was the Prime Minister in her speech last week (emphasis added)

In terms of immigration going forward, last week we announced that the Productivity Commission will hold an inquiry into New Zealand’s immigration settings.

The inquiry will focus on immigration policy as a means of improving productivity in a way that better supports the overall well-being of New Zealanders.

The inquiry will enable us to optimise our immigration settings by taking a system-wide view, including the impact of immigration on the labour market, housing and associated infrastructure, and the natural environment.

This will sit aside existing work being led by the Immigration Minister around reforms to temporary work visas and a review of the Skilled Migrant Category visa.

In fact this Monday Minister Faafoi will be outlining the case for change in New Zealand’s immigration policy in a speech in Wellington.

But let me be clear. The Government is looking to shift the balance away from low-skilled work, towards attracting high-skilled migrants and addressing genuine skills shortages in order to improve productivity.

So I looked forward to reading the Faafoi speech, with interest tinged with scepticism. Specially invited guests, some from out of town, must have looked forward to it too – even if for some their interest might have been tinged with apprehension. There are a lot of champions of large-scale non-citizen immigration out there – from the Green Party (who seem keen on importing supermarket workers) to much of the “big end” of town.

As it happens, Mr Faafoi was apparently sick yesterday, and so the Minister for Economic Development Stuart Nash got the job of reading Faafoi’s speech, and was reportedly then unable to answer most questions.

The speech itself seemed to have been downgraded – the PM had trailed it as making the “case for change”, but the minister’s heading was simply “Setting the Scene”. But it was barely even that. I guess we came away with the message that “we are determined not to return to the pre-Covid status quo”, but there was almost nothing of the how – no specifics at all – and very little, in any sustained sense, about the why. There was no evidence in the speech of any rigorous thinking, analysis or research from officials – the sort of work one might normally hope for (especially for a government four years in) in advance of policy decisions and announcements. Particularly unkind observers suggested that the speech was more in the nature of “an announcement about an announcement”, of the sort that has become all too familiar. In fact, we were told that “we’ll be engaging with you [who?] over the coming months to test our thinking”, suggesting there just isn’t much there yet.

And I say all this as someone who might, possibly, be somewhat sympathetic to some elements of the broad direction the government might be heading in around immigration (even while being highly sceptical of Stuart Nash’s statist centralised approach to business and the economy, and prone to scoff every time I read another reference to the vaunted Industry Transformation Plans, in which bureaucrats take the lead in (purporting to) shaping the future of one industry after another (a tourism one got a mention last night)).

There isn’t much point trying to unpick Faafoi/Nash’s speech bullet point by bullet point (for some unaccountable reason it appears on the Beehive website with every sentence a bullet point). But in this post I just wanted to address a claim made in the speech.

High levels of migration have contributed to 30 per cent of New Zealand’s total population growth since the early 1990s.

The “early 90s” is not only when the current broad approach to immigration was being introduced, but it is also when the current official population series begins.

Now I’m sure that one of the first things MBIE officials tell each Minister of Immigration is that to talk of “migration” isn’t very helpful in a policy context. There are inflows and outflows of New Zealanders and non-New Zealanders and the only bit policy controls is about the movement of non-citizens (arrivals, and departures for those on limited term visas). So in a speech on immigration policy, one might expect that the Minister of Immigration would focus his analysis on the movement of non-citizens. And that offers a quite different picture than the one Faafoi/Nash painted in the speech.

Here is a chart showing net non-citizen migration as a percentage of New Zealand’s population growth for each calendar year from 1991 to 2019 (I left off 2020 because the net migration numbers for that year are still estimates and the SNZ model for estimating these things for very recent periods isn’t great in normal times, yet alone Covid times)

non-citizen contrib

Not even in 1991 was the contribution of non-citizen net migration quite as low as 30 per cent, and 1993 was the last time the contribution (to a first approximation, the contribution of immigration policy) was below 60 per cent. Of the year to year variation, some represents variation in the number of non-New Zealand migrants, but much represents variability in the (net) out-migration choices of New Zealanders (mostly to Australia).

There are plenty of people who will think the numbers in the chart are a good thing. I don’t, given what we know about the continuing long-run bleak underperformance of the New Zealand economy. But whether or not you welcome these trends, they are the (relatively) hard data. For decades now – well, prior to Covid – New Zealand’s pace of population growth, which is among the highest of the OECD countries, has been largely an immigration-policy-driven phenomenon. No OECD country envisages a larger share of population growth coming from non-citizen immigration, and most envisage a far smaller share. And if anything, these data are likely to understate the true population consequences of immigration, since the median migrant tends to be relatively younger, and the children of those migrants – themselves New Zealand citizens – will have further contributed to the growth of the population.

Rapid (policy-led) population growth in such a remote location appears to have impeded the prospects for any reversal of the decades of productivity underperformance. It has skewed the economy inwards, persistently overvaluing the real exchange rate and thus crowding out potential export industries. Wage growth in New Zealand has been weak, but that isn’t directly some immigration phenomenon – such discussions, including the Minister’s, consistently ignore the demand effects of high immigration – and the data show that, for the economy as a whole, wage growth has tended to run quite a bit ahead of growth in the economy’s earnings capacity (nominal GDP per hour worked).

When the government finally gets round to specifics one can only hope their policy decisions are based on better analysis, including the some robust economic analysis of the specific New Zealand experience, than was evident in the speech last night.

And when the champions of mass-migration splutter at the general thrust of the government’s aspirations, perhaps they might offer some thoughts on what it is about New Zealand that means that – in their view – we need to be uniquely heavily dependent on large scale non-citizen immigration.

Economic policy malaise

Reflecting on the economic outlook, it hasn’t been the best of weeks.

Across the Tasman, a large chunk of Australia –  key market/source of exports, imports, investment etc – is locked down again for six weeks.   It is a reminder, including to anyone contemplating investment decisions, how easily things can be blown off track again.  And that is in a country with a death rate still (slightly) lower than New Zealand’s.  The coronavirus situation in much of the rest of the world doesn’t look that great either, and with it the outlook for the world economy.  Perhaps, at the margin, that troubled world economy contributed to the decision announced this morning to close Comalco.

Closer to home, the NZIER QSBO results were out.   ANZ’s commentary summed it up succinctly but bleakly under the heading “Worrying”.  Of course the June quarter outcomes will have been dreadful, but the forward-looking indicators weren’t really much better.   These sorts of surveys don’t always have much predictive power –  more unexpected stuff happens –  but they paint a pretty bleak picture of how businesses were seeing things just a couple of weeks ago.  Again from the ANZ

Today’s data will be worrying for the RBNZ and Government; firms are reportedly hunkering down, shedding workers, and cutting prices. But more monetary stimulus is needed, and an aggressive, front-loaded approach is warranted.

And all that is despite the massive fiscal spend over the last four months, which has for now replaced a fair chunk of the lost private sector income during that period, even as it saddles us –  and future governments –  with much more severe constraints on fiscal freedom of action in the years to come.    All that income support (in one form or another) will have helped keep private spending quite a bit higher than otherwise.  All the talk was about “tiding over”, but to what, to when?  It has always had the feel of a policy approach dreamed up back in late February/early March when the government (and Reserve Bank) were still refusing to take very seriously that economic shock that was already engulfing the world.

In that context, it was interesting to have confirmation from the Prime Minister that the wage subsidy scheme will not be extended further –  and given that firms get it as a lump sum, presumably the bulk of what will ever be paid out even under the extended scheme will already have been paid out.     Ending the scheme seems appropriate –  extending it the first time was probably more about politics than economics.    Anything else would have looked like a bizarre attempt to freeze chunks of the economy as they were six months ago, refusing to face the reality of a changed world.    But the scheme was putting large amounts of cash in the pockets of people in the private sector, supporting spending and holding GDP higher than otherwise.  And what comes after it?

Part of the answer, of course, is the higher-than-otherwise benefit paid to those who’ve lost their jobs as a result of Covid.   But it is only for 12 weeks, is still mostly about income replacement (buying time) rather than supporting a self-sustaining recovery in underlying economic activity, and of course many people just won’t be eligible for it.  Perhaps the government will decide to extend this scheme, but even if that were to happen it has its own problems (deterring the search for a new job).

One might, perhaps, have hoped for signs of a serious, rigorous, well-thought-out strategy from the Prime Minister.  As it happens, she gave a pre-election speech to her party’s Congress on Sunday.   As her party is odds-on favourite to dominate the next government I read it, twice actually.  In the speech the Prime Minister purported to offer a plan – a five-point plan even.

Today I am announcing our 5 point plan for our economic recovery.

It’s about investing in our people, it’s about jobs, preparing for our future, supporting our small businesses, entrepreneurs and job creators and positioning ourselves globally.

Sadly, she showed no sign of actually understanding how economies work or prosperity arises.    Anyone, what of the five points?

Which brings me to point one of our plan – investing in our people.

Whence follows a list of handouts, which might (or might not) individually make sense, but by no stretch of the imagination or language can be called investments.  Income support is fine, but it is no basis for recovery.

Perhaps this was a little closer to “investment”

That’s why we made a $1.6 billion investment in trades and apprenticeships training, which includes making all apprenticeships free.

We’ve also made those areas of vocational training where we need people the most like building and construction and mental health support workers – all free. The potential impact of these policies is huge.

Except that this is the government that had already introduced the fees-free policy, only for it be revealed that it was mostly income support too (transfers to people who would already have been undertaking tertiary education anyway).    And the new measures could have a feel of measures designed more to keep headline unemployment down than to actually revive the economy.

Even the Prime Minister recognises that training isn’t much use if there are no jobs.

But retraining isn’t enough if there aren’t jobs to go into at the end of it.

And this is where the second part of our plan kicks in, what I like to simply call, jobs, jobs, jobs.

She proceeds to run through some government initiatives.

First is the Big New Zealand Upgrade Programme designed to tackle our core infrastructure deficit. We announced it at the beginning of the year, and it amounts to $12 billion of road, rail, public transport, school and health capital funding. It could not have come at a better time.

That programme may or may not have merit, but as she says it was announced in January,  judged appropriate/necessary then –  pre-Covid.  It was factored into economic forecasts, including those of the Reserve Bank, then.  On to some other spending.

As part of our COVID response we have committed funding to providing an additional 8000 public houses, bring the total number of state and transitional houses to be built by this Government to over 18,000 by 2024 – thank you Megan Woods and Kainga Ora.

It is the largest house building programme of any Government in decades, and I’m proud of it.

But when we’re talking about infrastructure, it’s not just about the projects we in the government are responsible for, we also have the opportunity to partner with communities, with iwi and local government.

That’s what the $2.6 billion worth of shovel ready projects we announced earlier this week were all about.

Things like Home Ground, a project by the Auckland City Mission that will provide 80 apartments with wrap-around support and care, or the Poverty Bay Rugby Park Grandstand, least Kiri Allen stage a sit-in, right through to the Invercargill inner-city development.

It would take someone closer to the detailed data than I am to unpick quite how much of this is really new spending, and how much is just putting details to spending programmes (like the PGF) already allowed for.  Nor is there any sense of (a) displacement (lots more state houses will, almost certainly, mean fewer private houses being built) or (b) value-for-money (what is the taxpayer doing funding the Invercargill city redevelopment, throwing more money at KiwiRail or –  wonder of wonders –  tens of millions at the Wanganui port.

And then at the end of the “jobs, jobs, jobs” section we get this

Collectively these projects are estimated to create over 20,000 jobs in the next five years.

No analysis to support that number (and we’ve seen before how PGF job estimates are concocted) but even if it is correct, total employment in New Zealand is about 2.8 million people.   “Jobs, jobs, jobs”, even on the PM’s numbers, looks tiny.

She goes on to list a few environmental jobs projects.  Perhaps they are worthwhile, but they certainly aren’t a private sector led recovery.

But moving along

That brings me to the third plank of our plan – preparing for the future.

The whole of that plank is here

Restoring our environment is one thing, decarbonising it is another.

Investments in waste management and improving energy generation will be key- and this is where I am signalling there is more to come.

Preparing for the future also means supporting our businesses to innovate, especially as we go through a period of digital transformation.

There will be few among us who haven’t changed our routines and habits as a result of COVID-19. By the end of lockdown I can confirm that Damien O’Connor did indeed discover the unmute button on zoom.

We want to support our small businesses through this digital transition, which is why we established a $10 million fund to incentivise e-commerce and train more digital advisors.

It’s also why we will keep encouraging innovation in all forms. So we’ve created a $150 million fund to provide loans to R&D-intensive businesses.

Well, okay.  If you are of the left, you might find that appealing, but even then you’d have to concede there wasn’t much to it, not much that will help generate a rapid and strong economic recovery.

But there is, it appears, a role for the private sector.

All of this builds to the fourth part of our plan, supporting our small businesses, our entrepreneurs and our job creators

Which sounds good, until you read the text and realise that all she has to offer is the wage subsidy scheme, and the small business interest-free loan scheme, which was extended for a few months.    Income support etc has its place, but it isn’t the foundation for a strong robust economy or a rapid return to full employment.

And what of the final plank?

And the final plank of our five-point plan is to continue to position New Zealand globally as a place to trade with, to invest in, and eventually to visit again.

This has been an export-led lockdown, and so too will it be an export-led recovery.

Sounds good as an aspiration, but frankly seems unlikely.   What does Labour have to offer specifically?

That’s why a few months ago we provided $200m to help exporters re-engage with international markets, and support firms looking to export for the first time.

It’s also why we continue to expand our trade relationships. The limitations of the last few months didn’t stop us launching our free trade agreement talks with the UK …

We are investing $400 million in tourism because we know it is part of our future, and because open borders will be again too. It is not a matter of if, but when it is safe.

And on that, we already have work underway.

We are progressing with all the checks and balances needed for a trans-Tasman bubble, and also on reconnecting with our Pacific neighbours. We have a framework in place that will help Cabinet make a decision on when quarantine free travel with these parts of the world should resume.

All pretty small beer really.  No one supposes that a UK preferential trade agreement is going to matter very much, and in recent weeks we’ve heard David Parker fulminating about the frustrations of the EU’s position on trade negotiations with them.   And, of course, this is the economy that –  for all the talk of trade agreements –  has had foreign trade shares (exports and imports) falling as a share of GDP this century, the high point of this wave of globalisation.   There is also no sense of recognising that the real exchange rate remains very high –  not down at all, despite the big hit to one of our main tradables sectors.   And all this was nicely complemented by the government’s primary industries strategy announced early in the week and now championed as Labour Party policy, which (as the economist Cameron Bagrie pointed out) involved primary exports falling as a share of GDP over the next decade, even as that sector was supposedly going to help lead the recovery.

And that was it.  That, apparently, was the government’s economic recovery plan.

Typically we look to monetary policy at the main counter-cyclical stabilisation tool.  Ideally, it might be complemented by good pro-productivity structural reforms – of that sort successive New Zealand governments have lost interest in –  but they take time to design well and implement –  whereas monetary policy can be deployed very quickly.

Of course, in the context of the Covid shock it would have made sense to have deployed fiscal policy and monetary policy together.  Even if monetary policy can be deployed very quickly, it does not put money in the pockets of households instantly (and in the context of a “lockdown” and the immediate (quite rational) fear-induced drop in economic activity, there was a place for immediate income support.  But if monetary policy does not work instantly that is why it should be being deployed aggressively and early.  Had monetary policy been used aggressively and early –  starting back in February when the first OCR cut should have been done – by now we would be seeing quite a lot of the fruits (the full effects of monetary policy adjustments typically take 12-18 months), providing a stimulus to demand and activity as the fiscal support is wound back (as it is being, on announced government policy).

As it is, we have had almost nothing from monetary policy.  The OCR was cut belatedly, then an irrational floor was put on the OCR by a Monetary Policy Committee that was still struggling to comprehend the severity of what they were facing.  And because the Reserve Bank reacted only slowly and to a very limited extent, we’ve ended up with hardly any fall in real interest rates at all (inflation expectations have fallen almost as much as the OCR).   The exchange rate hasn’t fallen at all.  The Reserve Bank likes to make great play of their LSAP programme, but it mostly works –  if at all –  by lowering interest rates and underpinning inflation expectations.  And since we know expectations have fallen, and real interest rates have barely fallen, at the very best the LSAP programme can only have stopped things tightening.  In the Prime Minister’s words, this is a really severe global economic downturn……and yet monetary policy has done almost nothing; none of that necessary support is now in place even as the fiscal income support winds back and the domestic and world economies remain deeply troubled.

Of course, the failure of the Reserve Bank to do anything much useful rests initially with the Governor and his committee (the one he so dominates that we’ve never heard a word from any of the three external members, the one he ensured had no one with serious ongoing expertise in monetary policy appointed to it).  But they are officials, ultimately accountable to the elected government.  In fact, ever since the Parliament made the Bank operationally autonomous in 1989, the Act has always recognised that officials could get things wrong, and allowed for the Minister of Finance to directly override (transparently) the Bank.  The current government carried those provisions into its reform of the Reserve Bank, but now –  in a really severe economic downturn, in which the Reserve Bank is simply not doing its job –  they seem too conservative, too scared, to use well-established statutory powers.  They are happy to put in place limited zero-interest loan schemes for small businesses, but unwilling to ensure that –  amid the bleak economic outlook –  market prices for business and household credit are anywhere near that low.   In effect, that means they prefer to let more businesses fail, more people end up languishing on the dole, more “scarring” (a point the PM made in her speech) as if wishful thinking and idle hope was a substitute for serious policy.

Right from the start of the coronavirus, this government’s approach has been –  in essence –  to provide lots of income support and hope that the world gets back to normal pretty quickly.   It was a dangerous and deluded approach from the start, something that becomes more evident with each passing month.  All the more so as other countries’ governments are similarly failing to do much that might support a robust recovery elsewhere.  The current New Zealand government seems to have no ideas, no plan, to be unwilling to use the (low cost) powers they do have to help get relative prices better attuned to supporting recovery.  There is a growing risk that we are drifting into another of those periods –  perhaps worse this time –  as we saw after 2008, when it took 10 years to get the unemployment rate back to something like normal (with little or no productivity growth), and no one much among the political elites (either side) seemed to really care.

Of course, if Labour’s approach is bad, at least (being the government) it is on the table.  It is now less than two months until voting starts and we have no idea what National’s approach might be, but no reason to suppose it would be materially different or better.


Two years on

The weekend newspapers had several articles highlighting the second anniversary of the New Zealand First choice that led to the creation of the current government.  There was, for example, the double-page spread  in the Herald devoted to a not-at-all-searching interview with the Prime Minister and the Minister of Finance.  And there was another double-page article in the Dominion-Post looking at the government’s performance under a range of policy headings.  Since the government’s term is now two-thirds over –  likely to be in full campaign mode (say) nine months from now –  it seems not unreasonable to take a look at performance.

The Stuff political stuff divided up nine policy areas between them and wrote short reviews of the government’s performance in each of them.  On my reading, they tended towards a generous assessment.  All governments do stuff –  sometimes even just things in the works under a previous government – and where this government has done most (education notably) there isn’t a huge amount of evidence that there were real problems that needed fixing, or that their fixes were dealing with whatever real problems there were.

Take housing, for example, where the Stuff journalists summarise thus

Two years into the Government’s term, housing is far from Labour’s strong point, but it is not an area of total failure.

So house prices are still rising, rents are still rising (even in a low-interest rate world in which provision of rental housing could/should have been cheaper than ever) and there has been no legislation to free-up urban land markets, or to compel local authorities to operate a more liberal approach.   Set against that, a foreign buyers’ ban was largely irrelevant, and there is little reason to suppose that building a lot more state houses will increase the overall effective supply of housing (certainly won’t deal with the land issues).  For what was declared to be a “crisis” –  I’ll just settle for disgrace –  what has been done, or accomplished, is astonishingly little.  And it isn’t as if markets are pricing in better outcomes in future either.

But what really caught my eye was that there was no discussion of the government’s economic policy performance.  One might reasonably grant them a pass mark on fiscal stewardship –  but on anything beyond that the best reason why Stuff might have chosen to overlook this key area of policy is that there just isn’t much there at all.

Back when they were in Opposition we would, occasionally, here about the lack of any decent productivity growth, talk about growing export sectors, and so on.  Even today, the mantra of a “productive and sustainable” economy gets rolled out from time to time…..but with almost nothing to back it.

Actual productivity growth still languishes – running at no more than 0.5 per cent per annum, slower than in most other OECD countries. (It is fair to note here that there could be material revisions to a large number of macro series over the next couple of months, consequent on the census (and subsequent creative efforts) results, but there is no obvious reason to anticipate material improvements.)

There is no sign that the external orientation of the economy has strengthened (eg exports and imports as a share of GDP). no sign of robust business investment, and of course we all know that business confidence results are in the doldrums.  Interest rates have had to be cut further and the real exchange rate remains pretty high.

And what response has government policy made?   The government seems to have made quite a fuss about the new research and development tax credit. But they’ve produced no sustained analysis illustrating why this will make a great difference – and no sustained either looking at why firms didn’t regard higher rates of R&D spending here as offering attractive risk-adjusted returns.  And that really is about it.

And on the other hand, we have the government sitting idly by while the Reserve Bank Governor pursues his whim of making credit less readily available and more expensive, a halt to most new road-building even as the population continues to increase rapidly (and not, even, say, a congestion-pricing regime that might help reconcile the two), a ban on most oil and gas exploration, looming new regulatory restrictions around water.  Oh, and immigration policy –  for which there is no evidence of systematic economywide gains, in a country where (fixed) natural resources underpin prosperity –  is, if anything, becoming more liberal.

The government keeps telling us it has a plan.  I wrote here at the start of the year about an economics speech the Prime Minister gave, concluding

If there is any sign of a plan, it isn’t one that is going to do anything to lift our economic performance, in the short or longer-term.   All indications are that the Prime Minister doesn’t care. 

And then last month the government released something they did call an “Economic Plan” – in fact a thirty year one.  Notwithstanding all the glossy pictures and long lists of points, it sank without a trace, barely even reported at the time, even with a supporting op-ed from the Prime Minister herself (my take was here).

Once upon a time, I wondered (perhaps naively) if perhaps they –  upper reaches of the Labour Party – really did care.  They should.  After all, it is their traditional voters –  the poorer people, the working classes, the younger –  who suffer most from the decades-long failure of successive governments to improve New Zealand’s woefully poor productivity performance.    But all the evidence from their time in office is that any care is superficial at best.  Sure, they’d probably welcome a much better performing economy if it suddenly dawned fresh and shiny.  But they seem to have no real ideas, no compelling narrative, for how to markedly re-orient our economic performance, and they is no apparent interest in finding answers, or ensuring that our economic policy and analytical institutions are delivering them serious advice, grounded in the actual experience of New Zealand, on policy approaches that might really make a difference.

It is an utter abdication of responsibility.  No one made them run for office, no one forces them to stay in office, but when they take office they have responsibilities for the future prosperity of New Zealanders that they show no sign of taking at all seriously.

An academic economist left this comment on one of my weekend posts

With this in mind, I must confess that I always threaten to fail my Otago students if they don’t migrate to Austalia, because it shows they haven’t learnt anything from me; but the university doesn’t allow me to deliver on the threat. Still, most would be financially better off if they took this advice, and migrated to a place where better firms are located, and sought jobs there.

Sadly true.  And what a sad commentary on decades of policy failure here: Labour ministers currently hold all the key portfolios (Prime Minister, Minister of Financem Minister of Economic Development) and it is their failure now.


Making short-term foreign labour more readily available

There were, and still are, people who thought Labour and New Zealand First went into the last election campaigning on policies to materially and sustainably reduce the very high rates of non-citizen immigration to New Zealand.  (There were no such doubts about the Greens: after James Shaw in 2016 gave a fairly thoughtful and moderate speech on the issue there was a great backlash from his own supporters and he had to recant and do a very public form of penance.)

But what of Labour and New Zealand First?  It seems that under Andrew Little Labour had become quite concerned about immigration and thought there were votes in suggesting that “something should be done”.   But as I pointed out when their 2017 immigration policy specifics were released, whatever impression they wanted to create, any measures they were proposing would have reduced the net inflow for one year only.  Some of those proposals had some merit in their own right, but they were playing at the margin, while allowing Labour to associate itself with numbers of a 25000-30000 reduction in net migration.   Labour is quite correct to claim that they never set that as a target (it was a forecast, about what difference they thought their proposals would make), but they never owned up to the fact that any reduction would be one-off, not permanent.     Either way, even before the election –  after the change of leadership –  they were backing away from even their own published policy (checking old emails, I found one from a week out from the election in which a senior and well-connected journalist told me that Ardern and Lees-Galloway had taken a conscious decision to downplay the issue).

As for New Zealand First, there was occasional talk of reducing net migration to 10000 to 15000 per annum but (a) it wasn’t in their immigration policy, and (b) not much specific was.  Both parties seemed to want to create the impression that they would “do something” (note that National had actually “done something” –  albeit fairly modest – that year) without actually offering much in the way of specific commitments.  NZ First, of course, has 25+ years of form in that respect.    I guess not many voters read the specifics of manifestos (although media should) and so it is hard to have much sympathy for the parties when people now look at what the government is (and isn’t) doing and suggest that it doesn’t really square with the impression they were happy to create pre-election.

At times, it is hard to know quite what they are doing.   Actual residence visa approvals for the year to August were 34863, the lowest annual rate this century.   But that isn’t supported by any high-level policy changes and from all the accounts of massive backlogs of applications at MBIE –  having reduced its processing capacity –  it isn’t clear that it is deliberate (and if it is deliberate, it is a pretty callous way to do things, leaving applicants hanging uncertainly with indefinite delays).  And on the other hand, the number of Essential Skills visas approved in the year to August was a record high, and about twice as many as were being approved five or six years ago.  On MBIE’s figures there are almost 200000 people here with short-term work visas (consistent with that OECD comment that New Zealand has one of the highest –  perhaps the highest –  shares of short-term foreign workers of any OECD country).

But yesterday we got some specifics from the government in the form of a new policy on temporary work visas.  In thinking and writing about New Zealand immigration policy, my focus is on the residence approval programme –  which is what drives the longer-term contribution of immigration to population growth –  rather than the shorter-term visa programmes.  But reading through what the government released yesterday, it was hard not to call it a triumph for the business community (short-term) at the expense of New Zealanders (those two aren’t necessarily in conflict of course, it is just that there is no evidence that New Zealand’s liberal immigration policies have done New Zealanders any good).  As the Newsroom article this morning puts it

As soon as the embargo lifted on the Immigration Minister’s announcement on Tuesday, positive press releases flooded in from industry associations whose employers rely on imported labour, including Federated Farmers, Horticulture NZ, Business NZ and New Zealand Aged Care Association.

They see it as a win for employers who will be able to employ overseas workers with greater ease, after passing the initial tests.

Here is the overview document the government published.

Several things struck me.

First, the government and its advisers appear to have little use for economics (yes, some of you may think that to their credit),  What do I have in mind?     There was this, for example, the very first bullet point in the entire document

Ensure that temporary foreign workers are only recruited for genuine shortages, and that employers across New Zealand can access the skills and labour they need;

When there are incipient shortages of tomatoes or lettuces (storms etc) or even houses, the price goes up.   The market then more or less clears and in most cases at the new prevailing prices there are no “genuine shortages”, rather supply and demand adjust to the signal in the price. We see that this week in global oil markets.

But neither central planners in MBIE nor their political masters –  nor much of the business community, when it comes to inputs –  are keen on that sort of approach.  They prefer a model in which wages don’t rise much because whenever there is an incipient shortage –  which would otherwise trigger wage rises –  the employer can find another migrant worker.   A good deal for firms if they get the system rigged in their favour like that, and compromising, in that any firm that had qualms about whether this was really right, couldn’t really take a stand and refuse to get involved or they really would be rendered less competitive than other firms in their sector.

And there was this in a section on “Why the government is making these changes”

The Government is committed to ensuring that regions are able to get the workers they need to fill critical skill shortages, particularly during a time of low unemployment.

Where they show no sign of realising that –  as economists in New Zealand have known for decades – increased immigration has the short-term effect (perhaps lasting several years) of adding more to demand (including demand for labour) than to supply, thus exacerbating capacity pressures in aggregate, not relieving them.   Yes, an individual firm in a sector heavily reliant on immigrant labour might be made better off, but across the whole economy it is no fix at all.  (And if the intuition of this point isn’t obvious, fortunately we mostly don’t import dirt-poor illegals living 20 to a house, so new immigrant workers need houses, shops, offices, schools, roads etc much as you or I do, and building all those things takes real resources – including labour.)

There is a strange mix of central planner tendences and genuine liberalisation at work in the package.  I guess the government would defend that on the grounds of a strong central government hand around lower-paid migrants and more liberalisation for somewhat higher paid roles (the spin is about “highly paid” or “very highly paid” jobs, but that isn’t really so at all).  On the central planner side, there were things like this

The recently announced Regional Skills Leadership Groups will play a key role in informing government and regional responses to local labour market needs. Each Regional Skills Leadership Group will develop a labour market plan for its region to identify the availability of skills and labour in their region and any gaps that need to be addressed to help drive the region’s economic growth.

Or one could use market price signals and the resulting internal resource flows.  But the government believes bureaucrats and local worthies (business leaders with their own interests to advance?) will do it so much better.

Still on the central planner side, industries that are heavily reliant on migrant labour are to be subjected “Sector Agreements”

Sector Agreements will be negotiated with sectors that have a high reliance on temporary foreign workers (especially in lower-paid occupations). Employers who are recruiting foreign workers for occupations covered by a Sector Agreement will be required to comply with the agreement. Sector Agreements will support facilitated access to foreign workers to meet shortages in the short term by making this a more certain and lower-cost process. In exchange, the sector will be required to make commitments and demonstrate progress towards placing a greater share of New Zealanders into jobs in the sector and reducing the sector’s reliance on temporary foreign workers over time.

But there is a great deal of time-inconsistency about all this.  In the short-term, rest homes, road freight etc, will get “more certain and lower cost” access to migrant workers, and yet the sectors will supposedly be signing up to commitments to reduce future reliance on such workers. It will be interesting to see the details of the first such agreements (due mid-2020) but count me sceptical about whether any government will be willing to follow through and actually insist on reduced reliance on temporary foreign workers, having initially made them even easier to get.  All those lobbies will be moaning and complaining five years hence just as they are now.    Much better to put in place some clear and graduated price signals now.

The other area of central planners’ conceit in the document is the distinction between “the regions” and five of the six largest cities (for some reason Tauranga misses out on promotion to big boy status).  This continues the incoherence of the previous government’s approach, offering more residency points for jobs outside the big cities, in the process (almost as a matter of arithmetic) lowering the average quality of the people given residence visas.

Under yesterday’s package

The requirement to undertake a labour market test will be removed entirely for employers in the regions (outside the major cities) seeking to employ foreign workers who will be paid above the median wage. This gives open access to employers in the regions recruiting for jobs paying above the median wage. This means there is no need for skill shortages lists in the regions and the skill shortages lists will only exist for the five following cities – Auckland, Hamilton, Wellington, Christchurch and Dunedin. If a job in a city is on that city’s skills shortage list there will be no labour market test; if it is not on the list then there will be a labour market test (that is, the employer must advertise the job with the pay rate).

There is no attempt at a justification for this differentiation between, say, Tauranga and Hamilton, or Queenstown and Dunedin, or even between Kawerau and Auckland.   It simply continues the planner mentality –  even if we might count getting rid of (bureacrat-determined) “skill shortage lists” in some places as a modest gain in its own right.

And from a Labour-led government –  supposedly focused on “the workers”(especially less well-off), surely it evokes a hollow laugh when they release documents talking of people earning $52000 a year as “highly-paid”.      Such has been the increase in the minimum wage over recent years –  no relationship at all to productivity gains –  that Labour now class as “highly paid” anyone earning only 40 per cent above the minimum wage.

The final bit of the package that caught my eye was this

The Government will reinstate the ability for lower-paid foreign workers to support their partner and children to come to New Zealand for the length of their visa. This was restricted in 2017. The foreign worker will continue to need to meet a minimum income threshold, the purpose of which is to ensure that their income is sufficient to support themselves and their family while in New Zealand.

….Dependent children of a lower-paid worker will have access to primary and secondary education as subsidised domestic students. They will only be able to access tertiary education as full fee-paying international students.

I guess we should be thankful for small mercies re that final sentence.  But really…..the government makes it “more certain and lower-cost” to bring in relatively low-paid migrant workers, and then –  even if there were real economic gains from that particular “trade” –  dramatically erodes those possibilities by allowing such (supposedly) temporary workers to bring spouses and children.   Given the failure of the government to anything serious about fixing the urban land and housing market, that will put further indirect pressure on the housing market (and associated infrastructure) and the (substantial) fiscal cost of any school education for the children of such workers has to be set against the (inevitably modest, in a low-skilled worker) wider economic benefits to New Zealand of the parent being able to work here.

You can see some elements of sense in some of what the government is doing in elements of this package.  Perhaps the “sector agreements” are really well-intentioned, even if they seem most likely to be ineffectual over time in reducing the dependence on these sectors on modestly-paid modestly-skilled short-term foreign workers.    And, in principle, the absence of a “labour market test” for really highly paid or specialist positions makes quite a lot of sense.  But, even in this struggling economy, it is a sick and sad joke to talk of pay rates in excess of $52000 as “highly paid”.  More importantly, there is nothing in the system designed to set a financial incentive for firms to employ locals.

I continue to champion my own model, which I’ve run in various previous speeches and posts.   For work visas, at all levels of skill, in all regions, I would apply something like the following model

Institute work visa provisions that are:

a. Capped in length of time (a single maximum term of three years, with at least a year overseas before any return on a subsequent work visa).

b. Subject to a fee, of perhaps $20000 per annum or 20 per cent of the employee’s annual income (whichever is greater).

Doing so would largely get officials completely out of the approvals process (although not from enforcement), would treat all regions equally, and would provide a strong –  and transparent –  incentive to hire (and develop) locals, and bid up wages for locals, where at all possible, while providing easier access (than any government has allowed) where a short-term foreign worker may really be necessary in the short-term.   And the fee would ensure that even if there were no other benefits to New Zealanders as a whole, at least the public finances would benefit directly.

The much bigger issue, of course, is the residence approvals programme.  The government is supposed to be having announcements on that front before the end of the year,


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.


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….

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   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.