You’ll remember during the election campaign how National (Willis and Luxon) repeatedly told us that their fiscal plans (notably the Back Pocket Boost giveaway plan) was fully funded. Whenever doubts were raised about the foreign buyers’ tax revenue estimates National (a) asserted full confidence in their numbers, and b) reiterated that their plan was…..fully funded. The pretty clear implication – one might even be able to find specific quotes – was that if by some chance the revenue from that tax fell short they’d make it up elsewhere.
National’s fiscal plan – with the foreign buyer tax – was already some mix of ambitious and unambitious. Unambitious in that by 2027/28 (beyond the next election) National envisaged net debt at 0.7 percentage points lower than Labour’s plan, which had been captured in the PREFU numbers. The operating balance, having been in deficit for years (with no good economic basis for deficits) also wasn’t to return to surplus until 2026/27. “Ambitious” in the sense that National promised to do all this – closing a large structural fiscal deficit – without cutting any specific programmes, but with promises that fat would be squeezed out of the public sector. Like Labour’s fiscal plan there was a considerable element about it of “we’ll draw a line on a chart, and then just ask you to trust us that we might deliver”. Alternatively, as the target date for a surplus drew closer it might be pushed out further, as Labour in government has now done a couple of times.
You will recall that Labour has left a large fiscal deficit. On the New Zealand operating balance measure, a deficit this year of 2.7 per cent of GDP (in an economy more or less fully employed), while on the IMF’s internationally comparable metrics, a deficit among the very largest among advanced economies (all having nothing to do with the pandemic, the heavy spending on which was in 2020 and 2021).
Today we got the two coalition agreements. There aren’t any specific fiscal numbers in those documents, but there are policy commitments that all three parties are pledged to support.
To no one’s great surprise, once it was clear NZ First was going to be in the mix, the foreign buyers’ tax is not proceeding (and so unless some researcher with IDI access gets curious – about the detailed pattern of foreign purchases pre-ban) we may never know whether National’s revenue numbers were ever plausible), and with it $750m per annum of promised revenue has gone.
In my post last week I speculated that perhaps National might look to cover this by delaying a few of their promised giveaways a bit, and at least kicking the shortfall a year down the road. Instead, promises of fully funding the giveaways were scrapped along with the proposed foreign buyers tax.
In fact, not only did they not delay any of their giveaways but the restoration of interest deductibility (a good policy) is being done a little faster than National had promised, costing a bit more over the four years than National had allowed for. Not mentioned was the point some critics made pre-election that the deductibility costings had been done in a climate of low interest rates, such that at least over the next few years the cost of restoring deductibility will be a bit more than the National costings had allowed for.
Oh, and the agreement with NZ First allows for an extra $1.2 billion of regional development capital expenditure. That won’t count against the operating balance – at least until depreciation cuts in – but it is all debt, and NZ First last term didn’t have a great track record for high quality regional development spending. It is likely to be much more akin to extra public consumption (one reason why those IMF and OECD fiscal balance measures don’t use an operating balance concept – when governments are spending the money the distinction between operating expenditure and capex often tends to be hazy).
If one wants to look on the bright side of things, there is agreement to shift the tertiary fees-free policy from first year fees to third year fees. That seems pretty daft in terms of any substantive case for the policy – presumably about helping encourage people into tertiary education (which it hasn’t done) – but it does have the one-off fiscal advantage that it should mean no outlays in 2025 and 2026 before normal service resumes in the 2027 academic year. The optimist in me wonders if having operated for two years with no outlays, Cabinet in 2026 might decide to just scrap fees-free altogether but….that will be the election year budget. [UPDATE: paying fees-free for the third year will be cheaper, on account of students who don’t complete, but that just highlights the absurdity of the policy – rewarding those on the cusp of the higher incomes qualifications usually bring.]
A point I’ve made all along is that none of these sorts of things individually amount to much macroeconomically. The foreign buyers tax, for example, was supposed to raise less than 0.2% of GDP in annual tax revenue, but that comes on top of an already large structural deficit for which the parties had no clear or explicit plans for closing. A 2.7 per cent deficit becomes a 2.9 per cent deficit. A large fiscal hole bequeathed by Labour is dug a bit deeper by today’s announcement, making climbing out of that hole all the more challenging (especially if programmes aren’t to be cut). There would seem to be now next to no hope of the fiscal drag tax bracket adjustments in 2026/27.
And it is not as if this is all the potential slippage.
I looked through the ACT agreement and found these items:
a promise to consider sharing a portion of GST collected on new residential builds with councils. The same revenue can’t be spent twice, and
“explore further options to increase school choice and expand access to integrated and independent schools including reviewing the indepedent school funding formula to reflect student numbers”
And in the NZ First agreement:
Fund Gumboot Friday $6 million per annum
Look to increase funding of St John
Ensure Plunket is funded to do their job properly
Investigate the funding formula for new residential care beds
Look at asset thresholds for aged care
Work towards a bipartisan agreement on funding care and dementia beds
Upgrade the Super Gold Card
Some of those are more specific than others, and several may go nowhere. It also isn’t as if it could ever realistically have been expected that there would be no new spending initiatives even within the tight planned operating allowances. But, the pressures for nice shiny new stuff are going to be very real…..in a government that launched itself today by widening the structural fiscal deficit.
I was critical of National during the campaign for not making more of the fiscal deficits, a legacy of a succession of expansionary budgets by Labour even after the pandemic spending period had passed. But one might have hoped that they (Luxon/Willis) would at least hold the line on the starting point – to coalition parties if you insist on some revenue things not proceeding, additional savings need to be found, not in the never never land of successive budgets, but now.
But no.
Perhaps the deal is good politics – not for me to say – but it is unfortunate macroeconomic management policy, and is likely to further dent Willis’s reputation before she has even formally taken office. Robertson gathered a reputation as a Minister of Finance who was reluctant to say no. We really don’t need a successor like that.
It all puts a heightened pressure on Willis in her micro-budget before Christmas to start laying out some credible specifics as to how the large deficits are to be closed. There are limits to what she will be able to do in 3-4 weeks, but simply drawing lines on a graph again shouldn’t cut it (remember those Treasury cautions on even Labour’s numbers, and the task has just gotten bigger today). ACT had talked up the abolition of various government agencies, but it seems the coalition deals ruled that out – the Productivity Commission goes but the money just goes to fund a new public sector agency (whose effectiveness we can only guess at, but have to hope lasts longer than that of the PC), and the Maori Health Authority goes (as National always promised) but the cost of that just gets transferred into the main health votes. Willis and her leader in particular should face serious scrutiny about just how serious they are about sustained fiscal discipline.
It was always one of the worst things of Labour’s voluntary lurch to large deficits in the last year or two. Once the commitment to a firm focus on balanced budgets was sacrificed by one main party – voluntarily running larger deficits when times (revenue-wise) are good – it provides cover for the other lot. What’s another year they will each ask themselves.
Defenders of National will no doubt say “that’s MMP”, but I think it is fairer to say something like “that is what you get when the putative next PM and Minister of Finance don’t campaign hard on the unacceptable starting point of some of the largest deficits in the advanced world”. If they aren’t too bothered, why would their coalition partners be?
UPDATE (Sat): Realised that the discussion above does not allow for the fiscal effects of the change in tobacco policy. Those changes look as though they will avoid the large drop in tobacco excise revenue that was otherwise expected (and which was allowed for both in PREFU and by implication in National’s fiscal plan). The amounts involved are large and may well cover the gap opened by the absence of the foreign buyers tax.
In this morning’s edition The Post has a double-page article about what Nicola Willis might be like as Minister of Finance. Those of my comments that were included are here
My bottom line was actually very similar to that of CTU economist, Labour champion, and former political adviser to Grant Robertson who was quoted as saying that only time will tell whether Willis makes a good finance minister, specifically “you don’t master these things overnight”. That said, I was a bit less impressed by the one campaign event I saw her at (the Stuff finance debate). I’m anything but a fan of Robertson – I think he ends up having been the worst Minister of Finance New Zealand has had in the post-liberalisation decades – but I thought Robertson had the better of her. Despite the government’s poor economic record and Willis’s apparent past debating prowess, perhaps 9 years’ experience as Labour’s finance person counted?
Willis comes to the job with relatively limited experience in the portfolio. Contrast her 18 months as the spokesperson with the 9 years Michael Cullen had before taking office (having sat in Cabinet for three years before that), or the similar background Bill English had had by 2008 (he hadn’t been spokesman for that long, but had briefly held a finance portfolio late in the previous National government). David Caygill and Steven Joyce both came to the job late in their respective governments’ terms, having served as senior economic ministers for years previously. Willis’s record is perhaps closest to that of Grant Robertson (neither had an economics background, and Robertson had had only 3 years as opposition finance spokesman). Neither has ever run anything much previously either, so again there isn’t a great deal to go on.
One might think of three aspects of the role of Minister of Finance:
senior political operator and parliamentary figure,
manager of the government’s finances,
lead figure in overall economic strategy.
The first of those isn’t really my territory. But it was probably where Robertson did best. He seemed to be a very effective figure in the House and a formidable debater etc. That isn’t nothing, especially when (as they will, for any government) things go badly at times. Perhaps Willis will be similarly effective (she was, like Robertson, primarily a political operative by background).
But beyond that it is very hard to know. One could mount an argument that at least in the first couple of years Robertson didn’t do a bad job at all managing the government’s finances (the left thought him far too disciplined), but he’d inherited a fairly easy position (budget surpluses, unemployment falling etc). The problems really became apparent once the worst of the Covid disruptions were over, and instead of insisting on steering a path back to surplus (in an overheated economy), Robertson presided over additionally expansionary budgets both last year and this, such that he bequeaths large deficits in a country that for 25 years had largely avoided them. There seemed to be an inability or unwillingness to say no (and that in a government with no pressures from coalition etc parties).
How will Willis do in that role? There really is no way of knowing at this point. No doubt officials in Treasury have been beavering away for weeks preparing advice for an incoming Minister of Finance, one who plans to bring down some sort of mini-Budget within what will be not much more than her first five weeks in office, and will quickly have to focus on next year’s Budget. But as to what hard calls she is willing to make, or to insist on (both her Prime Minister and the other parties will have different views on things) no one knows. There is no track record (or nor really can there be, especially when neither she nor Luxon has previously served as a minister).
I’m not overly optimistic, including because of the reluctance to put the seriousness of the fiscal situation front and centre during the campaign, preferring to run a campaign in which – like Labour’s – (faced with large deficits) it was more a contest of who had had the shiniest new baubles to bribe voters with, financed by proposed tax changes that – like Labour’s – had little no economic merit, and around which there were also serious questions about the revenue they might raise. As to the foreign buyers’ tax business, my unease was less about whether or not the revenue estimates are roughly right – in macro terms it was always second order – than about the way she and her leader handled the issue, refusing transparency, refusing to release any of the modelling, relying on “trust us” assertions when it wasn’t particularly obvious why – with the best will in the world – we would. Verification helps underpin trust, and there was none of the former.
Being Minister, backed by a phalanx of Treasury staff and analysis, is different than being opposition spokesperson in a campaign. But it isn’t Treasury that makes the hard political calls (and too often in the last few years Treasury itself seemed more inclined to favour bigger government over balanced budgets). There is clearly now some political mood for restraint – even Labour seemed to get it in the last few weeks – but how well, and for how long, will that shape Beehive decisionmaking when the pressures from the numerous vested interests (of all sorts) mount?
My own unease is greatest around that “lead figure in overall economic strategy” role. There will be other senior ministers no doubt, but a Minister of Finance who is deputy leader of the main governing party should be able to be looked to as the key player in this area. And it is where, in her time as finance spokesperson, there is little sign that she has any more credible a model – or any more substantive interest – than Grant Robertson had for (for example) reversing the decades of economywide productivity growth failure. We shouldn’t look to the (any) Minister of Finance as some sort of economic guru, but there is little or no sign that Willis is greatly interested or has made any effort to surround herself with advice, expertise, or even active debate about what might be needed. The risk is that holding office will be sufficient, rather than doing something much in it. There is, of course, the 100 point economic plan (which when I read it I probably agreed with a majority of the items in it) but a list that long really is a list rather than a strategy backed by a compelling narrative. And it isn’t as if The Treasury seems to have much to offer there either (as distinct from narrower expenditure control stuff).
Who knows. We’ll see before long I guess. If I’m “not a big fan” – and I’m not – it is a long time since I’ve had much confidence in any senior New Zealand political figure (or most of their top bureaucratic advisers – an issue for Willis since The Treasury is weakly led, and entities she will be responsible for like the Reserve Bank and Productivity Commissions are worse. What, if anything, she is prepared to do about the leadership of these three agencies will be an early test). It would be great to be pleasantly surprised.
(In the snippet above I included Bryce Wilkinson’s comments, partly because he runs a quite different line about Michael Cullen than the quote from me. The background to my own comment was the observation that one didn’t need to have an economics background to be an effective Minister of Finance. Cullen’s politics were very different to my own, but I have here several times defended his fiscal management, noting that he proved to have been very badly advised by Treasury, which told him that even in the face of expansionary budgets late in his term the Crown accounts would remain in operating surplus over the forecast period. That proved to be very wrong, but it is The Treasury that is paid to do the numbers and provide those reckonings. A couple of posts on that are here and here.
All that said, when I wrote about Cullen’s book I ended the post this way
Those last few lines are the sort of thing that could fairly be said of pretty much all our Ministers of Finance for decades.
It would be great if Nicola Willis were to be different. But there aren’t yet many positive straws in the wind.
I have become increasingly concerned about the declining standards in New Zealand public life, where things that come close to corruption get justified or excused, with very little attention from main Opposition political parties or the media. Labour has been in government for the last six years, so many or most recent examples have featured Labour ministers or appointees (eg the Public Service Commissioner simply lying to the public, one of his proteges (who would not still be in office if ministers took standards seriously) who took lavish taxpayer-funded gifts etc when changing government jobs and was very slow to pay back the money when concerns started coming to light, a senior minister attempting to pressure Radio New Zealand re the employment of someone close to her (and then refusing all attempts to get the text of her remarks released), or Cabinet ministers left in office by the PM even as their spouses are soliciting business contracts from agencies the relevant minister has responsibility for – contracts that, by the nature of marriage, they are direct personal financial beneficiaries from). And so on.
But as the prospect of a change of government has increased, so has my level of concern that the leadership of the National Party has made fairly little of such episodes and tendencies, and in particular has refused to take a strong stance making clear that such behaviours would be dismissable offences under a National government and its Prime Minister. I am generally reluctant to quite concede Matthew Hooton’s suggestion that each MMP government is worse than the one before it, but when it comes to standards in public life it is increasingly hard not to think he is right (although whatever United Front interests/individuals are now going to be in Parliament I suppose we should be grateful there is no one quite as egregious as Jian Yang now in prospect).
I have also been on record for years being concerned about former senior ministers and Prime Ministers moving effortlessly from politics into highly-paid private sector positions. I’d rather we paid retiring senior politicians a decent pension than to never be quite sure that people were not governing with a view to their next appointment. Being Prime Minister should be a stepping-stone to….retirement, the grandkids, and perhaps doing good and charitable deeds.
This post was prompted by an article in The Post this morning, a feature interview with John Key about campaigning, the election, Christopher Luxon etc. It highlights another area of risk/threat, which I hope gets some scrutiny.
Were John Key simply a retired former Prime Minister now tending his garden, his golf or his helicopter (it gets a mention in the article) it would be no problem at all. He has real campaign experience and can offer some potentially useful insights on the man, campaigning and so on. Especially when we learn (to no one’s surprise) that
But John Key is also chairman of New Zealand’s largest bank, ANZ, something which features prominently and deliberately in the article.
and lest there was any doubt (could, just possibly, this be a personal office that just happened to be in the ANZ building)
It is the ANZ chairman’s office. Key could easily have arranged to have the interview over lunch in a restaurant, at home, almost anywhere really…..but he chose to have it in the office of the chair of the biggest bank in the country. His office, in that Bank.
Now, if one were an ANZ customer (I am as it happens) it might or might not bother one to have the chair of one’s bank so openly aligned with the (likely) incoming Prime Minister and his party. There is certainly no sign that Key has become an uncontroversial non-partisan figure in his late middle age. Personally, that aspect doesn’t really bother me.
What I’m concerned about is that big banks are heavily regulated entities (far too heavily in my view, but what is is), and – most importantly – entities where there is a very strong expectation that if they get into trouble governments will bail them out one way or the other. Bail-out decisions aren’t a matter for central banks but (and rightly) for elected governments (no one more so than the Prime Minister and the Minister of Finance). Not only that, but although much of the implementation of regulation is done at arms-length (Reserve Bank and FMA) much of the policy-authorisation requires ministerial say-so. Plus, of course, ministers appoint the boards of both the Reserve Bank and the FMA.
And so in a few weeks it seems we will have chairing the board of our biggest bank someone who describes himself (quite credibly from all else we’ve seen and heard over the years) as “quite close” to the new Prime Minister, with the new Minister of Finance one of his own former staff.
It is a really serious conflict, and one of those where even if all the individuals involved actually act honourably, always and everywhere, neither they (unconscious bias, subconscious motivations etc) nor the rest of us can be confident that would be so, most especially in times of stress and crisis.
Banks being run by close affiliates of senior political figures are a well-recognised risk in the banking regulation/supervision area. The risks here may be a bit different from those in some deeply corrupt developing countries – not, eg, a matter of soft loans to the politicians etc – but that doesn’t mean they don’t exist. Public confidence in our system relies on the public having good grounds for being sure that only the public interest is shaping major policy and regulatory interventions. No might how honourable the individuals concerned here might be (I am making no observation on that), we simply cannot be that confident when a close confidante of the (probable) incoming PM and MoF – and former leader of their own party – is chairing the biggest bank in the system. That is so in the stress events I most worry about, but it is also so around the more fevered politicised debate about bank profits and whether anything should be done about them.
I would note that this is not one of those problems that is either inevitable everywhere, or innate to a fairly small country like New Zealand. It is also a different issue than ones around wholly state-owned banks (dubious as the appointments of Bolger and Cullen to NZ Post/Kiwibank were). The issue is also not about whether Key might have some pre-politics expertise that otherwise equips him for an ANZ role.
If you check the main boards of the big Australian banks by contrast you will find no former Australian politicians on any of them (although Key is also on the main ANZ Board). And, as it happens, the ANZ main board also has on it a New Zealand citizen (albeit resident in Melbourne) – a long time ago even a Treasury official – with much more banking experience, and no obvious political party affiliations. The other big banks in New Zealand manage without such political figures in prominent Board positions.
I hope National has thought seriously about this looming issue (not really an issue while they were in Opposition) and has plans for how to handle it. Other political parties and the media should be asking questions now, because voters deserve to know (both on the specific, but also on the more general approach to standards in public life an incoming government would propose to take). The best we can hope for is high enunciated standards now, as things tend to corrode under the actual pressure of office.
It isn’t obvious what the solution should be from National’s end. The Prime Minister and Minister of Finance can hardly stand aside from bank crisis resolution issues, not just because potentially huge amounts of money will be at stake, but also because resolution is likely to be highly political and involve high-level haggling with the Australian government. Nor does recusing themselves from bank regulatory issues really work – some junior minister might get to make the formal decision, but junior ministers are ambitious to be senior ministers. Perhaps – yes this tongue in cheek – Winston Peters might have to be delegated that specific power, as I’m sure there is no love lost between him and Key.
Key could of course resolve the issue, and if he were to do so it would prove him to be an honourable person, by stepping aside from his ANZ roles if National is elected, recognising that otherwise the appearance of conflict will never go away, and neither he nor Willis/Luxon, nor the ANZ will ever be free of either controversy or suspicion. Even if all acted otherwise honourably in the presence of such a conflict.
But it needs to be addressed now.
UPDATE (2/10). Thinking about this issue a bit further, while it might not be a fully adequate solution one step Luxon and Willis could take is to cut ties with Key (no meetings, no texts, no nothing), for as long as he is chair of ANZ. That would be an indication that they took actual and perceived conflicts seriously.
For those still doubting there is an issue it was reported this morning that in an interview with Mike Hosking Luxon had made these comments. Much of it is probably empty pre-election rhetoric, but they are his own words…..”constantly monitoring” a bank chaired by his mentor, close adviser etc, about matters which aren’t delegated to independent agencies. Again, no matter how honourably all involved believed they were individually behaving, no one (including the people concerned) could really be verifiably confident of that. Hard lines have to be drawn when monitoring (in this case of politicians/private business figures etc) is impossible and the issues/entities not small.
National’s “fiscal plan” came out this afternoon. To no one’s great surprise I guess, we didn’t learn much from it. The big National numbers had been in the Back Pocket Boost package a few weeks ago, combined with the statement from Willis last week that National would get back to an OBEGAL surplus no sooner than Labour was suggesting it would (in PREFU, and in its own fiscal plan). Oh, and they paid some economic consultants to say much the same as Labour got their economic consultants to say: the promises listed added up to less than the future operating allowances the two parties had indicated. As I noted in my post the other day, Labour’s consultants (Infometrics) noted that they hadn’t had much time. But then, having splurged in the previous two budgets, Labour is going into this election with fewer and smaller promises. National’s Castalia is reported to have done a bit more work on a couple of items, but we are still left totally in the dark about the numbers behind the foreign buyers’ tax revenue estimate: neither National’s nor Castalia’s modelling has been released, and there is no official agency estimate to use as a starting point.
The National “plan” is unambitious, depressingly so if you care about fiscal responsibility, or even about easing pressure on monetary policy when (core) inflation – which National has (rightly) been quite strident about – is still coming down slowly if at all.
If you are wondering where that 0.7 per cent of GDP in the title of this post comes from that is how much lower net government debt is estimated (by National themselves) to be lower than the PREFU numbers by 2027/28 – a year so far out it isn’t even in the main PREFU forecast numbers (which run only to 2026/27), and which involves budgets set after the next election, when who knows which constellation of parties will be in office. In the final year of the forecast period – and the final year for which any new government elected next month will set the Budget – the difference is 0.4 per cent of GDP. The differences are derisorily small (and totally swamped by margins of errors around each parties’ plans, let alone uncertainty about denominators (what happens to the economy, and recall that Treasury’s PREFU forecasts were taken by many economists as veering towards the optimistic side)).
Now, I’ve seen Willis and Luxon quoted as saying “ah yes, but no one should believe that Labour can deliver on its plans” (the ones included in the PREFU, including future operating allowances). “Look at their track record, of consistently overshooting those lines in the shifting sands, announced intended future operating allowances.”
And I’d have some sympathy with that line, as no doubt would The Treasury, whose own lightly-coded comments in the PREFU were really rather sceptical (for a government agency in public), highlighting the tough choices and tradeoffs that would be required. At best, the fiscal numbers (recent “cuts” and future operating allowances) behind PREFU are statements of current high-level intent only. Achieving them against the backdrop of ongoing cost pressures – and temporary windfalls from surprise inflation that will not persist – will be challenging to say the least.
But the problem for National with this argument is that they will face all those same pressures, and instead of approaching this election with a serious stance of austerity, emphasising the size and unjustified nature of the current government’s deficits, they are playing much the same game as Labour has over the last year or two, competing to see who can give out the most electorally attractive baubles, and funding those handouts with either the same new distortionary tax Labour is championing (depreciation on non-residential buildings), even as they claim to the party of business and growth, or with a tax (foreign buyers) that is not only unprincipled and inconsistent with much of the rest of their messaging (“supply is what matters”, “foreign investment should be championed), but where the revenue estimates command no confidence whatever beyond the halls of the National Party wing of Parliament.
Now, I for one do have some confidence that National will be better at cutting, or restraining, spending in the next few years. They’ll be cutting stuff the other side did so won’t have the same attachment Labour ministers would have had. But……they need to be better at cutting just to get the same fiscal bottom lines as Labour, because their fiscal plans – bottom lines oh so little from Labour’s – already rely on much larger cuts than the numbers Labour themselves have already talked of (neither side offering any specifics at this point). And for all the talk of spending restraint, and even of a pre-Christmas “mini-budget”. today’s numbers seem to involve no change at all, relative to PREFU, to 2023/24’s spending levels.
And National has its own future fiscal vulnerabilities. Not only will there be pressure to bring down the 39 per cent income tax rate (ruled out only for the first term) but in the Back Pocket Boost package there was this
It isn’t a promise to adjust, but it is a promise to review, and it will be hard to resist the pressure for some adjustment in the 2026 Budget, running into the next election.
It is simply unserious from a party that has banged on – quite reasonably – about Labour fiscal excess in the last few years, and now seems to be slipping (predictably but sadly) into me-too mode, advertising themselves as just a little less bad than the current lot, offering a different set of baubles (ones that seem more electorally appealing at present, but have much the same macro effects).
One telling point (which I owe to Eric Crampton) is to compare what Labour planned to be spending in the medium-term before Covid hit and compare it to what National plans to spend (years down the track) in the medium-term, as (ostensibly) the smaller government party, the party of tough spending discipline. In fact, the one that won’t cut any serious programmes, and only wants to add a few more.
Here, it is only fair to focus on primary spending (National inherits the debt Labour ran up, and it has to be serviced for now). In the HYEFU at the end of 2019 core Crown spending excluding finance costs for 2023/24 was projected (on Labour stated plans) to be 27.1 per cent of GDP. We don’t have detailed tables from National, but there is a line in the plan stating that they intend core Crown spending will be 31 per cent of GDP in 2027/28. Adjust for finance costs (from the PREFU, adjusted for small changes in National’s plan from slightly lower debt late in the period) gives 29 per cent of GDP. That is almost two full percentage points of GDP higher than Labour’s medium-term number.
(Some of that will be because of the ageing population, but that only highlights that National’s plans include not even starting on raising the NZS age for another 20 years. 20 years…….)
Finally, National asserts that their policy will be less inflationary than Labour’s.
That looks fine on paper, but (a) any effect is tiny ($300m), less than 0.1% of GDP, utterly lost in the rounding of any inflation forecasting model, and (b) it ignores quite a lot. That line attributed to the Treasury may be valid in a very general broad-brush sense, but here we need to think about concrete proposals. Thus, even if National’s foreign buyer tax revenue estimates were to be roughly right – and Willis’s latest answers to questions on this point advance things not at all – the money will mostly be coming from income not earned in New Zealand (thus representing no drag on demand) to fund tax cuts pretty much across the board, to a household sector with a high marginal propensity to consume. But reading through the plan, I was struck by a couple of other points. The removal of the regional fuel tax for example (while it will temporarily slightly lower headline, but not core, inflation) puts more money in the hands of Auckland householders, without any immediate identified replacement, and National says they think reserves will enable the Auckland local authorities to keep spending. Net, that is a near-term inflationary effect. They also seem to propose to pay to councils an extra $25000 for each house built above a five year average, funded by discontinuing various other things, one of which is a Kainga Ora land acquisition programme. My point here is not about the merits of the policy, but a policy which stops asset purchases and instead gives councils more spending money is also likely to be inflationary at the margin.
I do not want to overstate this point. All these effects are small, individually and even in total. But there is just no serious basis for National’s claim that their fiscal approach will be less inflationary than Labour’s. And Labour’s added a lot to demand this year, when inflation is still a serious problem.
Finally, for all those – probably mostly on Twitter – who have spent the last few weeks bemoaning my bias (in their eyes) towards either Labour or National, I’m told that at the Mood of the Boardroom event in Auckland this morning both Robertson and Willis were each at pains to suggest that I was no friend or fan of either of them.
I’m just about to head to the airport but just saw Christopher Luxon’s interview on Newshub Nation and was sufficiently riled by his treatment of the foreign buyers’ tax issue that I thought one last post was in order.
I don’t get riled that easily. When Luxon on Morning Report the other morning dismissed some views of mine as “what a load of rubbish”, some people were outraged on my behalf, but we laughed over breakfast.
But the bluster……is really just too much
We got another round of “trust us, we are right”, repeated over and over again, but with simply nothing to back it up. We got the “we’ve published a 30 page document of costing etc” and have released the independent review we commissioned. All things he knows simply not to be so.
The 30 page document – described repeatedly by Newshub’s interviewer (a little uncharitably really) as a “marketing brochure” (heavy emphasis on the glossy photos) – is here. It is promoting the entire tax and spending plan, and is just fine for those descriptive and promotional purposes. There are 1.5 pages on the foreign buyer tax plan. The first bit is scene-setting advertorial, then there is a perfectly reasonable description of the features of the policy, then there is a glossy photo and a stylised example of a sort of person who might be motivated to buy under it. And that is all fine. What of costings? This is the text that Luxon repeatedly tries to play up with his talk of 30 page documents of costings and modelling.
For the sort of document it is, this is fine. A brief description of the broad way they went about trying to estimate numbers (in an area where there are no official estimates to use). That’s useful, but only until questions start being asked, whereupon you might think they’d be open to explaining rather more (they have added that they assume, broadly reasonably, an average sale price of $2.9m).
Then Luxon tells us they’ve had it all independently verified and have released that too. But the problem is that they haven’t. All they made available is what is described as an Executive Summary by Castalia. Perhaps there is a more substantial document behind that, but they have not released it.
In the document they have released Castalia say this
It is mildly interesting to know that Castalia agree with National’s numbers, but on its own it tells us nothing of substance, because we get no idea of their approach, no more detail on National’s, nothing beyond Luxon’s “trust us”.
Castalia describes their general approach this way.
That is a reasonable approach in principle, and since there are no government estimates we should be led to believe they did independent modelling of foreign buyer tax revenue estimates.
Later in the same document there is a table, showing “National modelling” numbers on the left and “Castalia modelling” numbers on the right for each item in National’s plan.
For some items it makes sense that there is no difference between the two (when using government estimates). In others, they describe where and why there are differences.
What is puzzling if Castalia really did model estimates themselves for the revenue from the foreign buyers’ tax is that they came to exactly the same numbers in total and each year. Reasonable approaches to complex issues like this, with real uncertainty about behavioural responses etc, will almost inevitably come to slightly different estimates, even if they end up in much the same ballpark (eg in this case perhaps differences in how one might think of first year effects as a result of pent-up demand).
My point is not that Castalia did not honestly believe National’s numbers (I’m quite sure they did believe them to be reasonable) but to raise again the as-yet unanswered question as to just how much in-depth analysis and review went on for this specific line item. Luxon offers us nothing on that. He has released nothing more. We are just supposed to trust him.
It is quite astonishing, and particularly from a party that now avers its belief in a state Policy Costings Unit. In any such regime, any costings of policies parties actually adopted would routinely be released.
I have no idea why Luxon and Willis will not release their working, or a detailed carefully written up description of them. or why they won’t release Castalia to describe in detail what they did on this item.
But it isn’t reassuring. Not, as I’ve said repeatedly, that it matters much at macreconomically, but because it seems to say quite a lot about their likely approach to governing. Trust matters in politics and government, but trust is earned, and is reinforced by verification. It isn’t won, in functional polities, with a smile and some bluster and a refusal to provide any supporting detail, all while in interview after interview actively misrepresenting what they have done.
Anyway, our paper and my post on the wider issue is here. We’ve put our material and arguments out there.
The National Party’s “Back Pocket Boost” tax and spending plan, announced a couple of weeks ago, included a partial lifting of the foreign house buyers’ ban, to be replaced with a 15 per cent tax but only on properties selling for at least $2 million. “Foreign” here is a shorthand: the tax affects non-citizen purchasers who do not have a residence visa for New Zealand. Moreover, it does not (as the current ban does not) affect or constrain Australian or Singaporean purchasers.
My initial interest in the package was mainly macroeconomic, including noting that a fully-funded package made no inroads on the (large) fiscal deficit, and that it might actually add a bit to inflationary pressures, including because the revenue from the foreign buyers’ purchase was probably not going to be generated from New Zealand incomes and the income tax cuts were going to people with a high marginal propensity to consume. The revenue estimates from the foreign buyers’ ban seemed quite high – and are quite important to covering the costs of the package – but that seemed to be an issue other people could think about.
But as the debate began on that specific point I got interested. Initially still mainly as observer. As someone who has long been sceptical of the case for a state-funded policy costing office for political parties, I did a post observing that the political market seemed to be working: questions were being asked, experts were coming out of the woodwork, and in light of what emerged (including the party’s choice to, or not to, publish their detailed estimates) voters could reach their own conclusions. In the end, precise numbers were likely to matter less than what the whole episode told us about the group that aspires to form our government in a few weeks’ time.
But then Sam Warburton approached me about getting involved in an exercise with him and Nick Goodall of Core Logic that would attempt to use what National had described of its methods and assumptions to see (fairly mechanically) how much revenue the policy would be likely to generate, using that approach. I don’t support any political party but my inclinations tend to be more right-wing than otherwise, and Sam is fairly well to the left. But there are plenty of issues economists can generally agree on – the general disapproval of Labour’s GST policy being another – and here the issue wasn’t one of whether the tax was a good idea (I don’t think so, and would rather lift the ban altogether), but simply how much it would be likely to raise on credible assumptions. It was and is essentially a technical issue. Oh, and since I don’t approve of state-funded policy costing offices, there was a bit of a sense of obligation to do my bit.
The point of this post is not to repeat everything in the paper, which is a deliberately narrow exercise (and which seems set to have quite a bit of media coverage anyway). But I should note that both in the note, and in the discussion in this post, it is simply assumed that tax and trade treaties don’t in the end pose obstacles to implementing the tax much as National has described it. We proceed as if it can be implemented that way, leaving any treaty issues to the lawyers.
To understand what was done in the paper, we assume:
foreign purchases (over $2m) occur in the same TLAs (and old Auckland TLAs) as prior to the ban (that means disproportionately, although far from exclusively, in Auckland),
foreigners buy the same priced houses as locals (we have detailed data on the distribution of all sales by price band in each TLA),
to ease the constraints of the $2m threshold, potential foreign purchasers will routinely be willing to pay $2m for houses that would otherwise trade at anything above $1.75m.
If one were thinking in terms of risk, the 2nd bullet may understate likely sales, but the 3rd would overstate them.
Reasonable people can produce quite a range of estimates, using approaches inspired by what National has described and other possible approaches. The plausible range is at least as important as any specific numerical estimate. Accordingly, I want to take a slightly more discursive approach to the issue of how much revenue can be raised, and how best to think about it. That includes questions about how much revenue we might reasonably think the tax would raise, but also what the implications are if we are roughly right and National is wrong.
Here I would add that one of the most surprising things about this entire episode is that National has never made any attempt to send out expert surrogates of their own, who might have been willing to champion in technical detail the party’s numbers. I don’t really expect Willis or Luxon individually to be all over every modelling detail, but they should have people who are, and people who are able to tell the story behind the numbers. As it is, no one (other than National’s own claims) who has looked into the matter seems to think the tax will raise anywhere near $740 million per annum. If there were even one informed commentator championing, with a detailed story, numbers that high or higher we’d all stop and take note. But there aren’t.
Standing back, the main question we face in assessing the plausibility of National’s revenue estimates is the volume of sales that would be made to non-Australian non-Singaporean foreign buyers under the proposed policy. There is also some uncertainty around the average price those buyers would pay. National has told us they assumed $2.9 million, and whether that is right or not the average clearly cannot, by construction, be below $2 million. To raise the revenue they estimate with an average sale price of $2.9 million there would need to be 1700 sales a year.
So an appropriate starting point for analysis is the previous experience with sales of houses (transfers) to foreigners (ie non-citizens without residence visas) buyers. Statistics New Zealand publishes a reasonably extensive range of data but only back to the start of 2017.
The ban came on for sales entered into from October 2018 (settlements a bit later). Once Labour was elected in late 2017, it was clear that the ban was coming and so sales/transfers in 2018 are likely to have been somewhat inflated by people buying while they still could, bringing forward demand and sales that would otherwise have been spread over the following few years. We also have data on the (substantial) number of sales each quarter to Australian and Singaporean buyers (the total of the sales that are still happening). A reasonable base level of sales prior to the ban seems to have been about 800 a quarter of which 150 a quarter would have been to Australian and Singaporean buyers (the latter making up more than half of sales to foreigners in the single most expensive locality in the country, the Queenstown Lakes District Council area).
Of course, world population has increased since 2017, as has the stock of houses in New Zealand. So perhaps if there were no ban at all and no tax, it might be reasonable to think of a starting point now of foreign sales of a bit under 3000 a year (plus the Australian and Singaporean ones).
If that many houses were sold to non-Australian non-Singaporean buyers each year at an average price of $1.5 million (well above the average New Zealand price and above even the average Auckland house price), the tax would raise $675 million, getting close to (but still not as high as) the numbers in National’s document. (As an indication of where average sales might go at without any restrictions, a number like this seems generously consistent with Vancouver data on the price the average foreign buyer was paying relative to the average resident.)
But….remember that houses can’t be sold to these sorts of buyers for less than $2 million, and relative to a no-ban no-tax environment the cost to these buyers is higher now than it was (higher in real terms just because all New Zealand real house prices are higher than they were five years, but more specifically higher because of the 15 per cent tax). One large group of people who might otherwise buy are still simply banned while the others face a fairly heavy tax.
There are two big uncertainties in getting from, say, 2017’s position for the number of non-Australian and non-Singaporean buyers to the regime National proposes.
The first is that there is no hard data on what prices those foreign buyers were paying before the ban. And for all the talk of high-priced Queenstown, we know there were more foreign sales in Christchurch (cheapest main centre in the country) than in Queenstown pre-ban, and about as many in each of Hamilton or Wellington as in Queenstown. Even Auckland is a very diverse place, and far from all the sales were in Devenport, Waiheke, or Epsom/Remuera. It isn’t likely removal of the ban on houses over $2m will reawaken effective foreign demand in Otara or Mangere. Pre-2018 buyers were themselves a diverse bunch.
And the second substantive uncertainty is how responsive demand in that over $2m price range will be to the higher prices the tax now imposes. People buying, say, a $2.5 million house in Epsom aren’t poor by any means, but they probably also aren’t money-no-object people either (and recall that the tax doesn’t apply to people living here permanently but to those without residence visas). These aren’t all, or even mostly, billionaires.
I’m not aware of any country that has put a price-threshold based tax on foreign buyers. But in their policy document National cites the experiences in Canada, where both Vancouver and Toronto had for a time a 15 per cent tax on foreign buyers (similar definition to New Zealand) but on all houses. Canada has a similarly encouraging immigration policy to New Zealand, and Vancouver in particular has an (apparently well-earned) reputation as a magnet for Chinese purchases of real estate. In both places reports indicate that the imposition of the tax substantially reduced foreign purchases (demand responded to the increased price the tax imposed). One formal paper I read estimated a 30 per cent reduction in demand. Other suggest perhaps a 40 per cent reduction. Our paper I linked to above deliberately does not attempt to include an estimate of this demand effect.
What do we know of the revenue these taxes generated in Canada? I’ve only been able to find scattered reports regarding Toronto – a city 20%+ larger in population than New Zealand – but what I have seen suggests revenue estimates from the 15 per cent tax rate on all foreign purchases and at all price points was around C$200m per annum (about NZ$250m). Toronto has very high house prices (and price to income ratios).
What of Vancouver? There I found references to official British Columbia revenue numbers (in this think-tank note). The tax was initially set at 15 per cent and then raised to 20 per cent in 2018,
and
C$180 million per annum (NZ$220m) looks to be a reasonable pick for a 15 per cent tax. And if metro Vancouver has only about half New Zealand’s population (a) their tax applied to all nationalities and all price points (on both points unlike National’s proposal), and (b) Vancouver has historically been more of a magnet for Chinese purchases that most other cities internationally (including Auckland).
If I had just arrived from Mars – or were an Opposition leader without the benefit of The Treasury wanting to do a reasonableness check on my team’s numbers – I guess I’d look around at various revenue estimates locally and try to triangulate them against what I could find about other countries’ actual experiences (remembering that places typically put these taxes on primarily to deter demand not to raise revenue). Perhaps such a tax raises quite a lot more than $200m or so in a normal year, but it wouldn’t be my first guess. I’d be a bit troubled if no estimate – not one – was in excess of my own team’s number.
Now here it is worth noting a couple of caveats that could help with revenue raising (and one working in the opposite direction). If house prices take off again I guess it would only be a few years until the average (not median) house price in Auckland was $2m. If so, a lot more potential buyers would be eligible, but….the government responsible might have other problems and concerns.
More seriously, it probably is reasonable to expect that in the first year of the new policy quite a lot more revenue would be raised. There probably is some pent-up demand, perhaps especially at the very top end of the market. But even if one doubled the first year’s revenue estimates, it doesn’t make much difference to the four-year view. The year in year out shortfall would still be substantial.
Note, however, that some of these foreign buyer tax regimes have provided a refund of the tax if the purchaser later establishes residence. That is not a feature of National’s tax policy so should not affect the current costings, but it is an issue to be aware of if the policy moved to being legislated
On the best estimate in the paper the annual revenue shortfall is $530m. That would also be consistent with the scale of revenue that appears suggested by the Toronto and Vancouver experiences. But the gap could be smaller: a $400m shortfall isn’t impossible given the inevitable uncertainties in the modelling and likely experiences. But a shortfall of $400-500 million per annum is a touch more than 0.1 per cent of annual GDP. This year’s deficit forecast in yesterday’s PREFU was 2.7 per cent of GDP, and that too is only a point estimate within a (not formally specified) range. 0.1 per cent of GDP is simply not macroeconomically significant. That is so in respect of fiscal policy, but it is also true of monetary policy. In fact, on its own the revenue shortfall would make little or no difference to monetary policy because as I’ve pointed out previously – although National continues to resist the claim – the revenue wasn’t mostly going to be coming out of what would otherwise be local demand anyway.
One could add – and I will because I have repeatedly made this point about policy costings offices – that no poll at present suggests that the National alone will have a majority in the next Parliament. Under MMP in particular, manifesto promises (especially detailed ones) are mainly signals of opening bids in the negotiations to form a government or settle on a legislative programme. If National wins, actual details are near-certain to be at least somewhat different from what was in the Back Pocket Boost package.
That doesn’t mean this is all a big fuss about nothing. First, the signalling matters. When the fiscal deficit as it as large as it is, a major political party promising tax cuts really should be able to convincingly suggest to the public that the cost will be fully covered and that if their programme was adopted it would not worsen the already-large deficit. National’s package does not pass that test at present.
And, more generally, how they handle episodes like this provides us as voters with information about the people who want to run the government in a few weeks’ time. An assured performance enhances credibility. Otherwise, not so much. An assured performance might have meant there were no major questions about any costings at all (at least from anyone other than cast-iron partisans) even in a high- profile package. It might also have meant that if/when questions started arising, you’d be able to release some enlightening report from the consultants you hired to check your workings, or you might release your own workings – or a nicely written up version – yourself, or got some well-informed surrogates to tell your story. Your leader might even have persuasive lines to assuage doubts. In this episode none of that has happened, and it has been anything but reassuring about just how much on top of their game, ensuring detailed stuff is done well Luxon, Willis, and their key staff advisers really are. It may also speak to their instinctive response under pressure: openness and engagement or hunkering down defensively. Probably hardly anyone is going to change their vote on this one specific (perhaps they shouldn’t – lots of things matter more), but that isn’t the test of whether these things matter. They do.
I haven’t mentioned Castalia’s role in all this. In my first post on the package I pretty much took for granted that I’d be able to count on that. But as our joint report notes, and having seen the [Executive Summary of the] Castalia report, it offered no basis for any reassurance at all on the foreign buyers’ tax revenue estimates. It explained neither what National had done nor indicated what robustness checks Castalia had made. In fact, the single half-sentence reference to the tax has a distinctly “last minute add-on” feel to it. One would hope it was not so. RNZ reports this morning that Castalia is standing by their review, but we simply don’t know what that review consisted of, so that assurance adds barely any useful information.
In closing I am going to repeat my opposition to a state-funded policy costings office. It is up to parties themselves to decide what work they get done on policies and what material they release, when and how. In this case, the existing system is working, putting a spotlight on National and their estimates and giving them choices about how they respond and us information that we can use in forming our views of the party and its leaders. Is it messy? Yes. Is the substance a second-order issue? In many respects, yes. But much of politics, and much of life, is like that, even if technocrats would generally prefer it was otherwise.
As for the issue at hand, whichever way you look at the numbers it is hard – but not impossible – to see the policy raising much more than $200m a year, and not at all that hard – but not perhaps likely – to see it raising less.
UPDATE 16/9
In the body of the post I used a Canadian think tank’s report on the Vancouver experience. That report quoted British Columbia Ministry of Finance revenue numbers, but I had not then got back to the source document. This table is from p321 in the PDF at that link.
Note that the parameters of the British Columbia interventions have changed repeatedly. They started with a 15% tax in Vancouver in (a surprise move in) 2016, and in 2018 both raised the rate to 20% but also extended the coverage to include some other areas including greater Victoria (another 400K people on top of Vancouver’s 2.6m). And from the following year’s Estimates Notes
Note that under the British Columbia tax rules you can receive a refund if you become a resident of Canada within a year of purchase. The data I have do not break about the scale ($m) of these rebates, but the gross revenue figures may be a bit higher than those shown in the Ministry of Finance table above.
Finally, on another aspect, this snippet is from the bit of the Castalia review that National has provided to some outlets (one of which gave it to us).
As an approach that seems fine. There are, however, no government estimates for the revenue impact of the foreign buyers’ tax.
Later in the same document there is a table, showing “National modelling” numbers on the left and “Castalia modelling” numbers on the right.
For some items it makes sense that there is no difference (when using government estimates). In others, they describe where and why there are differences.
What is puzzling if Castalia really did model estimates themselves for the revenue from the foreign buyers’ tax is that they came to exactly the same numbers in total and each year. Reasonable approaches will almost inevitably come to slightly different estimates even if they end up in much the same ballpark (eg in this case perhaps differences in how one might think of first year effects as a result of pent-up demand).
My point is not that Castalia did not honestly believe National’s numbers (I’m quite sure they did believe them to be reasonable) but to raise again the as-yet unanswered question as to just how much in-depth analysis and review went on for this specific line item.
In yesterday’s PREFU The Treasury was quite open about the fiscal impulse – the estimated impact of discretionary fiscal choices on demand and domestic inflation pressures in the current year.
In other words, a slightly larger degree of pressure on resources/inflation in the year to June 2024 than they’d thought in May’s Budget (and anything beyond the current year depends almost wholly on future budgets).
The IMF a few weeks ago had an almost identical estimate
Different measures, but very similar estimates of the impulse, the pressure fiscal choices are putting on inflation etc. It is an entirely conventional cyclical macroeconomic perspective.
On Radio New Zealand just now, the interviewer put the impulse point to Labour’s Grant Robertson. He pushed back, noting (correctly) that the Reserve Bank had been unbothered about fiscal policy in its recent statements, quoting one of Orr’s egregious lines that “fiscal policy was more friend than foe” for monetary policy.
He quotes the Bank correctly, but what the Bank says has no foundation in the numbers, or in any serious argument they’ve ever advanced. I’ve dealt with this in a couple of posts.
The first was back in July, in the wake of the July OCR review but unpicking material the Bank had included in the May Monetary Policy Statement.
The second was last month, following the August MPS and comments the Bank made at FEC the next day.
From that August post
I have been, and still am, hesitant about suggesting that the Governor and the MPC are operating in a deliberately partisan way. But it gets harder to believe such a pro-incumbent bias is playing no part (consciously or unconsciously) in their words and actions. I’ve documented previously the skewed, highly unconventional, and very favourable to Labour, way the Bank treated fiscal policy in May following the more expansionary Budget. In this MPS, the word “deficit” appears 44 times, but it appears that every single one of those references is to the current account deficit, and not one to the budget deficit (altho there is a single reference to “the Government’s plan to return the Budget to surplus”). The same weird framing of fiscal issues was there not only in the rest of the document but explicitly from the Governor this morning. He claimed that what mattered for the Bank from fiscal policy was only/mostly government consumption and investment spending, not taxes (or apparently transfers), let alone changes in structural deficits (the usual model). Having provided no supporting analysis or rationale whatever – speech, research paper, analytical note, just nothing – the Governor appears to have simply tossed the conventional fiscal impulse approach out the window, at just a time when doing so suits his political masters. Perhaps it is all coincidence, but either way it is troubling.
When I wrote that post I thought I should give the Bank a chance to put its case out there. After all, surely there would be some research or analysis they’d done which would back the distinctive and idiosyncratic approach to fiscal stimulus that the Governor had taken to touting this year? So I lodged an OIA request.
I am writing to request copies of any internal research, analysis or other less formal material undertaken by Reserve Bank staff in the last 12 months on the effect of fiscal policy on aggregate demand and inflation pressures.
I am also interested in (and thus this request includes) any material, internal or external, the Bank relies on to support the Governor’s claim at FEC this morning that what matters about fiscal policy for monetary policy purposes is government consumption and investment spending, or that explains why the Bank no longer appears to regard the Treasury fiscal impulse measure or a change in a structural fiscal balance measure as the relevant sorts of metrics.
Of course, if there had been anything of substance to see, it would have been a simple matter for the Bank to have responded by return email (or by putting out a pro-active release with relevant notes or research). Almost certainly there is nothing of substance, but the Bank isn’t any more keen to disclose that than it has been in times past when the Governor has simply made up stuff (including in front of FEC).
Yesterday I had an email from the Bank about my request.
The Official Information Act 1982 requires that we advise you of our decision on your request no later than 20 working days after the day we received your request. Unfortunately, it will not be possible to meet that time limit and we are therefore writing to notify you of an extension of the time to make our decision by 20 working days, to 12 October 2023. We will still provide you a response as soon as reasonably practicable, sooner than this date if possible and without any undue delay.
This extension is necessary because consultations needed to make a decision on your request are such that a proper response cannot reasonably be made within the original time limit.
If you believe that final sentence (a common one agencies like to invoke) you’ll believe anything. It wasn’t a complex request, it wasn’t a request for papers to or from other agencies or ministers or their offices. It was a request for material the Bank had to hand and/or had done itself. Can’t be hard to find…..if it exists at all.
But instead there is a 20 day extension which conveniently takes disclosure of what is (or more probably isn’t) there out beyond the last pre-election OCR review. Delayed embarrassment is valuable to bureaucrats with a track record of just making stuff up.
At the moment it smacks of the episode a couple of years ago when Orr told FEC, unequivocally, that the Bank had done its own modelling and research on the financial stability impacts of climate change, only for an OIA to show that they’d done none at all and in fact all they could offer was one short – and quite comfortable – staff note written a couple of years earlier. Perhaps the difference from then is that it could have been true – some central banks had done research – and just wasn’t. For the fiscal spin – which seems all too convenient politically- it seems most unlikely to be grounded in anything of substance.
So when the Minister of Finance tells people the Reserve Bank is unbothered about deficits and fiscal impulses don’t think “oh, well they have a big team or macroeconomists and should know” but (and sad to say) ask yourself instead which party winning the election is more likely to be in the personal interests of the Governor and RB senior management and Board. Because that is the most plausible – and I wish it were not so – explanation for the Bank’s fiscal lines at present.
On other matters fiscal, after the PREFU Christopher Luxon put out a statement which I responded to thus
Which is fine, but where is the alternative fiscal plan? The Back Pocket Boost package was advertised as only fiscally neutral(ie no inroads on the deficit), & it is clear that the foreign buyer tax numbers don't add up so for now the package adds to the already v large deficit. pic.twitter.com/droiTHGyl0
RNZ’s interviewer put this to Luxon (as the view of a “fiscal conservative” – a description I will embrace) this morning only for Luxon to dismiss it as “what a load of rubbish”. He is of course entitled to his view, but it would be good to see some solid arguments and evidence, or engagement with the substance of the criticisms I and others have made. Without it, voters are entitled to draw their own conclusions.
I’ve written a few posts here over the years about the idea – which apparently Labour, National, and the Greens are now keen on – of a state established and funded policy costings unit. The most recent two were a month ago, here and here. I’m a longstanding sceptic of the case for such a unit, seeing it is just a way to get more state funding for political parties, and not dealing with any of the common arguments made for such units.
It is election season now and some of the arguments have, in effect, been put to the test. This week National released its tax and spending plan, producing numbers suggesting that what they planned to spend was fully funded by other cuts and new taxes. I wrote here about the macro issues and implications of/around the plan, largely taking as given the specific numbers the party supplied.
I’m not close enough to any of the line by line numbers to know whether each of them is solidly costed. Their economic consultants say they have been, and (assuming there were no silly mistakes made by accident) National does have a pretty strong incentive to ensure the numbers are each reasonably robust. So, for now, I’ll assume they are (with a few possible caveats about the foreign buyers tax, see below).
[and, later, on that tax]
…As for the revenue estimates ($750 million a year), they seem quite high, and the tax rate seems high by most international standards (Singapore is a lot higher). Only time will tell how many people not living here so want a New Zealand house they will pay a 15 per cent tax to do so.
Individual costings really weren’t and, as macroeconomic commentator, still aren’t my focus. In the grand scheme of things, the overall package involves adjustments of less than 1 per cent of GDP per annum, most costings don’t seem to have been contested, and in an age of MMP even a big party’s plans are likely to be implemented a bit differently than the pre-election promises. The foreign property buyers tax itself is expected to raise revenue equal to 0.2 per cent of annual GDP (and the gambling tax about 0.05 per cent of annual GDP).
But both as a potential voter and as someone interested in institutional proposals, notably that for policy costings offices, the subsequent debate has been interesting. I don’t really understand the issues around the online gambling costings (and the amounts involved are much smaller) so I’m going to focus on the foreign buyer tax. On that score there seem to be two quite separable concerns raised:
first, how consistent is the proposed tax with various tax and trade treaties New Zealand has signed? and
second, even if the tax were able to be put into effect as National tells us it envisages it (excluding buyers from Australia and Singapore, as with the current outright ban), just how much revenue would the tax be likely to raise year in year out?
Of course, the more there are issues under the first leg, the more questions could legitimately be raised about the revenue estimates.
Based on what they have told us, in the lead up to the announcement National did what one might have expected from a party seeking to win the right to lead the government after the election. It hired a firm of advisers (Castalia) and asked them to review the draft numbers. From what National has said (and I recall one media outlet being shown Castalia’s comments), National went with numbers that were generally at the conservative and cautious end of the spectrum. Castalia apparently also cast a fresh eye over the numbers in light of the government’s fiscal announcements last Monday (although this is unlikely to have meant much since how much baseline spending can be saved – by either party – isn’t really something a consultant can tell you, since it is mostly about the resolve of the politicians’ themselves once in office).
In addition to having consultants review modelling numbers, the National document told us they’d sought legal advice
National has sought legal advice on whether the replacement of the foreign buyer ban with a foreign buyer tax is consistent with New Zealand’s existing free trade agreements – that advice confirms such a replacement would be consistent with those agreements. However, this policy assumes Australian and Singaporean citizens will not be affected by the tax as they are not currently affected by the foreign buyer ban.
and a Newshub article yesterday reported that National had sought both legal and tax advice on these issues.
So far and mostly so good. We don’t just have National’s word for the numbers, but an established firm – yes, paid for by National, but with an ongoing reputation to guard – is reported as telling us they thought the numbers overall had been cautious and conservative.
But then the questions arose. First, around the legality of imposing such a tax on various countries. Some of the points were from Labour Party spokespeople (eg this press statement). They are the political opposition so we might have no more particular reason to take their claims on trust than to take National’s on trust, but they do make some specific points, which to a lay voter seem like questions deserving an answer. In fact, there might be both legal questions and questions about whether the proposed tax is within the spirit of agreements that New Zealand governments have voluntarily entered into (and which National is not on record as having opposed, or is now proposing to withdraw from). (Non-specialists among us might also wonder why if absolute bans – the ultimate in discrimination – mostly are legally okay (we now have one), a tax which would be less onerous would not.) As National notes, some other jurisdictions have such taxes, but the issues here isn’t one of merits, but what specific New Zealand agreements do and don’t allow (and noting that New South Wales appears to have recently withdrawn its version of such a tax because of federal tax treaty issues).
And then questions arose around the modelling (ie even if the law could be done as National had suggested whether it would raise $750 million or so year in year out). Various economists and property analysts (people without apparent strong party loyalties that might make their perspectives suspect) raised doubts. On the property experts side this article from today’s Post seems representative.
There are, of course, some enthusiastic real estate agents. I read an article reporting one agent saying he’d had US billionaire clients on the phone within hours. I don’t doubt there would be interest: the question is how much, and how much beyond the first wave (a quick Google suggests there only 2700 billionaires in the world).
Without seeing National’s modelling, it isn’t really possible to reach a confident view on their numbers. But what makes me cautious is that I’ve seen no one – neutral expert or even National surrogate arguing that the numbers are really on the cautious side and a more realistic assessment might be higher again. It seems hard to find revenue estimates for other countries’ foreign buyer taxes – often they are designed to deter purchases rather than to raise revenue – although I found a reference yesterday suggesting that a similar tax in Toronto (a metropolitan area with more people than New Zealand) was raising only about $200m per annum.
So wouldn’t this have been a clear case for a policy costings office? I don’t think so.
National has used its (scarce) resources to pay for analysis and advice and has told as much as it seems to want to tell us. Debate and scrutiny has ensued. As a geeky analyst and undecided potential voter I’d really like them to release their modelling and any Castalia comments on it, and either the advice or a fairly full summary of the advice from the “legal and tax experts”. It would be good even if they had some known National-sympathising experts who they could wheel out to make the case for (a) the legal problems not being what some suggest they might be, and b) the robustness of the numbers (I don’t really expect Willis or their Revenue spokesperson to spending lots of time in public debate in the middle of a campaign).
But here’s the thing. It is their choice what to release (or not), and our choice as voters to draw our own conclusions. Elections are most unlikely to turn on a specific like this, which is ultimately fairly small in the scheme of things (eg against the backdrop of some of the largest primary fiscal deficits of any advanced country at present, 0.2 per cent of revenue isn’t nothing but it is almost lost in the rounding – and is less than the non-specific proposed bureaucracy savings). For some people and at the margin, it may shake confidence. Go back to that quote from my post earlier in the week: my starting point was to think that National had strong incentives to make sure that their numbers were robust, so as a starting point I took them as given. Now that questions (apparently serious questions) having been raised, they have chosen not to release anything more or to address the specific concerns. It is a legitimate choice (they are free to make it), but I (and the handful of interested analysts and potential voters) can draw my own conclusions. For me, I’m less confident now that the numbers add up, and also less confident than I might have hoped in their commitment towards being an open and transparent party in government. It reinforces my wider doubts about their overall fiscal stance.
And that seems to be the political market working. Parties will make choices about what they think a sufficient number of voters care about, or even about what sufficiently vocal commentators might shape public thinking over. It is very unlikely that details of this tax score highly on either count. Is that a bad thing? I don’t really think so. Voters are making judgements about values, about competence, about desires (or lack of them) for change. And frankly, if fiscal issues were to become an issue, such concerns should probably centre on things individually more important than details of this tax. The merits of unprincipled tax policies (this foreign buyers’ tax, Labour’s proposed GST exemptions, or the distortionary new depreciation provisions both parties have individually proposed to foist on the business sector) for example should probably count for more. Or the sheer size of deficits – without precedent in New Zealand now for many decades on the eve of an election. But in the end, voters and parties will make their own choices, and nothing this week suggests to me that we’d have been better with some state-funded tax and trade lawyers and economist adding to the mix. Precise numbers almost certainly do, and in my view probably should, matter less than what we learn about parties and their spokespeople in how they handle issues like this.
National announced its tax and spending plans this morning. You can read the full 29 page document.
In the way of all parties and bureaucratic agencies these days, everything gets quoted as a four year figure: $14.7 billion sounds like a lot but it about $3.7 billion a year, which is about 0.8 per cent of annual GDP. Cost things over 10 years and you could if you wanted call it a $35 billion plan, with no more or less meaning (and, to be clear, all parties and agencies engage in this headline-inflating exercise).
Today’s plan is sold as being fully separable from National’s fiscal plan, which we will apparently get to see after they’ve had time to digest the PREFU numbers (coming on 12 September). It is a clever wheeze – it seemed to work – in allowing Willis and Luxon to deflect all and any questions this morning regarding the deficit and the possible/eventual/one day return to budget operating balance or surplus. They sold this line on the basis that today’s package was itself fully-funded from new initiatives of one form or another, so that in principle the net impact on what fiscal numbers The Treasury comes up with this package could just be slotted in with no net fiscal effect.
I’m not close enough to any of the line by line numbers to know whether each of them is solidly costed. Their economic consultants say they have been, and (assuming there were no silly mistakes made by accident) National does have a pretty strong incentive to ensure the numbers are each reasonably robust. So, for now, I’ll assume they are (with a few possible caveats about the foreign buyers tax, see below).
But the overall argument – “this isn’t our fiscal plan, come back next month for that” – doesn’t really wash. It might if the budget now was pretty near balance, or even in surplus. No one would, or perhaps should, be very worried about modest changes in a comfortable fiscal position.
But we don’t have a comfortable fiscal position.
These were the fiscal numbers the International Monetary Fund put out yesterday in their annual New Zealand review
The blue numbers are more or less solid (actual fiscals are, but the cyclical adjustments could still change a bit), while the red numbers – calendar 2023 and 2024 – are going to be heavily influenced by choices and decisions the government has already made. The best advice from the IMF is that no progress has been made in reducing the deficits first run up in the Covid disruption years, even though actual Covid spending is no longer a thing. The Fund includes projections for the further-out years in which the operating balance goes back to respectable surplus for calendar 2027 and 2028, but those are really just assumptions, and don’t rely on specific identifiable tax or spending decisions that would bring about such an adjustment. I should stress that these are cyclically-adjusted numbers, so the ebbs and flows of the economic cycle don’t provide either the problem or the solution. These sorts of numbers led to the IMF recommending – in really quite pointed language for a diplomatic agency talking of a country that has been among the star fiscal performers for decades – “frontloaded fiscal consolidation” and steps to ease the fiscal pressure on monetary policy.
(The government’s control of the timing of the release of the IMF report, kicked to after Monday’s modest fiscal announcement, means these sorts of lines have had almost no media coverage. And of course no one seems to have gone and asked the Governor “what is this fiscal pressure on monetary policy/inflation the IMF talks about; you have claimed in the last two MPSs that there was none?”)
Last week I ran a post here using the OECD’s fiscal numbers. Those numbers will have been finalised a bit earlier than the IMF’s but are available on a consistent cross-country basis. Using that data you can see how large our (cyclically-adjusted) general government deficits now are relative to other OECD countries (and to our own past). The picture of recent years is a little different, but the final year deficit is also large.
Or here (not cyclically-adjusted)
We have a primary deficit that is large in absolute terms, and among the largest in the OECD.
These international comparisons aren’t done on the New Zealand operating balance definition. On that metric, the cyclically-adjusted operating deficit will be a smaller percentage of GDP, but there is little case for a cyclically-adjusted operating deficit (paying for the groceries etc) at all.
These structural deficits do not heal themselves. And while fiscal drag has been a bit of a help in limiting the deterioration in recent years, the forecast return to lower inflation means not even much of that support will be on offer.
Both Labour and National profess allegiance to the idea of an operating surplus…….but seem to have not the remotest interest in telling us what choices they are going to make to get us there. Discretionary choices/adjustments of perhaps 3 per cent of annual GDP might be required.
Today, however, is National’s day. This was their big tax and spending plan. Willis told reporters this morning that “your tax cuts are coming no matter how much Labour proves to have wrecked the joint”. So the tax cuts are iron-clad, and having bitten the bullet – after railing at Labour’s new taxes for years – and put several new tax increases on the table, it is hard to see they are suddenly going to pull a whole bunch more tax increases from their hat a couple of weeks hence to close the deficit.
It is always possible, they could announce some big new expenditure cut – killing off a few big wasteful specific programmes – but it doesn’t really seem in character, and would completely blunt the message from today that “tax cuts are coming”.
It is much more likely that – having announced their big tax and spending plan today – that is largely it. It may be fiscally neutral in its own right, which is better than the alternative of adding to the deficit, but they aren’t going to do anything much about the deficit at all. No doubt Labour won’t either – it will just handwave around whatever the PREFU shows, having cut (with no accountability whatever re eg likely cost pressures) future operating allowances on Monday. It will be a case of “trust us”, without even any credible evidence from either that ‘we know what we are doing” or really care one way or the other. We are at risk of sliding towards the normalisation of operating deficits, of borrowing to pay the grocery bill. The sort of really poor fiscal management you see in places like the United States federal government.
If asked, perhaps National will talk up cutting public sector bloat. I’m sure there is a fair amount to go round (and no one has mentioned the big increase in Reserve Bank spending that the government snuck out last week), but (a) in this morning’s announcement they ruled out a whole bunch of agencies, both because of Labour’s own vapourware announcements on Monday, and because they want any savings redirected to frontline services those agencies provide. That latter might be laudable but it doesn’t represent fiscal savings.
And, in any case, today’s package already relies on unspecific cuts in public sector bloat.
That is $4bn of the $14.6 billion cost of the overall package (30 per cent). I’m not disputing that there are (substantial) savings to be made, but savings made to finance tax cuts (as in this morning’s package) can’t then be used to also close the deficit. Both Labour and National talk of cutting consultant spend. That is cheap talk, unless (a) it amounts to a reduction in total spend, not just taking people onto the permanent staff (shifting the line item, but not changing the total, and b) identifying what work future governments don’t want done.
To the extent there is genuine bloat, the tax cuts package will have grabbed it. To cut further – cut the deficit – they would need to cut deeper and that would mean harder choices, which so far they’ve shown no inclination to be willing to make (nor Labour, but this is National’s day). And all this assumes that cost pressures are adequately captured in current baselines (which I doubt – citing for example the real wage cut forced on teachers despite apparently very real recruitment and retention challenges).
Finally a few thoughts on specific items. Childcare subsidies aren’t really my thing (better to collapse house prices), but both parties seem to like them. I like them cutting back the brightline test tax (less good than abolishing it, but…) and the restoration of interest deductibility for residential rental property owners (like any normal business). On the other hand, there is no commitment to inflation indexing income tax brackets even going forward (if they’d committed they’d have to have costed it).
But what got my goat were the first two of the new taxes.
Is it marginally better to have no ban on foreign buyers buying very expensive houses but having to pay a high tax to do so than to have an absolute ban? I might grudging acknowledge that, but any gain is marginal at best, and it is a policy that David Parker might have dreamed up in a moderate moment. It is an unprincipled revenue grab, which is wildly inconsistent with the party’s rhetoric (mostly good rhetoric) that freeing up the responsiveness of housing supply is what matters, and that we should be encouraging and facilitating more foreign investment generally. And from a party which claims to be – and historically has been – keen on immigration, it just seems weird (conflicting messages) again to not be allowing anyone who moves here, even on a work visa for several years, to buy a house. They are all over the place with barely a hint of philosophical consistency. It is all made more weird by this line from their document in which they seem to argue that their foreign buyer tax policy will itself somehow dampen property price growth.
As for the revenue estimates ($750 million a year), they seem quite high, and the tax rate seems high by most international standards (Singapore is a lot higher). Only time will tell how many people not living here so want a New Zealand house they will pay a 15 per cent tax to do so.
And then there was the other unprincipled revenue grab, the removal of tax depreciation for non-residential buildings. This measure – which increases the tax rate on businesses – was first introduced by National in 2010 to help fund that tax switch package, with no credible or rigorous underpinnings at all. Buildings depreciate (land doesn’t). In 2020 Labour restored this depreciation provision, and was supported in doing so by their own Tax Working Group. And now both Labour and National are campaigning on getting rid of it again, with no more rationale than that they need revenue (and no doubt tax depreciation provisions won’t show up in the focus groups). The intellectual bankruptcy behind this is evident in National’s document
No rationale at all beyond claiming it was a “tax break”. They rightly pushed back when Labour called interest-deductibility a tax break – it wasn’t, business operating expenses are generally deductible – and depreciation is no different. (Arguably, simply calling it a tax break is no worse than Labour pretending the 2020 change as a temporary Covid stimulus measure when they were quite clear at the time it was permanent, but…..it is a close call. Our political parties………)
Finally just a fairly small technical point. Willis claimed this morning that the National package would not add to inflation pressures. The justification for this claim is that the package is fiscally neutral. That isn’t necessarily sufficient for there to be no net demand impact. For example, the tax cuts etc are skewed towards people who probably have a very high marginal propensity to consume, and the revenue sources probably less so. Perhaps more important, and as someone pointed out over lunch, 20 per cent of the revenue is coming from the foreign buyers tax. Since the higher end, most lucrative, foreign buyers – some billionaire wanting a luxury mansion – mostly won’t be paying the tax out of New Zealand income that additional tax revenue may not represent any diminution of demand in New Zealand. These are small points – the whole (funded) package is less than 1 per cent of GDP – but all else equal I would expect it to be slightly stimulatory. Those compiling Treasury’s fiscal impulse measure might think the same.
The IMF probably wouldn’t think it was a step in the right direction. Perhaps the same will be able to be said for Labour’s plans as they unfold?
UPDATE: On the fiscal impulse issue, the removal of the regional petrol tax in Auckland has the potential to be net stimulatory, at least for a time, as the Auckland local authorities had to wind down projects or identify alternative revenue sources. Re the foreign buyers tax, there may be an incidence question (purchasers of mansions may be able to push the tax incidence back onto vendors, but probably not purchasers of $2.1 million houses in Roseneath or Epsom (where there would normally be more potential domestic purchasers)). In any case, I think most estimates of spending from capital gains – by fairly well-off vendors- probably assume a lower MPC than spending from income.
No posts last week between some mix of the war news (including related economics and financial markets news) being more interesting, and Covid – in our house that is. Not being too sick, but not being entirely well either I wasn’t concentrating very hard for very long. Fortunately, the isolation is now half over and no one’s health is particularly concerning. So back to some domestic economics and policy.
The leader of the National Party yesterday gave what he billed as a “State of the Nation” speech. You can read it all here. It was, however, largely a tax speech. And – and I say this as someone who would really really like to be able to vote for National – it was pretty disappointing.
It wasn’t that I disagreed with any of the tax ideas – none of them very radical anyway. So when he committed to repealing “each of these new taxes implemented by Labour”
I was quite pleased. On Radio NZ this morning he also committed to getting rid of the “ute tax” as well, and I was pleased to hear that as well. One might debate the merits of some of these measures at the margin (eg I’d be happy to limit interest deductibility – for all businesses – to real interest, not nominal), but none of them really represented good tax policy, and they make the economy work less efficiently.
I was also quite keen on the idea of adjusting income tax thresholds to take account of inflation since 2017 (although would be rather keener if that included a commitment to legislate indexation of the thresholds as a permanent feature of the income tax system). That is simply fairly good tax policy.
So far, so positive, although do note that all these proposals involve turning back the policy clock to 2017. National was the government then, so no doubt they look back fondly on that time. But our structural economic performance (productivity growth, business investment etc) wasn’t much chop then – as Labour then used to point out, before becoming indifferent to such trifles when in office, and implementing policies – and running into circumstances – that are likely to have made things worse.
My concern is the fiscal and macroeconomic aspects of what National is saying – in Luxon’s speech yesterday, and (on the other hand) in every second parliamentary question for weeks.
Of all those tax promises listed above, only the one-off indexation of the income tax thresholds is costed, presumably because they are actively calling for the government to adopt this proposal in this year’s Budget.
National has been trying to make a thing of the size of the operating allowance ever since it was announced in December. But doing so isn’t entirely straight. Here a couple of paragraphs from my post at the time
To illustrate the practical implications, here is a chart from that post.
The simplest explanation is simply that when there is a lot more inflation, things cost a lot more – the same bundle of goods and services (or real transfer) cost more – and the way the government’s systems are set up, most of that “cost more” has to be met through the operating allowance. I thought it was a daft system when I worked at The Treasury, and I still think it is a daft system – presentationally – but it is the system and both National and Labour-led governments have used it. When inflation is very low (eg undershooting the target), operating allowances can be low without any great austerity, and when inflation is very high (eg overshooting the target, operating allowances can look (and be) very high without any great fiscal extravagance. As the graph shows, if the government keeps to the plans announced in December, government spending will be falling (modestly) as a share of GDP over the next few years.
And what has happened (and is forecast to happen to) the price level?
When the current government Budget, and appropriations, were decided, Treasury thought that the price level (CPI) by June 2023 would be 6 per cent higher than it was in June 2020. By HYEFU time – when they decided on the operating allowance – they thought the increase would be 11.9 per cent. We don’t have new Treasury forecasts, but the Reserve Bank’s MPC published forecasts recently (and recall that the Secretary to the Treasury sits on the MPC) and they expected a 12.7 per cent increase. It isn’t impossible that events of the last 10 days – including last week the biggest weekly rise in commodity prices in 50 years – will have pushed those numbers higher again.
Things will cost more. That is true of things you and I buy (a point Luxon has, fairly, been keen to stress) but it is also true of things the governments buys or spends money on.
A very large proportion of that $6 billion operating allowance will be required simply to keep real spending at the levels the government had in mind in last year’s Budget. It is a really big price level shock, at a time when – almost every year – nominal GDP is at record highs, so it is hardly surprising that the operating allowance is itself a record high. It tells one nothing about fiscal profligacy. I suspect Labour is already finding putting together this year’s Budget quite a bit harder than they planned in December – harder that is if they are going to stick to the $6 billion.
I’m not suggesting that when the $6 billion was announced in December there was no room for new government discretionary initiatives. I’m quite sure there was (as pretty much every government ever has done). And it is quite likely that adjusting the income tax thresholds – for that big price level shock – is at least as good a use as whatever Labour has been cooking up. But……as the graph shows, Labour’s spending plans for the next few years were hardly looking reckless.
Here it is also worth repeating that National has not offered costs, or funding ideas, for their other tax promises. For some it doesn’t matter – the “Light Rail Tax” is vapourware at present anyway – but we know that the 39 per cent rate is pulling in a lot more people than initially envisaged, and probably a fair amount of money. Unless National proposes to run larger deficits/smaller surpluses in the out-years than Labour is planning/forecasting, the money needs to come from somewhere – presumably lower (than otherwise) government spending.
National has for months been running the line that high government spending is to blame for much of the surge in domestic inflation. I’ve been quite sceptical (and critical) of that view, including in a couple of recent posts, here and here).
If were a serious line of attack – as distinct from something that looks a lot like rank opportunism – one might have supposed Luxon and his party would be identifying significant areas where they would cut government spending. But this all they had to say
I’m not a fan of any of those policies, although it is hard to conclude that either the water system or the health system are just fine as they are, and (at least as far as I’m aware) daft as the “underground tram” might be, little is yet being spent on it, so it isn’t an explanation for the inflation we are now seeing. There was reference to welfare dependency – and again I agree it is a real issue – but no concrete ideas for materially cutting those outlays.
So we seem to be left with:
claims that high inflation – even high domestic inflation – are substantially the responsibility of high government spending, but (a) no serious analysis in support of the proposition, and (b) no substantial or material proposals for cutting government spending now, and
for the future, tax cuts promises that, while individually sensible and perhaps even laudable, aren’t supported either by burgeoning projected surpluses or by even a hint as to what expenditure will be cut (bearing in mind that demographic pressures on spending are likely to rise, not fall).
At best, even in the shorter-term we are left with an Opposition that wants to run no smaller deficits than Labour (operating to the same operating allowance for the coming year), and – on the things actually announced yesterday – smaller surpluses or larger deficits than Labour in the years to come. And all this while standard macroeconomic forecasters will put MUCH more weight on deficit/surpluses (and changes in them) as an influence on aggregate demand – something the Reserve Bank needs to respond to in setting monetary policy – than on the level of government spending in isolation.
Ideally, National would now use this as an opposition to pivot and move on, abandoning the “government spending explains inflation story”, shifting their inflation focus back onto the Reserve Bank’s failings (and the government responsible for holding them to account), and if they are serious about future tax cuts, start telling us how they plan to pay for those cuts. A serious move on the NZS age – a fairly prompt lift to 68 and life-expectancy indexation from there – would be a good place to start (as distinct from National’s policy hitherto of doing nothing at all for another 15 years or so).
Finally, as I noted earlier the speech seemed to involve turning back the policy clock to 2017. But productivity growth – the foundation of longer-term improvements in material living standards – was nothing to write home about back then either. One hopes – probably against hope – that before long Messrs Luxon and Bridges might let us on on their thinking on how we might do rather better over the medium-term than simply turning back the clock to five years ago, how we might at last begin to close those yawning economywide productivity gaps between us and the rest of the advanced world.
croaking cassandra 