Scattered thoughts on Budget 2018

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

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

There were few specifics in yesterday’s statement

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

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

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

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

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

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

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

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

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

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

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

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

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

What of this year’s numbers?

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

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

core crown expensese 2018 budget

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

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

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

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

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

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

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

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

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

rb and tsy int rates

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

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

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

exports to gdp budget 2018

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

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

next recession

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

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

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

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

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

 

 

New Zealanders leaving Auckland

Last month The Treasury published some new research aimed at providing better information on the population changes in each territorial local authority (TLA) between censuses.   At present we only have a census every five years –  and in some quarters there seems to be a push to reduce that frequency – and subnational population estimates between censuses have often been pretty poor, only to be updated and revised when the next census results finally appear.  At present, the published subnational population numbers are anchored to the 2013 Census, adjusted for estimates of the overseas net migration flow and data on  births and deaths.  In New Zealand we don’t have to tell some specific government agency when we move house or city.

Except that, as The Treasury observes, in practice we often do end up telling some government agency (or government-funded agency) or other –  in fact, are coerced to do so –  and the government has collated all that data in a single (anonymised) database.   That opens up enormous possibilities to use that data to, for example, update subnational population estimates in a way likely to be more accurate (albeit not very timely).   You might worry, as I do, about governments getting their hands on all that data combined, by some mix of coercion and seduction (eg have the slightest accident and you get into the ACC system) and worry that it might be used for ill as much as for good.  But, like it or not, the data are there and The Treasury is using them.

This chart from their paper gives you the picture of the data they are using

tsy popn

But my interest is less in the details of how they calculate their estimates, as in some of the bottom line results, and particularly those around estimated internal migration.

There are some interesting snippets.  The results suggests that New Zealanders’ rates of internal migration (one TLA to another) have been pretty stable, but that of immigrants has increased quite a lot.  The author offers no ideas about why that might have been (and I don’t have any to suggest either).

tsy popn 2 There is a fascinating picture of Christchurch following the earthquakes, including the continuing losses in recent years to neighbouring Selwyn and Waimakariri.

tsy popn 3

And then there is Auckland

tsy popn 4

There was a slight move into Auckland from elsewhere in New Zealand (mostly from Christchurch, see previous chart) in 2011, but otherwise the net flow of New Zealanders has been away from Auckland.  In fact, in the final year of the chart, the net outflow of New Zealanders (this is a NZ-born measure) was larger than the natural increase, so that the entire increase in Auckland’s population is (estimated to have been) due to international migration.

Readers with long memories may recall that I touched on the outflow of New Zealanders (as captured in Census data) in an earlier post.

This was the picture from the five years from 2008 to the 2013 Census.
internal migration 08 to 13As I observed then, we didn’t know what had happened since 2013.   Perhaps things had turned around?    But the new Treasury estimates suggest that if anything the outflow – still modest each year – may have accelerated.

We have the data going further back. Here is the extract from the earlier post.

SNZ has compiled this data back as far as the 1986 to 1991 five-yearly period. The last five yearly period in which Auckland experienced a net inflow of people from elsewhere in the country was from 1991 to 1996.

Here is chart which covers the estimated net internal migration to each region for the period 1986 to 2013 (with the two years 2006 to 2008 missing, because they weren’t captured by any of the censuses).

internal migration 86 to 13.png

 

None of this should be very surprising.   After all:

  • Auckland house prices have become impossibly high,
  • Traffic congestion problems, if temporarily relieved now by Waterview, seem continually pressing, and
  • The gap between Auckland incomes and those in the rest of the country, never large, has been narrowing.

But it must be an inconvenient truth for boosters of the Auckland story, including bureaucrats in MBIE, the Secretary to the Treasury, assorted past and present ministers (recall John Key on “quality problems”).  The people who know Auckland best  –  the opportunities for themselves and their families –  are, at the margin, leaving the place.   People in the rest of New Zealand aren’t (net) flocking to the big city.   It simply doesn’t seem to offer them better opportunities than staying where they are (or going to Australia).

The latest issue of the London Review of Books turned up in the mail yesterday.   In one of the reviews –  of a new book by Richard Florida –  I found this

The new urban inequality has two distinct and related aspects. First, superstar cities have moved ahead of the nations they’re found in.  The trend is clear in the US, where cities like New York have become richer relative to the country as a whole. But it is most pronounced in the UK.  In the 1970s and 1980s, London’s GDP per head was around one and a quarter times that of the UK as a whole.  Today it’s one and three-quarters.

It isn’t just London or New York.   I’ve shown previously a chart looking at GDP per capita in EU countries, looking at the ratio over time of that in the biggest city relative to GDP per capita for the country as a whole.  Over this century there has been a clear upward trend.

As for Auckland, in 2000 GDP per head in Auckland was 15 per cent higher than for the country as a whole, but by last year it was only 9 per cent higher.   I’ve shown previously (a couple of years ago) this chart of how small the New Zealand gap is between GDP per capita in the biggest city and that for the country as a whole, by comparison with many other advanced countries.

gdp pc cross EU city margins

There are, perhaps, some good dimensions to the New Zealand story.   We don’t have whole swathes of the country being left behind as the metropolis powers ahead.  On the other hand, the metropolis isn’t powering ahead at all –  just getting more and more people, in a city which is underperforming a country with weak (almost non-existent in recent years) productivity growth.

It is well past time for a rethink, and for our politicians and officials to start focusing on the specifics of the New Zealand experience.   In terms of economic success, Auckland bears not the slightest resemblance to London or New York (or Paris, or perhaps even Bratislava).   And yet the growth strategy (perhaps flattering it to use the term “strategy”) has seemed to rest almost entirely on a wishful belief that if only we tried really hard, and poured more and more people into Auckland, it just might be.  But one of the lessons of economic geography is that location matters.  Ours –  Auckland’s –  is exceeedingly unpropitious.

That LRB review I mentioned earlier notes that trends in recent decades have turned out to be very good for “established global cities in particular”, in ways that few anticipated.  That particular discussion ends thus

The business districts of San Francisco, New York, and London are ludicrously prodigious. The Borough of Westminster produces as much wealth as all of Wales.

I can’t vouch for that final statistic, but it does leave one thinking that it is more likely that Auckland is a Cardiff or (moving north) Glasgow, than that it is a coming London or New York.

Inadequate Treasury advice

I wrote about the new –  and last ever –  Policy Targets Agreement when it was released by the incoming Governor and the Minister of Finance last week.  Mostly the changes were pretty small, and in some cases you had to wonder why they bothered (since the PTA system itself is to be scrapped when the planned amendments to the Reserve Bank Act are passsed later this year).

I lodged Official Information Act requests with the Reserve Bank and Treasury for background papers relevant to the new PTA.  I wasn’t very optimistic about what I might get from the Reserve Bank –  both because of a culture of secrecy, and because the incoming Governor probably wasn’t covered by the Official Information Act when he was negotiating this major instrument of public policy.   But The Treasury kindly pointed out that they had already pro-actively (if not very visibly) released several papers, including Treasury’s own advice to the Minister of Finance, and two Cabinet papers.

(I would link to those papers, but Treasury has been upgrading its website this week and the link they provided me with no longer works.  If I manage to trace one that does work I will update this.)  [UPDATE 9/4.   Here is the new link to those papers,]

Those papers help answer the question about why they bothered with the small changes.  The Treasury advice to the Minister of Finance was dated 7 February, well before Treasury had formulated its advice on Stage 1 of the Reserve Bank Act review, and before the Independent Expert Advisory Panel had reported. In other words, well before it was decided that PTAs would soon be done away with altogether.  Indeed, there are suggestions in the paper that most of the relevant work had been done 18 months ago –  they say they consulted “a number of economists and market participants over 2016” –  when they thought the Minister would be replacing Graeme Wheeler early last year (rather than falling back on the unlawful “acting Governor” route to deal with the election period).  Interestingly,  the advice suggests Treasury favoured, on balance, increasing the focus on the 2 per cent target midpoint and de-emphasising the 1 to 3 per cent target range, but the Minister appears to have rejected that option.

There are two Cabinet papers among the material that was released.  One was from 19 February, before the Minister had engaged with the Governor-designate on the possible wording of the PTA.  In that short document the Minister outlines for his colleagues the draft PTA he would be suggesting to Adrian Orr.  The other was from 19 March, advising his colleagues of the text he had agreed with Orr.

The differences in the two texts are small, but in my view the changes represent improvements relative to the Minister’s draft (for example, keeping the political waffle about climate change, inclusive economies etc, clear of the material dealing with the Reserve Bank’s own responsibilities).  Presumably Orr would have consulted senior Reserve Bank staff, but on the basis of what has been released so far, we don’t know.

The documents suggest that The Treasury has played the lead (official) role in reshaping the Policy Targets Agreement (the Treasury advice to the Minister refers to them having consulted the Bank, but there is no suggestion that the Bank staff had necessarily agreed with the recommendations, or any suggestion of a separate Reserve Bank paper).  In a way, the lead role for The Treasury makes sense –  macroeconomic policy parameters should be set primarily by the Minister, not the Governor-designate.  On the other hand, The Treasury will typically not have the degree of expertise, or depth, in issues around monetary policy that the Reserve Bank should have.   I welcome the Minister’s announcement that in future, when the Minister directly sets the operational goal for monetary policy, he will be required to do so after having regard to the advice (publicly disclosed) of both the Reserve Bank and The Treasury.

My main prompt for this post, however, was one element of The Treasury advice which seriously concerned me, and represented a grossly inadequate treatment of an important issue.

In Treasury’s advice to the Minister, they have an appendix dealing with a couple of aspects of the Policy Targets Agreement where they didn’t propose change.  The one I’m interested in was the question of the level of the inflation target itself.

Treasury note that “there have been a number of arguments advanced by commentators over recent years in favour of either a higher or lower inflation target”.

Treasury notes, correctly, that

The main argument in favour of increasing inflation targets is in order to ensure that central banks will have enough scope to lower interest rates in the face of a large contractionary economic shock that may result in monetary policy reaching the effective lower bound of [nominal] interest rates

Amazingly, this issue is dismissed in a mere two sentences.  As they note

a higher inflation target would lead to higher costs of inflation at all times, whereas the risks of a lower bound event occur infrequently

But instead of moving on to offer some numerical analysis, or even plausible scenarios, the government’s principal economic advisers simply observe that

Given this, the costs of a higher inflation target may outweigh the benefits

Or may not. But Treasury doesn’t seem to know, and doesn’t offer the Minister (or us) any substantive analysis.

Here is one scenario.  Recessions seem to come round about once a decade, and in typical recessions (admittedly a small sample) the Reserve Bank has needed to cut interest rates by around 500 basis points.  If it can only cut interest rates by, say, 250 basis points, and that difference meant even just 2 per cent additional lost output (eg the unemployment rate one percentage point higher than otherwise for two years, the annual costs of a higher –  but still low –  inflation rate would have to be quite large, for the costs of a higher target to outweigh the benefits.  Perhaps my scenario is wrong, but Treasury doesn’t offer one at all.

Treasury devotes more space to the possibility of lowering the inflation target.  They aren’t keen on that –  some of their arguments are fine, others flawed at best –  but even then they seem determined to play down the near-zero effective lower bound on nominal interest rates, noting that (emphasis added)

a lower inflation target marginally increases the risk that the ELB [effective lower bound] may be reached, thereby providing monetary policy marginally less space to respond to shocks

Those who have sometimes called for cutting the target probably have in mind cutting the target midpoint from 2 per cent to 1 per cent (where it was in the early days of inflation targeting).    When interest rates are 8 per cent, that might make only a marginal difference to the chances of the lower bound being reached –  indeed, that was standard Reserve Bank advice in years gone by, when the lower bound was treated as a curiosity of little or no relevance to New Zealand.   But when the OCR is at 1.75 per cent (and the central bank thinks the output gap and unemployment gaps are near zero) a 1 percentage point cut in the inflation target would hugely reduce the effective monetary policy space for dealing with serious adverse shocks.  The floor would be hit with relatively minor adverse shocks.

And they conclude this way

New Zealand’s inflation target has been changed a number of times in the past and frequent changes to the level of the target could undermine the credibility of the regime.

There were two changes in the level of the target inside six years, which was unfortunate.  But the most recent of those changes was 16 years ago.  At that time, the idea of running out of monetary policy room in New Zealand was little more than a theoretical possibility.  Now it seems quite likely whenever the next recession happens here, and has already happened to numerous other advanced countries.

As I hope readers recognise by now, I regard an increase in the inflation target as an undesirable outcome, a second-best option.  I would rather the authorities (Reserve Bank, Treasury, and the Minister of Finance) treated as a matter of urgency removing directly –  and with preannounced certainty and credibility –  the extent to which the near-zero lower bound on nominal interest rates bites, by reducing or removing the incentives in the face of negative interest rates for people (large holders of financial assets, rather than transactions balances) to shift to holding physical cash.   Even just ensuring that the Reserve Bank gets inflation up to around 2 per cent –  rather than the 1.4 per cent (core) inflation has averaged for the last five years –  would help.

But there is nothing about any of this in The Treasury’s advice on the main instrument of New Zealand macroeconomic policy.  It seems extraordinarily inadequate.  Perhaps they have provided some other, more in-depth, advice on these sorts of issues –  in which case it might be good to proactively release that –  but there is no hint of, or allusion to, any deeper thinking in the PTA advice.   “Wellbeing” is all the (content-lite) rage at The Treasury these days.  I’m not a fan, but perhaps they should reflect that one of the biggest things policymakers can do to avoid adverse hits to “wellbeing” is to avoid unnecessarily severe or protracted recessions (and spells of unemployment).     Indifference on this score is all the more inexcusable when the limitations arise wholly and solely from policymaker/legislator choices –  whether around the level of the inflation target or the system of physical currency issues (and the prohibitions on innovation in that sector).  Ordinary New Zealanders –  not Treasury officials –  risk having to live with the consequences of their malign apparent indifference.

As it happens, a reader last night sent me a link to a couple of new pieces on exactly these sorts of issues.  The first was the (brilliantly-titled) “Crisis, Rinse, Repeat” column by Berkeley economist and economic historian Brad Delong.  He concludes

It has now been 11 years since the start of the last crisis, and it is only a matter of time before we experience another one – as has been the rule for modern capitalist economies since at least 1825. When that happens, will we have the monetary- and fiscal-policy space to address it in such a way as to prevent long-term output shortfalls? The current political environment does not inspire much hope.

And his column took me on to recent work by his colleagues David and Christina Romer, and in particular to a recently-published lecture on macroeconomic policy and the aftermath of financial crises.

The authors focus on financial crises (and I have a few questions about which events are included and which are not), rather than recessions more generally, but it isn’t obvious to me why their results wouldn’t generalise.   Here is their abstract.

Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises. This paper examines the role that macroeconomic policy plays in explaining this variation. We find that the degree of monetary and fiscal policy space prior to financial distress—that is, whether the policy interest rate is above the zero lower bound and whether the debt-to-GDP ratio is relatively low—greatly affects the aftermath of crises. The decline in output following a crisis is less than 1% when a country possesses both types of policy space, but almost 10% when it has neither. The difference is highly statistically significant and robust to the measures of policy space and the sample. We also consider the mechanisms by which policy space matters. We find that monetary and fiscal policy are used more aggressively when policy space is ample. Financial distress itself is also less persistent when there is policy space. The findings may have implications for policy during both normal times and periods of acute financial distress.

These are really huge differences.  And they reflect a combination (a) a substantive lack of capacity, and (b) a reluctance to use aggressively what capacity still exists when the bottom of the barrel is getting close.

Here is the chart they use for monetary policy space (and lack thereof).

romer chart

(the dotted lines are confidence bands)

The Romers offer some thoughts on the policy implications, including

Very low inflation means that nominal interest rates tend to be low, so monetary policy space is inherently limited. A somewhat higher target rate of inflation might actually be the more prudent course of action if policymakers want to be able to reduce interest rates when needed.

Our finding that policy space matters substantially through the degree to which policy is used during crises also implies difficult decisions. For example, it is not enough to have ample fiscal space at the start of a crisis. For the space to be useful in combating the crisis, policymakers have to actually enact aggressive fiscal expansion. However, countercyclical fiscal policy has become so politically controversial that policymakers might refuse to use it the next time a country faces a crisis.

What of New Zealand (included in their empirical sample)?      We have plenty of “fiscal space” –  both gross and net debt are pretty low (around the lower quartile of OECD countries).  In a technical sense that might substitute to some extent for a lack of monetary policy capacity (if a recession hit today, we start with an OCR at 1.75 per cent, while most countries were at 5 per cent or more going into the last recession).    But fiscal deficits blow out quite quickly in recessions anyway –  as the automatic stabilisers do their work –  and can anyone honestly assure New Zealanders that governments would be willing to engage in much larger than usual, more sustained than usual, active fiscal stimulus if a new and serious recession hits at some stage?  Of course they can’t.  Politicians can’t precommit (and even Treasury can’t precommit what its advice would be) and the political constraints on a willingness to actively choose to take on large deficits far into the future –  perhaps on projects of questionable merit –  would almost certainly be quite real (as they were in so many countries after 2008).  So we are better placed than some because of the fiscal capacity –  itself less than it was here in 2008 –  but we really should be taking steps to re-establish effective monetary policy capacity.  That might involve (my preference) dealing directly with the lower bound, it might involve changing the inflation target, it might involve putting more pressure on the Bank to get inflation up to 2 per cent, or it might even involve asking questions about whether inflation targeting (as distinct from levels targeting) offers more crisis resilience (senior US monetary policymakers have openly been discussing some of those latter issues).

There is no sign, for now, that The Treasury is taking the issue at all seriously, and there has been no sign –  in speeches, or Statements of Intent –  that the Reserve Bank has been doing so.  That needs to change.   Perhaps it is a good opportunity for the new Governor.  But the Minister –  rightly focused on employment issues –  should really be taking the lead, and insisting on getting better quality analysis and advice, engaging with the real risks and offering practical solutions, than what was on offer when the PTA was being reviewed.

The Treasury reminds us that GDP – and productivity – really is almost everything

In recent times, we’ve heard endlessly from The Treasury and the government about the emphasis they want to place on the “living standards framework” Treasury has been cooking up for some years for a left-wing government (the previous government had little interest).  We are constantly told that there should be less emphasis on GDP-based measures.

This was a news report just a few week ago

Prime Minister Jacinda Ardern was enthusiastic about the new approach in her speech in a church on Wednesday about the Government’s plans beyond the first 100 days. From 2019, Budgets would be delivered using new metrics designed to paint a more accurate picture of New Zealanders’ lives and encourage government to tailor spending to lift the country’s performance across those metrics, she announced.

Budgets would go beyond GDP per capita and debt to GDP ratios to analyse the wider effects on people’s wellbeing and the state of the environment in an inter-generational way, she said.

“By Budget 2019 Grant and I want New Zealand to be the first country to assess bids for budget spending against new measures that determine, not just how our spending will impact on GDP, but also on our natural, social, human, and possibly cultural capital too,” she told the crowd.

I’m among those who’ve long been sceptical of the Living Standards Framework, and the “four capitals” approach that is now its shop window.   It has always seemed content-light, and more about product differentiation (on the one hand), and a way of avoiding focusing on the decades-long record of productivity growth underperformance (on the other).   Treasury has had no compelling answers to the productivity failure, and so it must have been tempting to shift the focus. Since the new government evidently has no plan, and they have “feel-good” constituencies to please, it must have seem doubly appealing.

I’ve been meaning to write some more about some of the papers and speeches The Treasury has released recently, expecting to cast further doubt on whether the new framework is likely to add any analytic value, or improve the quality of policymaking.

But yesterday I noticed that The Treasury had saved me the effort.  On their Twitter feed was this retweet

vs. : What makes countries better off? IMF economists crunch the numbers. Read

It was drawn from this IMF piece. In it, the IMF reports

For years, economists have worked to develop a way of measuring general well-being and comparing it across countries. The main metric has been differences in income or gross domestic product per person. But economists have long known that GDP is an imperfect measure of well-being, counting just the value of goods and services bought and sold in markets.

The challenge is to account for non-market factors such as the value of leisure, health, and home production, such as cleaning, cooking and childcare, as well as the negative byproducts of economic activity, such as pollution and inequality.

Charles Jones and Peter Klenow proposed a new index two years ago (American Economic Review, 2016) that combines data on consumption with three non-market factors—leisure, excessive inequality, and mortality—in an economically consistent way to calculate expected lifetime economic benefits across countries. In our recent working paper, Welfare vs. Income Convergence and Environmental Externalities, we updated and extended this work, attempting to include measures of environmental effects and sustainability. In this blog we look at our results from updating the new index.

Our findings clearly suggest that per capita income or GDP does capture the main component of well-being. And health—a key component of well being—is critical to raising welfare and income.

The well-being index

What emerges from Jones and Klenow’s work is a consumption-equivalent index that measures welfare derived from consumption, then adds the value of leisure (or home production) and subtracts costs related to inequality. This calculation is made for each country over one year and then multiplied by the life expectancy in each country. This gives us a measure of average expected lifetime welfare based on consumption, leisure, inequality, and life expectancy. (Click here for a further discussion of the well-being index.)

There is a close relationship between our calculation of per capita welfare for 151 countries in 2014 and per capita income or GDP. The chart above [reproduced in the tweet] shows that most countries line up fairly well along the 45-degree line (where relative welfare and income per capita are the same) indicating correlation, but there are significant differences, too. Poorer countries on the left are largely below the line, showing that welfare is lower than income. Richer countries at the top right are above the line, reflecting welfare that is higher than income.

Enough said really.  There is little sign of any obvious gain from shifting the focus of the Budget, or The Treasury’s advice from GDP per capita, and the productivity measures –  GDP per hour worked, and MFP –  which are associated with them –  to amorphous living standards/ “four capitals” measures.

Of course GDP isn’t perfect.  And of course governments can boost GDP is welfare-detracting ways (eg conscription and forced labour), and yet The Treasury ends up promoting new research from the IMF suggesting that in fact countries don’t do so to any material extent (if it were otherwise more countries would be much further from the 45 degree line).  It suggests what everyone has always known –  that in setting policy governments do think about other stuff, not just GDP (check out all those Cabinet papers with “Treaty implications” section, as just one example).  And that measures that free people and economies to lift productivity, and with it potential GDP, remain the most salient and reliable way to lift key elements of living standards (not just material consumption).  Fix productivity and many other possibilities comes with it.   It still won’t capture everything, but beyond that a great deal involves explicit value judgements, in which area Treasury has no superior expertise or insight.

Perhaps instead of diverting so much of their analytical resource into the new-fangled, not particularly robust, tools and frameworks, The Treasury could return to getting the basics right: robust advice on expenditure, calling out bad or rushed policy when it is proposed/promised, and focusing in –  with a genuinely open mind – on the specifics of why New Zealand’s long-term productivity performance has been so poor.

 

Two BIMs and a bureaucrat

As I noted last week, government departments’ (and agencies’) briefings to incoming ministers have mostly become a bit of a joke: mostly devoid of any substance, typically specifically tailored to the preferences of the particular incoming government (ie written/finalised after the shape of the new government is clear), and mostly not much more than process pieces.  If one is interested in the actual substantive advice –  the sort of things the Lange government intended to make available when they began publishing BIMs in the mid 1980s –  citizens need to fall back on the Official Information Act, with all its limitations.

There are exceptions –  I wrote the other day about some substance in the Reserve Bank’s BIM.   And even on the little that is released, sometimes tantalising hints sneak through.  The intelligence services, for example, left unredacted a suggestion that governments might need to be concerned about the influence activities in New Zealand of foreign governments –  something neither the current Prime Minister nor her predecessor have been willing to take seriously or address openly.

Of the other economic functions, neither the Treasury nor the Immigration BIMs say much.  But sometimes there is quite a bit even in a few words.  Take immigration for example.    It was only a few years ago that MBIE was telling Ministers of Immigration (and the public) that immigration was a “critical economic enabler” –  a potential catalyst to transform New Zealand’s dismal productivity performance.   There isn’t much in this year’s Immigration portfolio BIM –  mostly process again –  but my eye lit on this paragraph

New Zealand’s immigration system enables migrants to visit, work, study, invest, and live in New Zealand. Economically, it contributes to filling skill shortages, encouraging investment, enabling and supporting innovation and growing export markets. Immigration has contributed to New Zealand’s strong overall GDP growth in recent years largely through its contribution to population growth. However, the evidence suggests that the contribution of immigration to per capita growth and productivity is likely to be relatively modest.

The theory –  dodgy bits like “filling skill shortages” and the more plausible bits –  is there in the first half of the paragraph.  But by the end of the paragraph, even MBIE has to concede that there isn’t likely to be much boost to per capita income or productivity at all –  the effects are “likely to be relatively modest”.  It is hard to avoid that sort of conclusion –  looking specifically at the New Zealand experience –  when (to take MBIE’s list from the second sentence) “skill shortages” have been a story told in New Zealand for 150 years, business investment has been weak by OECD standards for decades, firms haven’t regarded it as particularly attractive to invest heavily in innovation (again by world standards), and the export share of GDP is now at its lowest since 1976.  Still, it is good to see reality slowing dawning on MBIE.  On my telling, they are still too optimistic, but even on their telling when such a large scale policy intervention seems to produce such modest economic results it might be time for a rethink.

And what about the BIMs prepared by Treasury?   There isn’t much in the main Finance document (lots of process stuff, and plenty of talk of diversity and wellbeing and none on productivity).  There is an appendix specifically aimed to address what Treasury understand to be the new Minister’s priorities, but not much about Treasury’s own view of what needs to be done, or the pressing problems.    If anything, reading Gabs Makhlouf’s covering letter to Grant Robertson one might conclude that Treasury didn’t think there was much to worry about at all.

You are taking up your role at a time when New Zealand’s economy is in a relatively strong position.  There is solid forecast growth, complemented by fiscal surpluses and a strong debt position.  And while international markets still present a number of risks and uncertainties, overall the global economy –  as reflected in the IMF’s recent outlook –  presents opportunities for New Zealand to seize, in particular with Asia’s ongoing growth.

Presumably the Secretary didn’t think it worth emphasising five years of no productivity growth, seventy years of pretty weak productivity growth, shrinking exports as a share of GDP, sky-high house/land prices, pretty weak business investment and so on.  Or even the fact that notwithstanding “Asia’s ongoing growth” –  a story now for more than forty years –  nothing has looked like turning around New Zealand’s continuing gradual economic decline.    And perhaps when you are a temporary immigrant yourself –  as Makhlouf presumably is –  the cumulative (net) loss of a million New Zealanders isn’t something that concerns you?

In their BIM Treasury proudly asserts that “We are the Government’s lead economic and financial adviser”.  Perhaps they hold that formal office, but it is hard to be optimistic about the content of what they might be offering the government.

But Treasury also had some other BIMs for other portfolios they have responsibilities for.  The one I noticed was the Infrastructure one.    Buried in the middle of that document was this observation

Auckland’s ability to absorb growth has been reached. Environmental, housing and transport indicators all reflect a city under increasing pressure. Traditionally, Auckland has been more productive than other regions of New Zealand but, on a per capita basis, this productivity premium has been shrinking over time. Auckland is not performing as well as expected for its size and in comparison to other primary cities around the world.  There are opportunities to increase this productivity but only if supply constraints, especially transport and housing, are resolved.

That key middle sentence –  no hint of which appears in the main Treasury BIM –  could easily have been lifted from one of my various posts on similar lines.    They could have illustrated the point with a chart like this.

akld failure

 

Appearing in the standalone Infrastructure BIM, Treasury appear to want to blame these poor outcomes largely on infrastructure gaps –  a conclusion which I think is flawed –  but I’m encouraged to see a recognition of the problem in official advice to the Minister of Finance.   It is all a far cry from the rather lightweight celebratory speech Gabs Makhlouf was giving about Auckland’s economy only 18 months ago, which I summed up this way

[it] might all sound fine,  until one starts to look for the evidence.  And there simply isn’t any.  Perhaps 25 years ago it was a plausible hypothesis for how things might work out if only we adopted the sort of policies that have been pursued. But after 25 years surely the Secretary to the Treasury can’t get away with simply repeating the rhetoric, offering no evidence, confronting no contrary indicators, all simply with the caveat that in “the long run” things will be fine and prosperous.  How many more generations does Makhouf think we should wait to see his preferred policies producing this “more prosperous New Zealand in the long run”?

If the Secretary to the Treasury was going to address the economic issues around Auckland, one might have hoped there would be at least passing reference to:

  • New Zealand’s continuing relative economic decline, despite the rapid growth in our largest city,
  • Auckland’s 15 year long relative decline (in GDP per capita), relative to the rest of New Zealand,
  • The contrast between that experience, and the typical experience abroad in which big city GDP per capita has been rising relative to that in the rest of the respective countries,
  • The failure of exports to increase as a share of GDP for 25 years,
  • The fact that few or any major export industries I’m aware of our centred in Auckland (the exception is probably the subsidized export education sector) –  and by “centred” I don’t mean where the corporate head office is, but where the centre of relevant economic activity is.

There is nothing of economic substance on immigration in the main Treasury BIM this year, but perhaps over the next few years Treasury could start thinking harder about whether it really makes sense to be using policy to bring ever more people to one of the most remote corners on earth, even as personal connections and supply chains seem to be becoming ever more important, at least in industries that aren’t simply based on natural resources.

The one other thing that did catch my eye in the Treasury BIM was this paragraph

The Treasury Board. This external advisory group supports the Treasury’s Secretary and ELT to ensure that its organisational strategy, capability and performance make the best possible contribution to the achievement of its goals. Current members of the Board are the Secretary to the Treasury (Gabriel Makhlouf), the Chief Operating Officer (Fiona Ross), Sir Ralph Norris, Whaimutu Dewes, Cathy Quinn, Mark Verbiest, Harlene Hayne and John Fraser (Secretary to the Australian Treasury).

Now, to be fair, the “Treasury Board” has no statutory existence, and no statutory powers.  It isn’t even clear why it exists at all –  Boards are typically supposed to represent shareholders, and as regards Treasury, the Minister of Finance, Parliament, and the SSC are supposed to do that on our behalf.  But given that there is an advisory Board, what is a senior public servant from another country  –  the Secretary to the Australian federal Treasury –  doing on it?      New Zealand and Australia might be two of the closer countries in the world, but we don’t always have the same interests, and at times those interests –  and perspectives – clash rather sharply.    I gather John Fraser is quite highly regarded, but who does he owe allegiance to, and whose interests is he advancing in his work on the New Zealand “Treasury Board”?  I might not worry if he were a retired former Treasury Secretary from Australia, but he is a serving official of the Australian government.  It seems extraordinary, and quite inappropriate.   Did he, for example, have any involvement in the recent, superficially questionable, appointment of a former senior Queensland public servant to a top position in our Treasury?    Again, close working relationships between the two Treasurys –  each as servants of their own governments –  might be reasonably expected, and perhaps mutually beneficial.   But providing a senior official of another government with inside access to the senior-level workings of one of our premier government departments seems questionable at best.  GIven Makhlouf’s past enthusiasm for China, perhaps the appeasers at the New Zealand China Council will soon be suggesting he appoint someone from China’s Ministry of Finance could join Fraser on the “Board”?

And finally, some kudos for a bureaucrat.  As various people have noted, Graeme Wheeler went for five years as Governor –  as the most powerful unelected person in New Zealand –  without ever exposing himself to a searching interview, or making himself available for an interview on either main TV channel’s weekend current affairs shows.  His appointment might be highly legally questionable, he might be only minding the store for a few months, but yesterday Grant Spencer went one better than Wheeler and sat down for interview on Q&A with Corin Dann.    I thought he did well, but what really counted was just showing up, and being open to questions.

Since much of the interview was about Spencer’s speech last week, which I’ve already written about, there was much in it that I disagreed with.  But I’m not going over that ground again.  Perhaps the one new thing that caught my attention was when Spencer claimed that the Bank is independent for monetary policy, but not around things like LVRs.   That is simply factually untrue.  The Act makes it very clear that any decisions to impose or lift LVR restrictions are solely a matter for the Governor (also a point that the Prime Minister, the Minister of Finance and their predecessors have recognised).   Spencer went on to say that if the then government had not wanted the Bank to impose LVR restrictions they wouldn’t have done so.     That might be fine, but I hope they never apply that standard to monetary policy decisions.  And if LVR decisions really are more political and redistributive in nature, perhaps as part of the forthcoming review, the Reserve Bank Act should be changed so that the Reserve Bank offers technical professional advice, but the Minister of Finance makes the decision?.  We can, after all, toss out elected governments.

 

 

 

What does The Treasury want to know? Not about productivity apparently

Last week I joined 80 or 90 other economists and people from related disciplines, drawn from the public sector, universities, consultancies, and think tanks, together with a few commentators, at an event organised by The Treasury.  It was billed as “Wealth and wellbeing: High quality economics in the twenty-first century”.  They were looking for input.

The symposium began with a presentation by The Treasury’s chief economist, Tim Ng, based around a paper he and a couple of colleagues had written, “Improving economic policy advice”.  That paper, in turn, built on the Living Standards Framework that Treasury has devoted a lot of effort to building and promoting over the last half dozen years or so (and which you can read all about here).

The Living Standards Framework has troubled me from the first, and despite the numerous refinements, and attempts to articulate how it is used, and how government policymaking benefits, I remain sceptical.   I’m not the only one: the New Zealand Initiative’s Bryce Wilkinson published a critique last year (pages 7 and 8).  Bryce made a number of good points, including the merits of a traditional cost-benefit analysis approach, and the tendency of the Living Standards Framework to assume the benevolence (and knowledge) of officials and politicians, in a way that simply ignores much of the economic literature around incentives, information, and the possibilities of the sort of government failure we see all the time.

The Treasury has for some years now proclaimed a vision for itself

Driving what we do is our vision to be a world-class Treasury working toward higher living standards for New Zealanders.

Like Bryce, I’m also uneasy about that

Personally, I am not a fan of vision statements for government agencies. Public servants are paid to serve their elected ministers in the wider public interest and perform their delegated authorities impartially.

Either Treasury’s vision has content –  in which case it has no more legitimacy than the personal preferences of a group of senior officials –  or it is little more than vacuous waffle (“we want to do well”).

There is much the same lack of clarity around the Living Standards Framework, the  centrepiece of which now appears to be this smart new picture.

Higher Living Standards - The Four Capitals - Natural, social, human and financial/physical

Good things flow from these “four capitals”.

There is an accessible, relatively recent, guide to using the Living Standards Framework(LSF).  But it is still not clear whether there is very much substance to it at all, or whether it ever means anything more than “when you do policy advice, there are lots of dimensions it can be important to think about”.  As if anyone ever doubted it.    Treasury talk about a list of six ways they have used the framework.  The first was for brainstorming, but then surely the whole point of brainstorming is not to be tied into an artificial organising framework?   They also show an example of analysing defence policy using the LSF, but (despite the pretty picture, page 10) it is not clear at all how analysing defence policy as a contribution to “social cohesion: abroad” is particularly helpful to anyone.   And their final use is “to measure progress”, featuring a heroic attempt to illustrate change across each of the dimensions since 1870.  An exercise of that sort might be useful for economic and social historians –  with all the inevitable caveats –  but it isn’t clear how it helps today’s ministers.  In fact, it would still be interesting to know whether any major decisions during the term of the previous goverment were made differently because of the advent of the LSF.

Perhaps it will be different under the new government? My observation at the time Treasury first came up with the LSF was that they seemed to be preparing for a Labour/Greens government.

There is also still the tone of a “grab bag” of the latest trendy ideas to it.   This line appeared in the paper presented to the Symposium

To be relevant, wellbeing measurement and cost-benefit analysis need to be sensitive to changing technological, ecological and social trends, such as digitalisation, globalisation, the rise of China, environmental limits, and an increasing policy focus on inequality.

And anything else ministers, citizens, or bureaucrats happen to find “relevant” at the time?  It doesn’t sound like much of a basis for rigorous, detached, free and frank advice.

One of the many problems is that there is little robust basis for aggregating all these issues, concerns and indicators.   But that doesn’t stop The Treasury, who have apparently decided to use the OECD’s Better Life Index, another theory-free ad hoc summary measure (on which New Zealand happens to score well).

Conveniently perhaps, the OECD index doesn’t even include either GDP per capita or related productivity measures (although there are some other income measures).   For some of the variables, it isn’t even clear whether, or why, something counts as good or bad.  The employment rate is in the index, but employment is mostly an input (inputs are costly), not an output –  and yet I presume the OECD counts a high employment rate as “a good thing”.   New Zealand score on ‘years of education’ will presumably lift now that we are going to have free tertiary education, but there is no assurance that the policy will lift average national wellbeing (as distinct from transfering it from one group to another).   Labour market insecurity appears in the index, in a measure in which a country is penalised for having low unemployment benefits relative to market wages –  but what basis is there for the OECD’s implicit judgement that one system is better than the other in the longer-term?  The share of expenditure devoted to housing also appears in the index: it will tend to be higher in a country with larger houses, but what basis is there for any sort of welfare interpretation of the numbers.   (And, on the other hand, the share of the native-born population living abroad –  a reasonable relative-welfare indicator, taken from revealed preferences – doesn’t appear in the index at all.)

These indices, and the Treasury’s Living Standards Framework, often seem to be developed in reaction to some sort of caricatured view that GDP (even per capita GDP) is everything.   But the problem with the caricature is that it is view that no one has ever held.  Every economic policy adviser recognises (for example) that GDP includes the spending/activity to replace depreciated physical capital.  A measure of net domestic product is a little more useful for welfare purposes, and a measure of net national income (distinguishing the income generated that accrues to residents) better still.   Measures of consumption per capita might be better again, if the purpose of economic activity is conceived as supporting consumption over time.   And it is not as if the concepts of externalities, or the depletion or degradation of natural resources, are exactly new phenomena.   And if some government were crazy enough (and powerful enough) to simply set out to maximise GDP per capita, they’d conscript us all, prohibiting retirement, individualised childcare, or even any leisure beyond what the maintenance of productive capacity might require.   It doesn’t happen in free societies (although it came close in wartime).   It is a straw man.  (As incidentally would a similar articulation about GDP per hour worked: if a government were crazy enough to seek to unconditionally maximise that variable they would simply ban all but the most productive people from working at all.)

So the issue about productivity, or GDP per capita, isn’t that the goal of policy has ever been to maximise either.  After almost 70 years of underperformance (productivity growth less than in other countries), one doesn’t have to get into debates about “maximising productivity” to want Treasury to be able to offer good answers about why we are in this situation, and how we might out of it.   Officials and advisers might concentrate on identifying roadblocks –  government policies that impede firms and households making choices they would otherwise take –  the removal of which might result in GDP/productivity outcomes more in line with those in other, apparently more successful, countries.  Of course, each of those interventions needs to be evaluated on its own merits.    There are good reasons to make schooling compulsory, or not have lump sum taxes or whatever, but many regulatory interventions won’t pass any sort of decent test (as, in its day, rules that led to the assembly of TVs didn’t).  I’d argue that our immigration policy doesn’t.

And if I can’t fully put my finger on what I don’t like about the “four capitals approach” it is a sense –  not stated, perhaps not even believed, but implicit nonetheless –  that these are resources of the government, to be marshalled and managed by governments in what they judge to be some sort of “national interest”.   And all too little of a sense that governments more often corrode these so-called capitals than foster them.

And in the New Zealand specific context, a focus on the Living Standards Framework can come to provide cover for the failure to grapple with New Zealand’s long-term economic underperformance and (in this specific context) the failure of The Treasury –  the government’s principal economic advisers –  to be able to offer compelling advice, built on compelling analysis and narrative, for what has gone wrong, and what might be done to fix it.   Perhaps we’ll see some startling new insight on that problem when the Treasury’s Briefing for the Incoming Minister is finally released, but I’m not expecting it – there have been no new ideas tested in working papers or speeches or anything of the sort.  In the paper presented at last week’s Symposium there was more on macroeconomic stabilisation issues (which New Zealand does relatively well) than on productivity, and no obvious policy ideas (on productivity) beyond changing the tax treatment of housing and land use laws (there might be elements of use in that, but no one seriously believes those changes alone would close the 60 per cent gap between, say, productivity levels in New Zealand and those in places like France, Germany, the Netherlands or the United States).

Much of the focus on the Symposium seemed to be on building links between Treasury and the academics.  I’m not sure they got far on the day, although the forum did provide a good opportunity for the academics to remind Treasury that (a) research costs money, (b) research takes time, and (c) the PBRF university ranking and funding scheme strongly discourages academics from doing any research, however well-remunerated, that doesn’t lead to publication to international journals or books published by university presses.

Treasury also used the occasion to launch something called the Community for Policy Research as part of strengthening relationships with researchers working on New Zealand issues.    As part of that, they have released a Research Interests document, a list of research interests which is

“our assessment of where additional research with a New Zealand focus could be useful.  It reflects a number of judgements, including our sense of gaps in the evidence base, where we believe polciy development is being hampered by lack of evidence and emerging medium to long term issues. Often we are looking for research that will help us make a step change, where wider debate will be necessary over the medium to long term”.

Which sounds fine, until one actually turns to the list.

On fiscal policy, for example, there is an item

“Should New Zealand have an Independent Fiscal Council?”

Perhaps it should, perhaps it shouldn’t, but it is explicit Labour and Greens policy that we should.   Presumably the outstanding issues are around the form, and responsibilities, that Council should take?

There are 13 macroeconomic topics –  many of them rather technical (output gap estimation, time-varying NAIRU estimation –  and not a single one of those topics relates to any sort of timeframe beyond the cyclical.    Thus, they are interested in “different approaches to population/immigration projections (eg Bayesian)” but apparently there are no outstanding issues around the longer-term term impact of immigration policy (whether on productivity, or those social and environmental capitals).

In fact, the word “productivity” doesn’t appear at all (or any cognates).  Does Treasury have all the answers already, or have they more or less given up?    The productivity issues seem like classic New Zealand-specific longer-term issues that The Treasury –  principal economic advisers to the government –  really should be looking for answers to, and associated research on.  But, apparently, topics like “What is the relationship between volunteer work, social and human capital?” count as more pressing.

Several people at the symposium took the opportunity to push back in reaction to Treasury’s recent boast that this year it had hired no one with just a straight economics degree.   As one public servant put it, they wouldn’t want to go to a mechanic for brain surgery, and as another former public servant noted, Treasury needs to be really excellent in its economic advice –  and tacking a few short day-release economics courses on to a degree in a quite different subject isn’t really likely to be enough.  One might be less bothered if there was a sense that Treasury’s analysis and advice was consistently excellent, and the only obstacle to first-rate policy was the politicians (of whatever stripe).  That just isn’t so these days.

Finally, it was interesting to observe the numbers of Treasury speakers and of panellists attempting to use Maori phrases, or introductions, or talking about the need to incorporate Maori perspectives into thinking about wellbeing.  As it went on, I started looking round the room trying to spot anyone who might themselves be Maori (noting that there were at least four adult migrants at my table –  of 10  –  alone).  Finally, my curiosity was satisfied when one of the panellists, clearly with the same sort of reaction, asked for a show of hands.  In a room of at least 80 people,  two responded that they identified as Maori. I hope it left the organisers just a little uncomfortable.

I’ve been reasonably critical of Treasury’s work in this (excessively long) post.  But I would commend them on the aspiration behind the occasion, and on going to the effort of openly engaging with a wider group of policy and research people, openly articulating issues they are interested in seeing research on.  There is a place for confidential policy advice and for the free and frank exchange of views between ministers and officials, but our understanding of the issues is only likely to be advanced by open, two way, dialogue and debate at earlier stages of the process.  Some of the challenges New Zealand faces are substantial, and the pool of able, interested and available people isn’t large, or necessarily restricted only to the public service.

 

 

 

OIA: unexpected bouquets and brickbats

I have been critical over the years of the Reserve Bank’s approach to Official Information Act requests.  I made mention of it, in passing, just this morning.   The long-established practice had been to withhold absolutely anything they could conceivably get away with, and to delay as long as possible anything they really had to release.   The presumptions of the Act (well, specific provisions actually), of course, operate in the opposite direction.

In the last couple of weeks I had lodged requests for a couple of pieces I had written while I was still working at the Bank in 2014.   One was the text of a speech, on New Zealand economic history and the evolution of economic policy, to a group of Chinese Communist Party up-and-coming officials, delivered as part an Australia New Zealand School of Government programme (in which they got to hear from John Key, Gerry Brownlee, Iain Rennie, no doubt a few others, and me).     The other was a discussion note I had written on how best to think of New Zealand’s economic exposure to China.    The second request was lodged only late on Monday.    I could not envisage any good (lawful) reason for them to withhold the material, but that often hasn’t stopped the Reserve Bank in the past.  If they released the material at all, I was anticipating a 20 working day wait.

But this afternoon, I received both documents in full.  I was shocked.  I took the opportunity to send a note to the Bank thanking them for the prompt response.  And as I have often been critical here of aspects of the Bank’s handling of various things, including OIA requests, I thought I should take the opportunity to record my appreciation openly.    Who knows what prompted the change, but it is an encouraging sign.  Perhaps the “acting Governor” (a sound caretaker, unlawful as his appointment may be) is making a positive difference?

On the other hand, I’ve usually been pretty openly positive about The Treasury’s approach to OIA requests.  One isn’t always happy with their decisions, but there is a strong sense that they generally do all they can to be as open as possible.    There is the look and feel of an agency that seeks to comply with the spirit of the Act, as well as the letter.

But not when it comes to the Rennie review.   Some time ago, they refused a journalist’s request for the terms of reference for the review.   They also refused to release some of the papers associated with the Rennie review (including drafts of the report) that I had requested some time ago .   In July they told me they wouldn’t release papers because of “advice still under consideration” (even though that is not a statutory ground, and Rennie is neither a minister nor an official, and even though I had not then requested a copy of the final report which had been delivered in April).

But time has moved on, and so early last week I lodged a fresh request.  This time I asked for:

I am requesting copies of :

  • the draft supplied to Treasury on 5 April 2017
  • the report delivered to Treasury on 18 April 2017
  • the version of the report sent out for peer review
  • the completed report incorporating any comments provided by the peer reviewers.
  • copies of comments supplied on the draft paper by peer reviewers
  • file notes of meetings Rennie or assisting Treasury staff had with non-Treasury people in the course of undertaking the review (including the Board of the Reserve Bank).

I am also requesting copies of any advice to the Minister of Finance or his office on the Rennie review, and matters covered in it, since 18 April 2017.

And this afternoon I got a response from The Treasury, refusing to release any of this material.

Their justification?

This is necessary to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials.

That is, in principle, a valid statutory ground (unless public interest considerations trump it).  But…..Iain Rennie is not an official or a Minister, but was rather a contractor to The Treasury.

But what about the advice to the Minister himself (or his office)?  Well, according to Treasury,  “Mr Rennie’s report has not been tendered to the Minister of Finance, nor has any other Treasury advice on this issue since the report was commissioned.”

So, the report which was requested by the Minister of Finance himself (he told a journalist so in April which is how news of the review became public), which was finalised more than six months ago, has not been sent to the Minister of Finance at all, and nor has any advice from Treasury been sent.  Since oral briefings are covered by the Official Information Act, we must then assume that a notoriously hands-on minister has no idea what is in a report he requested, and which was finished six months ago.   Perhaps, but it seems unlikely.

Treasury tries to claim in its letter “that this work was commissioned to inform Treasury’s post-election advice”.  But that certainly wasn’t the impression the Minister of Finance was giving in April, when this was presented as his own initiative.   But even if that story is true, it still isn’t grounds for withholding a six months old consultant’s report paid for with public money.  It is official information, and releasing the report is not the same –  at all –  as releasing Treasury’s views on it.

There were three external reviewers of the draft report.  Comments were sought from:

  • Charles Goodhart, an academic and former Bank of England official and MPC member,
  • Don Kohn, former vice-chair of the Fed, and currently a member of the Bank of England’s Financial Policy Committee, and
  • David Archer, former Assistant Governor of the Reserve Bank and now a senior official at the Bank for International Settlements.

The comments of the first two are withheld on the standard ground “to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials”, but neither Goodhart nor Kohn is either an official (of New Zealand or –  in Goodhart’s case of anywhere) or a Minister, and these are comments on a draft report I’m seeking, not something ever likely to get as far as the Minister of Finance.

Archer’s comments are withheld on different grounds:

  • “the making available of that information would be likely to prejudice the entrusting of information to the Government of New Zealand on the basis of confidence by the Government of any other country or any agency of such a Governoment or by an international organisation”

But there is no indication that Archer was commenting on behalf of an international organisation, but rather was offering personal views (rather than confidential “information”).   It isn’t, say, confidential information about the business of, say, the BIS.

  • “to protect information which is subject to an obligation of confidence where the making available of the information would likely prejudice the supply of similar information or information from the same source and it is in the public interest that such information should continue to be supplied”.

There is no evidence that (a) Archer’s comments, made presumably in a personal capacity, were subject to an “obligation of confidence”, or (b) that publishing his comments on a draft report would make him less likely to provide such comments (not clearly “information” in any case) on future Treasury consultants’ reports on Reserve Bank issues.      And nor is there any reason why this clause should apply any more to Archer’s comments than to those of Goodhart and Kohn –  for which it has not been invoked.

It is all (a) incredibly obstructive and (b) not remotely convincing.  I will be appealing The Treasury’s decision to the Ombudsman.  Perhaps some journalist might consider asking Steven Joyce if it is really true that he has no idea what is in the Rennie report that he asked for eight months ago, which was completed six months ago, and which is held by his own department.  Even if that is true, it is not good grounds under the Act for withholding a consultant’s report, let alone drafts of it.

So, well done Reserve Bank.  And it is a shame about The Treasury.