Reserve Bank of New Zealand (Economic Objective) Amendment Bill

December 13, 2023December 13, 2023 Michael Reddell Monetary policy, Reserve Bank Act reforms

I guess it will be an Act by the end of the day, but for now the short bill giving effect to a return to a single statutory objective for monetary policy is here. Yesterday’s parliamentary debate (first and second reading) is here, here, and here.

The heart of the bill is this clause

Note that this does not return things to as they were in 2018, keeping Labour’s addition of “over the medium term”. My own view is that references to time horizons are better kept for the Remit, which can be written in a more context-dependent way (sometimes it might be really important to get back to “price stability” – which isn’t 1-3% annual inflation anyway – really rather quickly. For example, after three years of inflation well above target?) With a bit more time, it might have been a good opportunity to simplify the 1989 bit of the wording as well. Simply “maintaining stability in the general level of prices” would be an improvement. But those are second and third order issues about this symbolic legislative change.

My bigger concern is that the legislation is not a complement to substance but a substitute for it. There is nothing wrong at all with symbolic steps, but if done in isolation they quickly come to seem like cosmetic distractions.

Take for example the Minister’s first reading speech

The bill is certainly a symbolic statement, but on its own it is nothing more than that. What is more, the Minister really should know that. There is nothing in the amendment that will, on its own, be “remedying one of the greatest stains of the outgoing Government and that is the stain of the cost of living crisis”. And there is nothing else even hinted at in the speeches from either the Minister or her associate (Seymour).

There has been a massive monetary policy failure in New Zealand in the last four years by the Reserve Bank of New Zealand (similar mistakes were made in many other advanced countries, but each operationally-independent central bank is responsible for its own country’s inflation rates). But, in part because there is a wide range of statutory legislative goals across countries and most of them ended up making much the same (really serious and costly) mistakes, it simply is not plausible to believe that things would have been materially different had that new “economic objective” been in place rather than the one that was actually on the statute books. There is no evidence at all to suggest that the monetary policy easing in 2020, the huge highly-risk LSAP punt, or the sluggish tightening in 2021 and early 2022 would have been any different at all, since the Reserve Bank’s own forecasts at the time (2020 and 2021) suggested to them that if anything what they were doing wasn’t really quite enough to keep inflation UP to the target midpoint.

This is all familiar ground but it is inconvenient ground (it appears) to the Minister who seems more interested in the rollicking political theatre of blaming her predecessor for his symbolic statutory amendment than in fixing our decayed and failing central bank. I read her speeches yesterday in both the first and second reading debates and there is no hint there that this statutory amendment is a first step in a process to fix the Bank or even to insist on some effective accountability for those whose decisions visited highly costly inflation and $12 billion of losses to the taxpayer on us. They used to talk of launching an independent review of Covid-era monetary policy. I was never entirely convinced of the case for such a review, and as I noted here recently if it is done the choice of reviewer will probably pre-determine the character of the final report, but it was a fairly consistent line from National. But there is no mention of it in yesterday’s speeches (the speech from the Associate Minister seemed more focused on the inflation of the Roman Empire than in actually fixing New Zealand’s central bank now).

The Minister (and her predecessor as Opposition finance spokesperson) has on several occasions been lied to by the Governor at FEC. The chair of the Board appears to have gotten away with lying to The Treasury, and getting Treasury to run spin for he and his Board have banned experts from serving as external members of the MPC. No external members have made even a single speech on monetary policy and inflation in their almost five years in office. The Board is stacked with underqualified mates of the previous government – a couple appointed despite, at the time, clear conflicts of interest, suggesting that not only the previous Minister but also the Governor and the board chair have at best a hazy sense of high standards in public life. Hardly anything is ever heard from the Governor on inflation – speeches from him on climate change are more common than those on the conduct of monetary policy. The Reserve Bank publishes little research, and is a bloated top-heavy regulation-fond expensive bureaucracy.

Not all of those failings could be fixed overnight even if the new government were so minded. The problem is that there is no sign at all that they are seriously interested in fixing any of them. This from a Minister and Associate Minister who did not support the reappointment of the Governor – a serious step for them to have taken then, but apparently meaning little now. There is no hint also that the Minister is going to reopen the selection process for the two external MPC roles falling vacant early next year. If she simply takes nominees who got through the Orr/Quigley/Board and Board recruitment agency process undertaken earlier this year, under the broad aegis of the previous government’s priorities/views, it is a recipe for things being no better in future. Either the nominees she is presented with will be amiable non-entities happy to be guided by the Governor, or (at best perhaps) people who were willing to keep their heads down and say not a discouraging word through the last four years of central bank failure.

Perhaps I’m being too critical too early? But if the Minister is at all serious about things being done differently in and by the Bank, yesterday’s speeches would have been a great (and easy) opportunity to have signalled something. It also hasn’t been too early for some other ministers to have written letters of expectation to agencies for which they are responsible, making clear the new government’s priorities around those agencies. But there seems to have been nothing from Willis.

Instead we get examples like this of her economic thinking

As economic thinking, the final sentence is a little embarrassing. There is little or no reason to suppose that there is any medium to long relationship (positive or negative) between the inflation rate and the unemployment rate (or “maximum sustainable employment”). One can have highish inflation and (sustainably) low unemployment or one can have low inflation – even price stability – and (sustainably) low unemployment. The record – across countries and across time – is pretty clear. But inflation – and especially unexpected bursts of inflation – is something the public dislikes, and for good reason. Getting and keeping sustainably low average rates of unemployment should be an important concern for governments, but Reserve Bank monetary policy has little or nothing to do with such outcomes.

Unfortunately there is quite a lot of muddled thinking around monetary policy and the expression of objectives. I could only agree with this line in the Minister’s first reading speech

Flexible inflation targeting, whereby the MPC has regard to the impact of monetary policy on the broader economy when determining how quickly to return inflation to target has been central to New Zealand’s successful inflation targeting regime for many years, and was the case prior to Robertson’s dual mandate hitting the books, regardless of whether there is a single or dual mandate, that remains the case.

and in fact giving expression to that generally shared understanding was one of the motivations for Labour’s legislative change in 2018. But, of course, the issue was never primarily about demand shocks and forecasting errors – like those of the last few years – that delivered us high inflation and unsustainably low inflation at the same time. Failures on the scale we’ve seen recently were simply never envisaged (and should never have happened). By contrast, supply shocks – that tend to drive headline inflation one way and unemployment the other way – aren’t infrequent at all and were always actively envisaged in the design and modification of Policy Targets Agreements over they years. In the face of such shocks it has always been the shared, usually expressed, understanding – and this dates all the way back to the oil shock in 1990 just a few months into the life of the 1990 Act – that faced with such shocks it would generally not be sensible or prudent to attempt to counter the direct price effects immediately, and that to do so would involve unnecessary and undesirable employment and output costs. There isn’t much of a sense of this in the Minister’s speeches – perhaps understandably as it veers to the geeky – but it is important nonetheless.

Finally, approaching the end of this post I wanted to offer a few thoughts on the Treasury’s Regulatory Impact Statement on the removal of the “dual mandate” from the Reserve Bank Act. At five pages long it is perhaps the best advert for the government’s decision not to require RISs for early pieces of legislation that are simply repeals. It leaves readers no better informed on the issues, offers no serious analysis, and actually muddies the ground in places. On the latter, for example, it correctly notes that Reserve Bank and Treasury view that the different mandate made no difference to policymaking over 2019 to 2023 (when the dominant shocks were understood to be demand shocks, likely to affect core inflation and unemployment in the same direction) but simply never engages on supply shocks (see previous paragraphs) or the flexibility long built into both central banking practice and the succession of Policy Targets Agreements. Since the political debate has further muddied this water – reinforced by half-baked media lines (of the sort I heard on RNZ this morning – it might be desirable for the new MPC Remit to make some of this stuff explicitly clear. There are short-term tradeoffs, but no long-term ones.

The RIS also repeats and endorses – and perhaps fed the Minister – the line that price stability is a “prerequisite” for achieving other objectives. It simply isn’t, and Treasury really should know better than to indulge what is not much more than misleading political rhetoric.

In RIS it is customary – perhaps even required – to look at three different ways of responding to the identified “policy problem”. The artificiality of this was never better displayed than in the Treasury RIS, in which they treat as a serious option using the reserve powers in the Act allowing the Minister of Finance to override temporarily the existing statutory economic objective, rather than amending the Act. Unsurprisingly, they recommend against using these never-used (dusted off for refreshing the memory every decade or so), which should never have been considered as an option in the first place – as not only would the market signalling have been terrible, but it would have gone quite against the direction the government was seeking (a permanent change).

Treasury ended up opposing the government’s legislative change, preferring to change just the MPC Remit (which the Minister can do pretty much any time he or she likes). Their only argument for this – eg they don’t seem to invoke any argument about reminding readers of statute of the wider context, or even that it is the Remit not the Act that is supposed to guide the MPC – seem to be a preference not to amend the Act (as if not amending the Act was a good in and of itself). They say “Treasury puts significant weight on the value of a stable and enduring legislative regime for the Reserve Bank” which (a) is weird coming immediately on the back of several years of extensive legislative overhaul around the Reserve Bank, (b) could be as easily seen as an argument for the government’s legislative amendment, which is closer to the “stable and enduring” legislative model that prevailed for almost 30 years, and (c) assumes recent reforms generally got things right, when there are clearly significant problems with the way the Reserve Bank Act reforms were done (including but not limited to making the underqualified board, which has no expertise in monetary policy, primarily responsible for holding the MPC to account and in appointing MPC members and the Governor).

Finally, Treasury seeks to invoke “international best practice” in defence of retaining Labour’s wording. In respect of legislative (or similar wording) they are simply misleading. All four of the most important advanced country central banks – Fed, ECB, Bank of Japan, and Bank of England – have a single statutory objective, even if often accompanied by wording designed to articulate something of why price stability matters. It is certainly true that some central banks have more explicit “dual mandate” wording and others talk openly about the interactions between inflation and employment, sometimes in “dual mandate” terms, but there is nothing out of step with the legislative amendment the government is putting through today. The Treasury explicitly tries to cite the US in its support, but while the Fed likes to talk “dual mandate” rhetoric, its actual statutory objective for monetary policy is (a) a single objective, and (b) one with very outdated – legacy of the 1970s wording.

“So as to” are the envisaged benefits of pursuing and achieving the specified single objective.

It was simply far from being Treasury at its finest, and if time was short there was no obstacle to writing a much better short paper.

As for the government it is early days, but the early signs are not great around the Reserve Bank. I’m quite prepared to believe the new government won’t accommodate more institutional bloat, and that their appointments will be no worse than those of their predecessors, but for now there are no signs leading a reasonable independent observer to expect anything much better about fixing the Reserve Bank (or our diminished Treasury for that matter).

UPDATE:

This is from a speech by the minister at the committee stage

The problem is that she contradicts herself. There are forms of inflation targeting where accountability might be really easy – any time CPI inflation is outside the target range, sack the Governor – but everyone has been agreed for 30+ years that that would not make sense and would generally produce inferior economic outcomes. In fact, the Minister herself agree because she is at pains to point out that the flexible form of inflation targeting (operated for the first 30 years) will be retained. In such a system it is not easy or mechanical to be able to exact accountability. These things -as so often in life – require judgement, and a willingness of ministers to exercise such judgement and, on rare occasions, act accordingly. Grant Robertson failure to do anything – and his decision to reappoint Orr and the 3 externals – is what made him party to their (central bank) failure.

Wellington

December 11, 2023December 12, 2023 Michael Reddell Wellington

Yesterday’s Sunday Star-Times had an article built around some comments from me and from Infometrics economist Brad Olsen on the economic prospects of Wellington. The headline captured the gist of my contribution, “Sorry, Wellington, things could get worse and they probably will”.

The question the journalist, Kevin Norquay, had posed to me a week ago was about the impact of the government wanting to cut numbers of public servants and consultants, all in the context of a CBD where working-from-home seemed to be taking its toll [perhaps, although it is quite hard to park in The Terrace carpark at even 9am these days] and the Wellington city council was struggling to get enough revenue to maintain basic infrastructure.

My starting point is that Wellington is not in a good way and that, absent serious steps to fix itself, slimming down the public sector (if sustained) only worsens the plight of a city that few private businesses not dependent in one way or another on the government (or its subsidies, see the film sector) now choose to base themselves in. After all, as alternatives there was the big city (Auckland), the much-cheaper similar-sized city (Christchurch) or, increasingly, Hamilton or Tauranga.

Olsen, who is reported to be a member of the Wellington Chamber of Commerce, has a more optimistic take

Perhaps he had in mind the top of Mt Everest as in inhospitable place that few get to, and none stay longer than they really need to, where nothing grows, and most humans who make it need additional oxygen?

I’m not sure quite which of my comments Olsen was shown, but his comments seem quite cyclical in nature. And by most standards the last few years have been good for Wellington – it doesn’t export much and it does depend on the fiscal spigots being turned on. And that is more or less the story of the last few years.

But my points were set more in the context of longer-term decline. For example, this chart showing how GDP per capita in Wellington (regional council area) compares with that in the country as a whole, from a post earlier this year.

The trend decline is, large, clear and (as yet) unbroken. Sure, average GDP per capita here is still higher than the national average, but that seems to be largely because Wellington is a big head office town of a entity that isn’t subject to any sort of market test. Much of central government is complex and needs specialist support services etc, and those sort of roles will naturally pay above average. In principle, GDP is measuring value-added, but in a central government function that is largely just what the government pays people (there is no market test for the outputs). The externally-facing private market has increasingly gravitated away from Wellington.

Which isn’t that surprising when the climate is blah at best (yes, temperate sounds good, but that just means really hot days in summer are very rare. Oh, and the wind…..), house prices are punishingly high, almost everywhere you turn there are water leaks, while the councils seem more interested in really expensive vanity or ideological projects (be it the Wellington Town Hall, a heavily-subsidised convention centre, or the endless cyclelways) than in doing any of the basics well. Did I mention that the regional council is keen to stop new greenfields development of housing, and the local authorities mostly seem very much in tune with that sort of approach. Even by New Zealand standards Wellington is a long way from anywhere (90 minutes from Christchurch gets you to Mt Hutt, but 90 minutes from Wellington gets you to Masterton and Levin. 10 minutes from Tauranga gets you to the Mt Maunganui beaches). Oh, and latterly it seems we have a public drunkard as mayor of the largest local government unit in the region.

Wellington once had one big thing going for it: a large, deep, and safe harbour. That mattered a lot in the 19th century. It was still a significant asset in much of the 20th. I looked up an old New Zealand Official Yearbook on my shelf and found this overseas trade data. This was the import data by port

and this is exports (note the comment in the previous picture re exports via Tauranga)

Twenty years on Wellington was still the second largest port for foreign trade. But that was then. These days, by contrast, you struggle to spot Wellington port data (and at that the port doesn’t cover its cost of capital, at cost to ratepayers).

Of course, there are services exports these days as well. Wellington is well-known for the heavily taxpayer-subsidised film and related industry, but not so much for viable private businesses making it on their own (just recently the council’s “economic development” arm was clamouring for subsidies for gaming firms lest, horror of horrors, those firms relocate to Christchurch, where the climate is better and housing much cheaper).

In my comments to the journalist I noted that Wellington will always be a bit of a magnet for young graduates who want some years under their belt working for central government. But how many will really want to stay when housing is impossibly expensive, rates bills are spiralling. And these days, Wellington is so expensive that not even the presence of government and the much-vaunted Cuba St generates enough of an inflow of university students to sustain the sort of courses you might think natural in a capital-city university (the way it liked to market itself). When I was young all but one of the our economics honours class moved into public sector jobs. These days – the need for expertise being no less – Victoria can no longer sustain a proper economics honours programme.

The SST article ended with these comments from me

I guess there is nothing very wrong with being a Canberra, but that isn’t the story local government figures and other worthies like to tell themselves. They like to tell themselves tales of a vibrant private sector, a tech hub etc etc, but the data don’t really support their story. And why would it? Wellington isn’t a big city, not even by New Zealand standards. It is remote and expensive and ill-governed.

It could do things differently to give it at least a bit of a better chance. Its local government could, for example, commit to making housing abundant and affordable – cheap houses, cheap rents. That doesn’t mean building them themselves, or deciding where they should go, or what they should look like, but simply freeing up the land – all the land – and making it easy to build. Instead we have ideologues of intensification (NB, there is nothing wrong with intensification if that is what individual purchasers want), even though intensification as goal has simply never worked to collapse, and keep low, house and rent prices anywhere.

The Council could move to strip out the savage rates differential that acts as a hefty tax on private businesses operating here. No doubt those costs are passed through – in one form or another often back to government, the captive industry – but, as with corporate income taxes generally, when you tax heavily something that is mobile (and most outward-oriented services sector businesses have choice) you get fewer of them.

Perhaps there was some golden age of Wellington (100 or more years ago) when government was relatively small, direct subsidies few, and Wellington wasn’t that much smaller than Auckland. But those days are a very long time ago now, and the recent sugar rush (lots more public servants under the recent Labour government) don’t disguise the fact of Wellington’s decline.

Sorry, Wellington, things could get worse and they probably will. And that is even though the political tides will turn again and before too many years pass perhaps there’ll be another resurgent wave of public servants and the consultancies that hang off government agencies. But it is unlikely to mask the decline of Wellington as anything other than a centre of government.

Really?

December 6, 2023December 6, 2023 Michael Reddell Monetary policy

It doesn’t seem to have been the best week for the Reserve Bank since the release of the latest Monetary Policy Statement last Wednesday. Of course, one could make a pretty compelling case that in the Orr years few weeks have been, and especially not any weeks when Bank figures actually say or do anything. But for now we’ll focus just on the last week.

On the one hand there was some pretty clear pandering by the Governor to the instincts and preferences of the new government. There is nothing like losing $12 billion dollars of taxpayers’ money and delivering several successive years of core inflation well above target – with no contrition on either count – to suggest past loss of focus and energy, but we learned from the Herald that

The PM said that during his conversations with Orr on Tuesday he was pleased to hear the governor’s “obsession” with lowering inflation.

If that was really Orr’s word – and it isn’t entirely clear from the story whether it was his word or the PM’s take – and he really meant it (as distinct from just indulging in loose rhetorical pandering) it would be more than a little concerning, when central bankers (New Zealand and abroad) have been at pains for decades to explain that having an inflation targeting regime does not mean they are (in their own words) “inflation nutters”. There are many many examples, in formal literature and less, from here and abroad, but as just one local example this article from Orr’s time as the Bank’s chief economist back in the (allegedly hardline, but always actually quite flexible) Brash years. I don’t think Orr was actually serious about the “obsessive” bit, because when he was asked about inflation in the MPS press conference he was at pains to explain – sensibly – that if there were forecasting errors around how quickly inflation comes down they simply couldn’t be sensibly corrected immediately (lags and all that). But it speaks of a Governor who is simply not a nuanced and serious communicator (consistent with the near-complete absence of speeches from him on monetary policy, through a period of serious policy failures).

In his remarks last week Orr also seemed to be getting on side with the government’s stated intention of legislating to restore the statutory goal for monetary policy to price stability, noting that the Bank’s own work on the Remit review had suggested a more prominent place for the price stability goal. That was all fine, and Orr has been pretty clear all along that Labour’s change to the goal in 2018 had not made any material difference to monetary policy decisions in the last few years, and the Bank – under successive Governors (and chief economists) – has long championed its (internationally standard) flexible inflation targeting approach.

But then the current chief economist was let loose and in remarks to Newsroom is reported under this headline

as having said

which is an astonishingly loose comment from someone paid hundreds of thousands of dollars a year and holding a statutory office as an MPC member. It is no doubt true that one could set up a highly-simplified model in which some arbitrarily chosen reaction function to some specific types of shocks might end up with (temporarily) higher unemployment under one specification of the statutory target than the current one. But….not only would there be other shocks in which unemployment would be (temporarily) lower (when both inflation and unemployment are low), but there is no sign of any work or thought on whether such shocks are at all frequent, or how they were actually dealt with under the statutory goal in place here for the best part of 30 years. And, notwithstanding Conway’s comment, the monetary policy decisions that matter are almost never easy, precisely because they are about uncertain futures. Take the last time core inflation was well away from the target midpoint – in 2008 – and check how many times the Reserve Bank was tightening then. It wasn’t, of course, and was right not to have done so (whatever mistakes it (we) might have made in the previous couple of years). It might be interesting for someone to OIA the Bank and ask what evidence they have for Conway’s claim that the planned legislative amendment will result – even “at the margins” – in higher unemployment.

But all that was general high level policy frameworks stuff. What about actual policy and outlook.

In the MPS – which the Governor described as “a wonderful wise document” – the Reserve Bank again revised upwards their future track for the OCR, lifting both the peak of the track (to the point where they reckon there is a better than even chance of another OCR increase next year) and increasing quite materially the extent to which they expect interest rates will have to stay high. The further out projections have been lifted by about 50 basis points, coming on the back of similar increases at the previous MPS.

But here is the most immediate problem (from a tweet last week).

Much of the media comment focuses on annual rates of inflation. The Reserve Bank projections have annual inflation finally dropping into the target 1 to 3 per cent range – although still a considerable way from the 2 per cent midpoint the Bank is required to focus on – for the year to September 2024. Even that isn’t far away now, but in thinking about policy it is typically more useful to be looking at the projections for quarterly percentage changes in the CPI.

There is some seasonality in the CPI (September quarters are typically much higher and the other quarters a bit lower than average). Unfortunately the Reserve Bank does not publish its inflation forecasts in seasonally adjusted terms, but on this occasion eyeballing does fine. You can see not only that ever quarter in 2024 has quarterly inflation at about half what it was for 2023, and as early as the June quarter of next year (mostly measured as at mid May, so only five months away) the headline quarterly CPI increase is projected to be already 0.5 per cent. By the December quarter of next year, the quarterly CPI increase is explicitly consistent with annual inflation of 2 per cent.

And how long does monetary policy take to have its largest effects? Views differ but the standard Reserve Bank line – the reason why the Governor suggested that if they are wrong about September 2024 they can’t sensibly immediately fix things – is something like 18 months. Even if it is as short as 12 months, those inflation outcomes next year in the Bank’s projection are the result of the current OCR, not a possible increase next year. And those outcomes are entirely consistent, on a quarterly basis by next November at the latest, with the midpoint of the inflation target range.

So why would you publish projections now showing a further OCR increase next year, and no cuts below the current 5.5 per cent until mid 2025 when (a) your best projections (presumably) are that quarterly inflation will be at target next year, and (b) your routinely repeated view is that monetary policy takes perhaps 18 months to have its main effect on inflation? If anything, that looks like a recipe for keeping the unemployment rate – not expected to peak, at above 5 per cent until mid 2025 – a bit higher rhan otherwise “at the margin”.

One possibility was that it was all just about “jawboning”. In the MPC’s view markets were getting a bit over-enthusiastic looking for the first rate cut so perhaps the track was pushed up and out a bit to send a message (and yes, late messaging changes to interest rate tracks do happen). But…..even if that had been the case, why wouldn’t you also have pushed up the inflation track? After all, the Reserve Bank’s inflation projections (see chart above) show a really sharp collapse in quarterly inflation rates, starting right about now.

But two members of the MPC have been sent out to assure us, via different media outlets, that no, the Reserve Bank was dead serious, and it was not (in a Post article reporting comments from Conway) “talking tough for effect”, or (in a Herald interview with the Deputy Governor) that there were no games going on and “our messages are genuine”.

If genuine, then incoherent. If inflation is doing anything like what the MPC’s own published inflation projections are suggesting (ie very quickly now getting back to target), there is no credible case for keeping the OCR well above (assumed) neutral for the indefinite future, and not cutting at all until mid 2025.

(To be clear, I am not and never have been a fan of published central bank interest rate projections, or any medium-term central bank forecasts – the state of knowledge is so limited that anything is more about messaging and game playing than any real information – but it is the MPC that chooses what it publishes.)

The story really doesn’t add up. Nor is it particularly compelling to suddenly start playing up fiscal pressures on demand (nothing having changed on the expansionary side around fiscal policy settings since the May Budget, and the Governor repeatedly played down demand effects in May and August – when it suited the government of the day for him to have done so). One could say something about immigration pressure (when the huge surge in net non-citizen arrivals has been evident for many months) altho the near-term estimates of the inflow have been increased.

But that big shock – the additional net arrivals – has already happened (quarterly this year), and yet the MPC tells us the think the inflation rate is just about to collapse, on current monetary settings.

Up to this point I have not taken a view on whether the Reserve Bank’s inflation forecasts are likely, just highlighting the tension between what are really quite rosy inflation projections, and that OCR forecast track – and the rhetoric- which is anything but.

The Reserve Bank has also been at pains to make the (obvious) point that they have to set monetary policy in the light of the New Zealand inflation outlook and that whatever is going on in other countries is not necessarily a great guide to what will be required in New Zealand. Which is all true, but…..much of what has gone on around inflation in the last three years has been fairly common to a whole bunch of advanced countries. There were, of course, the largely common supply shocks – ups and downs of oil and freight prices etc – but more importantly excess demand pressures, and extremely stretched labour markets, also became apparent in many countries. And if our fiscal policy looks to have been a bit more expansionary than in most, the biggest demand effects of that seem set to have been in 2022 and 2023 rather than beyond. The surge in immigration has certainly been huge – and my standard model for a decade has emphasised the positive net short-term demand effects from migration but (a) similar things have been seen in Australia and Canada, and to a lesser extent in countries like the UK, and (b) the Bank’s forecast assume quite a sharp slowing (annual net immigration next year is forecast at half the rate of this year.

In a post a few weeks ago I highlighted that on IMF estimates New Zealand had had the biggest excess demand (positive output gap) problem of pretty much any advanced country. If so, that would be a reason for caution, why inflation might be tougher to beat here than elsewhere (and it is true that our OCR is only around those of other countries, whereas in most past cycles it has had to go higher). But the OECD’s recent forecasts, out last week, suggest a picture that has New Zealand’s experience closer to the pack for this year and next.

What has happened then to (core) inflation in other advanced economies?

There are positive stories (US and euro area getting a fair number of headlines)

Each of those current annual inflation rates are materially below New Zealand, and the quarterly/monthly data are often more favourable.

In the Nordics, perhaps a mixed picture

but even then if one looks to the Norges Bank’s core indicators things seem to be heading in the right direction.

And even in the central European countries there has been a big reduction in core inflation (with a long way to go)

None of this is any guarantee that any of these countries will get to 2 per cent quickly, but the direction seems pretty clear, and it isn’t really obvious why it would suddenly become so much harder to cover the last mile. Nor, thus, is it really apparent why things will prove so much different here – when the RB itself tells us they think inflation is just about to collapse. It wasn’t as if there was any serious sustained analysis in the MPS itself to explain a) why the Bank expects inflation is on the brink of collapsing, or b) why they are really reluctant to believe their own numbers. Sure, the Governor was heard to mutter things about inflation expectations – even, bizarrely, suggesting that 10 year ahead numbers were some sort of personal blow, when we know the Governor will be gone in 4.25 years at most – but the best predictor now would have to be that if headline and core inflation fall away sharply, as the Bank tells us it expects, survey measures of inflation expectations will follow.

The Bank was in a slightly awkward situation last week, as neither they nor anyone else yet had (or has) a good sense of what the new government’s fiscal policy will mean (fiscal impulses etc) but that is no excuse for such an unconvincing set of stories on the data and evidence they do have. And of course now they have gone for the summer, with no speeches, no serious supporting analysis, just those strange plaintive lines from Messrs Conway and Hawkesby “no really, we are serious…..we really think inflation is to fall like a stone next year and yet we really think the OCR will have to stay this high or higher for the next 18 months”. It reflects poorly on the Bank, and should be just another set of evidence around the weaknesses of the Bank that one can only hope Nicola Willis will in time do something about.

Government net debt: how does NZ compare?

December 2, 2023December 2, 2023 Michael Reddell Fiscal policy

In my post yesterday on the new OECD Economic Outlook fiscal numbers I included this chart

Even if you leave off the last two observations (OECD projections based on current – Labour government – fiscal policy) recent trends have hardly been something to take any comfort in. But at least we were still a bit less indebted than the median OECD country. But as I also noted in passing, the big OECD countries mostly were a lot more indebted than most of the rest.

I was talking this morning to my son – yes, a geeky economist-in-waiting- about the German constitutional “debt brake”. The great and the good in much of the rest of the world have been critical of this provision since it was put in place in 2009 – for the FT editorial view recently see here – and just recently a constitutional court ruling has created tensions that apparently may threaten to bring the government down. The rule stops German governments running material structural fiscal deficits, except in an emergency (Covid was, appropriately, treated as one), which I’ve long thought should be the benchmark fiscal rule our government should work to (yes, formally operationalising it is a challenge, given uncertainties about output gaps etc, but in principle a rule of that sort is a useful discipline).

The cynic in me has sometimes wondered whether other people disapproved of the rule because it showed up their own countries’ fiscal fecklessness. Here is a chart showing net general government liabilities for the group of large OECD countries.

Germany’s public debt is not extraordinarily low in absolute terms – just a bit higher than New Zealand’s at present – but it is this only one of the large OECD countries to have kept the level of public debt (a) fairly low, and b) stable this century. Were I a German voter I would look favourably on that sort of record. Remember that such “brakes” do not stop governments choosing to spend more, they just require them to front up to the voters with additional tax demands now.

The group of large OECD countries is different. Here is another chart with the OECD countries for which there is data (not the Latin American ones,Turkey or Iceland) grouped as large (as above), medium, and small (population of about 10 million or less), and compared to New Zealand (also in the “small” grouping).

A couple of things caught my eye. First, when the comprehensive data start (1995) our debt was a bit higher than the medians for any of these groupings. 1995 isn’t really that long ago. Second, that group of large countries really is different. It isn’t that there aren’t other highly indebted countries – Greece is in the “small” grouping – but the small and mid-sized countries have typically run much lower (and more stable) public debt ratios than the large countries. And that isn’t because of some threat to the ability to borrow: both Japan and Switzerland are big net external surplus countries, and Japan has very large debt (and deficits) and Switzerland has net general government financial assets. it is, by and large, simply a series of political choices.

Third, all the debt ratios rose in 2020, through some combination of GDP taking a hit (lockdowns etc) and more spending being judged necessary appropriate. What makes New Zealand unusual is that our debt ratio has kept on rising even after the economy had recovered, Covid spending had ended, (and surprise inflation has reduced somewhat the ratio of debt to (inflating) nominal GDP).

And finally, of course, the convergence at the end of the chart. We used to run lower debt than the typical OECD small and medium-sized country – although we were never (not even in 2008, when 10 OECD countries had lower net debt) anywhere near the least indebted-country. But now we look pretty much like the typical OECD country, once one leaves out the feckless few (the big countries minus Germany plus Greece). If your inclinations are more leftist than mine you might think that is just fine – where I think it is regrettable – but in a country where much political and economic coverage is still focused on the US and the UK – it is a reminder that there isn’t now vast unexploited capacity to borrow, just to make us like some “normal” advanced country, rather than one characterised by Cullen/English alleged “underborrowing”.

And if in some senses we are just another small (underperforming) advanced economy, we are also one more exposed to natural disasters and the associated fiscal risks than most (Iceland is another, but not in this particular dataset).

The fiscal situation: some comparisons using OECD numbers

December 1, 2023December 1, 2023 Michael Reddell Fiscal policy, OECD

Before the election I ran several posts here trying to look at New Zealand’s fiscal position – deficits and debt – by comparison with other advanced countries. The problem with doing so was that the IMF and OECD only come out with their comparable numbers/tables every six months, although the IMF Article IV report released in September did have some updated New Zealand numbers in IMF format.

The IMF Fiscal Monitor came out in early October and I did a quick post the day before the election using those numbers across the full set of advanced economies. Those comparisons, using cyclically-adjusted primary balance estimates, showed New Zealand in a pretty poor light.

The OECD published its latest Economic Outlook a day or two ago, and with it a full database. Nothing much fiscally will have happened in New Zealand between when the IMF and OECD numbers were finalised (the new government’s policy programme released last Friday won’t have been incorporated), so these are probably the last read on fiscal policy and fiscal imbalances based on the Labour government’s policies.

(Unfortunately, the Treasury HYEFU may yet be something of a mixed bag in what it tells us, as it isn’t clear how much of the new government’s policies will have reached a point where estimated effects can be included in the Treasury numbers, which might well being finalised in a week or so from now.)

I downloaded several series. My preference has been to focus on the general government primary balance, as a per cent of GDP, whether headline or cyclically-adjusted numbers (the latter are generally preferred in principle but……a lot turns on output gap estimates).

Here is the headline primary balance series, shown by comparison with that for the median OECD country

We (a) used to run primary surpluses and no longer do, and (b) used to have a more favourable fiscal balance than the median OECD country, but no longer do. Things were heading in that direction even before Covid, and the picture still holds now and (in the projections for the next year or two) now that Covid fiscal pressures are a thing of the past. But….the gap between us and the median OECD country isn’t very large.

Here are the same two series on a cyclically-adjusted basis, where the gap – NZ worse than the median OECD country – is larger (and where the median OECD country has much the same balance as the average of the previous 20 years).

As something of a memo item, here is another fiscal balance measure. Net lending is a measure of the gap between government saving and government investment flows. The picture isn’t too different from the first chart above.

What about debt? The OECD measure is (general government) net financial liabilities

We used to have a lot less net debt than the median OECD country but that gap has closed considerably in the last five years, and on pre-election policies was on track to close quite a bit more in the next couple of years. Note (a point clear in earlier posts) that the median other advanced economy has not increased debt as a per cent of GDP since just prior to Covid. That is a stark difference to New Zealand.

(Incidentally It isn’t true of the OECD wastrel big countries. Here is the feel-better comparison between them and New Zealand

I set out to do this post mostly for completeness, but in doing so it also became clear how different the IMF and OECD numbers are for New Zealand’s cyclically-adjusted deficit measures. I highlighted pre-election that on the IMF’s numbers our cyclically-adjusted primary deficit for 2024 was the third largest in the group of advanced economies. As you can see from the second chart above, the OECD thinks our deficit this year and next, on current policies, will be larger than that of the median OECD country. But we aren’t anything like third worst. perhaps 10th worst (out of 30 or so countries). That isn’t great, but it is rather less headline-grabbing than the IMF numbers had suggested.

What accounts for the difference? Fiscal policy hasn’t changed.

But there are quite different views how much any headline fiscal deficit needs to be adjusted to account simply for the state of the cycle. In other words, the two international agencies have widely divergent views on the output gap (calender year numbers)

Taking last year (2022) as a starting point both the IMF and the Reserve Bank see the New Zealand economy as having been hugely overheated, with positive output gaps of almost 3 per cent of GDP. By contrast, the OECD’s 1 per cent output gap represents only a modest degree of overheating. For this year, the OECD thinks that across the year as a whole there has been no excess demand, whereas the IMF thinks the economy has still been badly overheated (the Reserve Bank is somewhere in the middle, and I’d noted the contrast between their view and the IMF’s in a post a month or so ago).

For next year – all essentially on current policy as the Reserve Bank’s endogenous monetary policy projections don’t have the OCR changing materially – the differences are equally large, but this time the OECD number is between those of the IMF and the Reserve Bank. The IMF reckoned the economy would still on average be moderately overheated next year, while both the Bank and the OECD see a lot of disinflationary pressure.

What is interesting is that the three agencies have almost identical unemployment rate numbers. Last year’s numbers are, of course, already hard, but when the IMF did this year’s numbers it had only the June quarter outcomes, and all the 2024 numbers are simply forecasts (calendar year averages)

If I had to punt, my sense would be that “truth” about excess demand/capacity rests somewhere between the OECD and RBNZ numbers for this year, with a lot more uncertainty about next year. Whatever the correct answer our deficits are projected to be worse than those of the median OECD country – and a lot worse than they used to be – but quite how much worse depends on just how stretched the economy has really been. (If it is still materially overstretched the Crown will be pulling in a lot of revenue that simply won’t be sustained when things normalise).

In one of my pre-election posts, I lamented the fact that Treasury does not provide their own fiscal numbers, and own cyclically-adjusted balance estimates, in a format that allows their numbers for New Zealand to be compared to those the international agencies are producing for other countries. Failure to do so makes timely international comparisons hard, and if at times that suited the politicians, one would hope that Treasury itself had a stronger commitment to enabling effective cross-country comparisons (New Zealand data on its own really only allows comparisons across time in New Zealand, a relevant metric but far from being the only one).

Dismissing top public officials

November 30, 2023November 30, 2023 Michael Reddell Adrian Orr, MPC

In both monetary policy and policing there is a case for a considerable degree of operational independence from politicians. The case is (by far) strongest in respect of the Police, where it would be just egregiously unacceptable to have a system in which politicians got to decide who was and wasn’t arrested or charged. It isn’t a foolproof system, because Police Commissioners can have their own biases and preferences, and if there are some (eventual) protections against them arresting people for things that aren’t crimes or on allegations that have no real foundations, or against them simply making up evidence, there are no real protections against them just choosing not to enforce the laws Parliament has written. But constabulary independence is better than the alternative.

The case in respect of monetary policy is technocratic, and views have come and gone on the strength of that case. Operational independence has been the fashion of the last few decades, although in many countries (including New Zealand) there has always been scope for political overrides.

But, whatever your views on the case, in a free society operational independence has to be matched by effective accountability. If you wield great power you must be accountable for its use, and “accountability” here cannot just mean something as feeble as having to publish an Annual Report or front up once in a while at a select committee. The standard form of accountability – really in any job, but certainly in public life – is the threat of losing your job. That is, after all, what happens to politicians: when enough of us disapprove enough of their performance they lose the election, and office.

Both the Police Commissioner and the Reserve Bank Governor can be dismissed, but it is interesting to compare and contrast the statutory provisions.

First, from the Policing Act 2008

I hadn’t known until yesterday (when stories were around as to whether the new Minister of Police would or would not express confidence in the current Commissioner) that the Police Commissioner could be dismissed at will. It isn’t old legislation, and there don’t seem to be any process etc requirements in the Act around potential dismissal. All it seems to take is the signature of the Governor-General acting on advice.

My family used to be keen watchers of the New York police show Blue Bloods and I was always struck then by the fact that the mayor could dismiss the police commissioner at will, a point both (fictional) parties noted fairly often. It had the feel then of something open to abuse (and like all these things, in practice conventions and ex post scrutiny act as restraints) but I guess it recognises that ultimately the law and the enforcement of the law – the coercive powers of the state – are political matters.

To be honest, dismissal at will (with no compensation) seems a rather dangerous provision when it comes to the Commissioner of Police. It might be quite reasonable for a new government to want a different style of policing, and thus a different sort of person to run the Police, but if so they should be prepared to (and required to) state their reasons, and offer some compensation for loss of office. But what we shouldn’t want is a Commissioner of Police pandering to the minister behind the scenes to save his or her job, whether the pander involved things nearer to policy or things nearer to protection for some mate of a government (the latter might seem low risk, but we build institutions against tough times and risks of attempts to pervert the system).

I’m not overly interested in Police or the current Commissioner, and don’t have any strong views on his fate (although it probably isn’t irrelevant that his term only has 16 months to run) but I am interested in the Reserve Bank, and particularly the contrast between the dismissal provisions for the Police Commissioner and those who exercise official power at the Bank, notably the Governor. The statutory provisions in the Reserve Bank legislation are a little more complex.

Take the Governor first

The Governor can be dismissed at any time, but only “for just cause”. That immediately makes it much harder to dismiss a Governor, because it injects the potential for the courts to become involved in reviewing whether any cause cited by a Minister of Finance in dismissing the Governor was a just one. That makes dismissal almost inconceivable as a practical option, except perhaps in a truly egregious case of public disgrace (eg Governor charged with a serious criminal offence), or physical or mental incapability, because with so much power resting in the Bank we could not reasonably have months of market uncertainty while a court process, and appeals, were worked through.

What might constitute a just cause? You’ll notice in section 90(2) there are two sub-clauses. The first (2a) allows the Minister to seek to dismiss the Governor if (and only if) the Bank’s Board has made a recommendation to dismiss (for the current situation, remember that the entire Board was appointed in one go by the previous Labour government, and signed off on the Governor’s reappointment only last year). That particular provision is narrow – relating specifically to relations between the Governor and the Board.

The more general case is 2b, where the Minister can seek to dismiss whether or not the Board agrees. And what does the Act say counts as “just cause”?

It needs to be read together with this, which applies also to other MPC members

It is a long list, but it is really quite restrictive. Against the backdrop of Adrian Orr’s performance, probably only 92(1a) and 25(1a) are likely to be relevant. And, although the lawyers may have a different view, I’ve take these provisions as applying only to things done (or at least apparent) in the Governor’s current term of office. It isn’t obvious that he could be dismissed for the failures (of which there were many) in his first term, which expired in March this year, even if those failures were captured by these specific grounds for dismissal.

What of 92(1a)? I doubt anyone could mount a seriously credible argument that Orr was unable to perform the duties of his office or that he had neglected his duties (his focus on many other things not his responsibility notwithstanding). What of “misconduct”? I reckon actively misleading (or worse) the Finance and Expenditure Committee this year should count – it is a clear breach of Parliament’s own rules – but…..it is probably a stretch against the wording of this particular piece of legislation.

And so that brings us to section 25 in the schedule covering MPC members, including the Governor. On paper, 25(1)(a) sounds most promising. But what are the ‘collective duties’ of the MPC?

The MPC, under the lead of the dominant Governor, may have burned through $12 billion of taxpayers’ money, delivered inflation well above target for three years in a row, failed to deliver much in the way of speeches or serious supporting analysis……..all things that seem like clear marks of failure in the job, but it is simply impossible to envisage a court accepting that policy was not formulated (at the time) in a manner consistent with the Remit. It clearly was. It was just done very very badly, with not a sign of any contrition since from any of them. The sort of thing that should mean you could lose your job. But not, it appears, when you are the Governor or MPC member. Could continuing to run a big open punt on the bond market now (years on from Covid) count? I doubt it, as I doubt it would be considered now as “formulating monetary policy”, and it clearly had the support of the Board and the previous Minister of Finance.

The final possibility might be

I don’t think actively attempting to mislead FEC, in his role as Governor and MPC member, is acting “with honesty and integrity”…..but it seems a stretch.

Were Orr operating under Police Commissioner rules (law) he – and his fellow MPC members (especially the externals) – could be dismissed at will. It is not a choice that should ever be made lightly (and the terms of two externals in any case expire shortly), but when you (individually and collectively) have done as badly as Orr and his colleagues have in recent years it should be an option open to an incoming Minister. After all, the new government can impose a new Remit – against which the MPC has to operate – pretty much at will (doesn’t require legislation, at least within quite wide bounds) so why shouldn’t it be able to dismiss the key individuals and ensure that those holding these powerful offices genuinely enjoy the confidence of ministers?

If I could wave a wand I’d make it easier to dismiss Governors and MPC members and a bit harder to dismiss the Police Commissioner. As it is, it reminds me of an article I wrote perhaps 15 years ago – which the the Bank’s Board weren’t too comfortable with and insisted on changes – suggesting that in practice accountability for the Governor mostly existed at the point of reappointment. And since then governments have amended the legislation to make it a bit harder to dismiss the Governor, while limiting to two the number of terms any Governor can serve. Over the objection of the Opposition parties, Robertson chose to reappoint Orr last year, and since he is now on his second term (as are all the external MPC members) and can’t be reappointed again we are in this unacceptable position of someone exercising enormous power (doing it poorly, and having done a particularly poor job in recent years) and facing no effective accountability at all.

Of course, there are always options of seeking to buy out the Governor – whether directly or through the offer of another public role – but that would be to reward failure and poor performance, not punish it.

Were the Governor an honourable man he would already have resigned. But were he an honourable man he would at some point have expressed some serious contrition in recent years. Instead, he wields the power and we – and the incoming government – are left with massive financial losses, a huge inflation shock, and a poorly performing institution.

Reading the documents

November 28, 2023November 28, 2023 Michael Reddell New Zealand economic performance, NZ politics

The two coalition agreements (ACT and NZ First) and the ministerial list, that is.

First, the ministerial list with its 28 ministers and 2 under secretaries, in a Parliament that at standard size has only 120 MPs. Yes, it is one fewer undersecretary than Ardern had in 2017 (meeting the ambitions of three parties as well) but…..this was supposed to be the government of busting public sector bloat, not simply matching previous excess (Luxon was quoted yesterday defending his numbers by reference to Ardern). Supporters of the government will pop up on Twitter suggesting there is a big agenda and they may all be very able people, but……it is far from obvious why (for example) we need an undersecretary to the Minister for Media and Communications, the entire job of one NZ First appointee (this parallels a 2017 appointment when one Labour person had the entire job of being undersecretary to the Minister of Ethnic Communities, a portfolio itself barely a job in the first place). The reforming governments of 1984 and 1990 didn’t seem to need executives of 30 or 31 people to get their jobs done.

And then there are all the portfolios: 76 of them by my count (up by five, I think, from the previous government, and 68 in the first Ardern ministry). If I read the table on Wikipedia correctly, the 1984 governments had only about 45 portfolios. It seems to have become a cheap form of pandering (pure portfolio labels themselves don’t cost much, but over time portfolio labels probably tend to beget activities and expenditure) to almost conceivable sector and population group.

It is almost as if your existence isn’t validated until the government has created a ministerial portfolio that covers you. (It is not as if none of these portfolios has any useful substantive content but…..why do we need a minister “for” manufacturing, or “for” hunting and fishing” or “for” hospitality, let alone for something as basic and individual as “recreation? I’ll go further – taking for granting that the Racing portfolio is absurd – and suggest there is no need for a Minister for Tourism either, even if we have had one for more than a hundred years. And that is before starting on the plethora of population ministries, for not one of which one could really mount a serious case for (notwithstanding there may be bits and bobs of real needed stuff in places like Maori Development). None of it speaks of a government that is serious about shrinking the public sector and back-office bloat. The amounts involved of course aren’t individually large, but the pennies add up, and people look to actions at least as much as words.

What of the coalition agreements. The preambles made interesting reading (basically the same, but here I’ve used the ACT one) for what the parties wanted us to believe they were about.

I was struck by the two highlighted bits. First, I wasn’t sure – even though all parties talk it up – why “social cohesion” was thought to be a good thing (seemed to be talked about eg by people wanting “hate speech” laws or the dodgy Disinformation Project people). There are real and deep divides among people, and values differ very deeply – I (for example) regard most of the parties of the further left as repugnant (on multiple grounds) and am not any keener on David Seymour’s moral vision. Much of the country now, on the other hand, regards orthodox Christianity as repugnant (governments even legislating to outlaw some of it). We all have to rub along in some form or another living in a common space, but that is about it surely? And second, that bit about being a “world economic and social leader”. It was bit puzzling for two reasons: first, there is no way what is in these agreements is at all consistent with that stated ambition (and, to be fair, National in particular never suggested otherwise in the campaign) and second, when New Zealand was regarded as a “world economic and social leader” wasn’t that primarily under the pre-war Liberal governments that were relentlessly extending the role of the state? As for “export powerhouse”, well I suppose it sounded good when they wrote it down.

For those who haven’t dug into the coalition agreement documents themselves you might not have seen mention of the “Ongoing Decision-Making Principles”. These are them

I take them with something of a pinch of salt, but I was pleased to “rigorous cost-benefit analysis” in there twice. Let us hope so. It would certainly make a change, and not just from the most recent previous government.

Consistent with the pinch of salt approach, there was a telling item in the ACT agreement. It starts “when evaluating government expenditure it should be assessed on the extent to which it is delivering public goods [here I’m going “tick”], social insurance [another “tick”, perhaps a little less enthusiastic], regulating market failure [“tick”, I suppose, although “being cognisant of government failure” would go nicely with that] and [………..wait for it] political choice”.

You have to wonder why they bothered. It was going quite well with that list, until the “and anything else we happen to want to spend money on at the time” was added. It is realistic I guess, but not exactly inspiring or even very aspirational.

The bigger question across all these documents (which incorporate, when not specifically excluded, the things in National’s 100 day plan, their 100 point economic plan, and their fiscal and tax plans (“plan” in some cases being a generous description)), is to what extent the new government’s programme mostly unwinds some of the bad stuff the previous government did and to what extent it genuinely sets a pathway to a much better future. Whatever you think of the state of things when National left office in 2017 – and at least there wasn’t a fiscal deficit – our average productivity performance was then as poor as ever, business investment lagged that in most OECD countries, and no real progress was being made towards abundant and easily affordable housing. And, for example, the Wellington City Council still wasn’t well-run and was still prioritising ideological vanity projects over basics (water, most notably).

There is a long list of stuff in the documents outlining the new government’s programme that I like. But it is long on things (small and large) undoing the last government’s agenda, most of which I put big ticks next to.

But it seems (and I’d like to believe I was misreading it, but I don’t think I am) short on making for a much better future relative to 2017.

Take the business side of things. National has long talked about encouraging foreign investment, but…..there was never much in their campaign, and the ill-conceived attempt to ease the foreign buyers housing ban proved stillborn. There seems to be a commitment to make it easier for overseas investors to engage in build-to-rent housing projects which sounds positive. But there isn’t much beyond that. The one item I spotted was this

which sounds as though it should be positive, but also seems quite limited. Presumably all the screening requirements and other current restrictions remain in place.

New Zealand has one of the highest company tax rates in the OECD, and not only is there nothing in the agreements to lower that rate – which bears most on foreign investors – but they are proceeding with the same distortionary policy Labour also proposed to remove tax-depreciation provisions for buildings (offices, factories etc). It is a step in the wrong direction.

There are some positives, including provisions around consenting for renewable energy projects and infrastructure projects, ending the oil and gas ban, encouraging minerals development and exploration, and to the extent that they are followed through on and work a focus on better schooling should produce some economic payoffs a decade or more hence (which isn’t a criticism just a reality). I’m all for school choice, but it is mostly about choice (good in its own right), and it isn’t yet clear how far the parties will be willing to go. The talk of a new RMA sounds good on paper, but with minimal detail, and huge uncertainty about specifics and then how courts might interpret things, who really knows how much it will amount to.

Could the new Ministry of Regulation end up being a positive? Quite possibly (although we once hoped for that from the Productivity Commission), but conducting reviews – worthy as they may be – is different from getting a three-party Cabinet to agree on substantial material regulatory and legislative changes, and National in particular did not campaign for a mandate of major change. And it isn’t clear either that the parties have a clear idea as to what it would take to once-again be a world-matching economic performer, or that they are going to supported by an officialdom with the intellectual leadership etc to produce top-quality advice equal to the challenges.

As for housing, the parties have committed to keep in place the outgoing government’s “highly productive” land restrictions, which functionally have the effect of making it harder to get the sort of competition in land around cities that really could drive down house prices. On the positive side, “automatic approval for appropriately certified building materials from the US, Europe, the UK, and Australia”.

Some are lamenting the agreement to make the Medium Density Residential Standards voluntary. I’m not – as on their own they were never going to materially contribute to lowering house prices, and represented something of a central government overreach that never dealt at all with real externalities, even if some of those involved had good intentions (others – like too many councils – just had a vision of urban form they wanted to impose). I am sorry that the government did not pick up the idea of allowing easy localised (ie own group of properties only) opt-outs from the new rules, and is not doing anything about a presumptive right to build. Overall, in combination, and in combination with an immigration policy which seems to be even more “big NZ” than late Labour, it is a recipe for house prices in New Zealand to continue to be ruinously unaffordable for huge proportions of the population.

Oh, and National’s (very weak) NZS policy has been kicked for touch, so that there is not even a pretence of beginning to face the fiscal implications of the continually ageing population and growing life expectancy (themselves both good things), all of which might seem a trifle less bad if we were starting with fiscal surplus and very low debt, rather than with big fiscal deficits and debt levels rapidly converging on OECD medians.

Time will tell. But for now I’m not much more optimistic than I was before the election. There is a reasonably encouraging list of things to unwind (although many more things could have been added), but having done the unwinds little in the agreements suggests any sort of full-throated seriousness about actually reversing decades of economic failure or the scandal that is house prices in land-abundant New Zealand. I doubt we will even hear again that stuff about once again being a world economic leader: with such an unambitious forward agenda, and weak policy capability, the gap between rhetoric and reality would quickly just be too sad, inviting head-shaking and some derision.

The new government and the Reserve Bank

November 27, 2023November 27, 2023 Michael Reddell Fiscal policy, Monetary policy, MPC

But first a correction. As I noted on Twitter and very briefly on the post itself on Saturday, it seems that the gist of my post on Friday was wrong. The repeal of Labour’s tobacco de-nicotinisation legislation – whatever motivated the parties that championed the change – will leave the flow of tobacco excise revenue largely as it was, providing the government an extra flow of revenue – relative to what was allowed for in PREFU – that will, if anything, more than compensate for what National had told us they expected the foreign buyers’ tax would have raised. With the various other bits in the various coalition agreements they are probably back to being in roughly the – very demanding – fiscal situation National thought it would be facing before the election: large deficits, very demanding indicative operating allowances, and an aversion to cutting programmes/”entitlements”,

As for the impact of fiscal policy on aggregate demand, and thus the pressure on monetary policy, they’ve ended up – without really consciously trying, or so it seems, with a somewhat helpful policy switch; dumping the foreign buyers’ tax which was supposed to raise money from wealthy foreigners who mostly would not have been earning or otherwise spending that money in New Zealand (which revenue therefore would not have dampened demand) and replacing it with the reinstatement of the tobacco tax revenue scheme, mostly raising money from relatively low income New Zealanders who will, on average, have a very high marginal propensity to consume in New Zealand. Whatever the substantive merits (or otherwise) of either policy, all else equal the switch is slightly helpful for monetary policy.

A few days after the election I wrote a post “What should be done about the Reserve Bank?” itself if (as I put it in that post) a new government is at all serious about a much better, and better governed and run, institution in future. Perhaps unsurprisingly I stand by all the points in that post, around both individuals (Orr, Quigley, external MPC members, and so on) and the institution.

That post ended this way

That final paragraph was about the fact that unless he leaves more or less voluntarily it would be hard to get rid of Orr (judicial review risks etc and attendant market uncertainty) and yet it would be highly beneficial were he to be replaced well before March 2028.

Anyway, with the release on Friday of the two coalition agreements we know a little more re the options for the monetary policy functions of the Bank.

At a high level, both agreements commit the parties to make decisions that are “focused” to “drive meaningful improvements in core areas including

One might have briefly hoped that this might have resulted in the government lowering the inflation target to something actually consistent with price stability – eg, allowing for index biases, 0 to 2 per cent annual inflation – but it probably only means the abolition of the so-called dual mandate (something both National and ACT had campaigned). The specific material on monetary policy is from the ACT agreement

In National’s own 100 day plan the legislation to amend the statutory goal of monetary policy was to have been introduced – not passed – within the first 100 days, but in the coalition agreement there is no indication of the legislative priority. However, the Act makes it clear that the Minister of Finance could issue a new Remit – the actual targets the MPC is supposed to work to – at any time

It would be a simple matter of deleting one short paragraph from the Remit, which would then also have the appeal (to the government) of being clear that the MPC was working to this government’s Remit not the last government’s one. That doesn’t need to await the other advice, it could be done today or tomorrow (perhaps after the first Cabinet of the new government), and before the MPS on Wednesday. If the Minister moved that fast it would no doubt prompt specific questions at the MPS press conference, but…..they are going to be asked anyway. (UPDATE: The Minister is required to consult (but not necessarily have regard to the views of) the MPC before issuing a new Remit, so the next day or two probably isn’t an option, but it need not be an elongated process when the government has a clear electoral mandate for change.)

(To be clear, I am not a big fan of this change. I largely supported the 2018 legislative change. But……from the then-government’s perspective the change then was mostly about political product differentiation (essentially cosmetic) and so will the reversal be. Few serious observers think either change has made, or will make, any material difference to monetary policy decisions (and the Governor has repeatedly stated that it has not done so to now), but the change is – I guess – a way of signalling that the government recognises the public’s visceral distaste of high inflation and that it expects the Reserve Bank MPC to do so too (for the last two years there has been no sign of that).)

What about those other points on which advice is to be sought (presumably things ACT championed that National refused to agree to upfront, and may be disinclined to support at all)?

There are three of them:

replacing the “over the medium-term” time horizon for meeting the inflation target with some specific time targets (eg “over a rolling 18-24 month horizon” or somesuch),
removing the Secretary to the Treasury as an non-voting member of the MPC, and
returning to a single decisionmaker model for model (given the heading and context, presumably only for monetary policy, but perhaps more broadly).

I would not favour any of those changes.

The most marginal call – which wouldn’t excite me if it went the other way – is the position of the Secretary to the Treasury. I favoured the non-voting member provision in 2018 (it is a not-uncommon arrangement in other countries, and in Australia the Secretary to the Treasury is still a voting member), but there is no evidence from the four years of the MPC’s existence that the Secretary to the Treasury (or her alternate) has added any value (most often one of her deputies attends), whether around substance or process. The evidence we have also suggests a risk that the Bank and the Treasury are too close to each other, undermining the likelihood that the Treasury does its job – as the Minister’s adviser monitoring and holding to account the Bank – at all rigorously or well. How likely was it, for example, that there would be any serious accountability around the LSAP losses when the Secretary to the Treasury sat through all the meetings and there is no record of any ex ante concern being expressed? We also now know – from a recent OIA – that Treasury did nothing at all about the way they were lied to by the Reserve Bank Board chair as regards the earlier blackball on experts serving as external MPC members.

(More generally, if the new government is serious about a much better public sector they should be looking to replace the Secretary when her term expires next year, but this post is about the RB not the Treasury per se.)

I would not favour specific time targets for monetary policy. These were used in the early days of inflation targeting (when the first target was 0 to 2 per cent inflation by 1992), but once the target was achieved things reverted (sensibly in my view) to a model in which it was expected that inflation should (a) be kept within the target range, and (b) if there were deviations (headline or core), the Bank was expected to explain the deviation and explain how quickly it expected to get inflation back to target (either inside the band, or the target midpoint the MPC has been required to focus on since 2012).

It would not be advisable to put ex ante specific imposed timeframes on the MPC, mostly because shocks and deviations from target will differ. They may include, on the one hand, essentially mechanical things like GST changes (or other indirect tax or subsidy changes) which will appear in annual CPI inflation and, all else equal, automatically drop out 12 months later. But they will also include things like big – and perhaps sustained – supply shocks. You could think of a sequence of years in which – unexpectedly – the price of oil kept moving sharply higher (this happened in the 00s). A surge in petrol prices might take inflation above target. It is fine to require the MPC to bring inflation back 12 or 18 months hence, but if there is another surge six months on, you’ll end up with another overlapping target (the first having been deemed essentially redundant). And nine months later there might be a third surge.

Or we could – although let us fervently hope not – have a repeat of the last few years in which most everyone – RB, Treasury, outside forecasters – misunderstand and misjudges the severity of the pressures giving rise to the inflation, and thus the seriousness of the inflation problem. Back in November 2021 the Reserve Bank’s best professional opinion (presumably) reflected in their published forecasts was that inflation would have been back within the target range by March 2023 (a mere 18 months), with the OCR never having gone above about 2.5 per cent. Given a target to get inflation back in 12-18 months they’d have thought they were on course. That was wrong, of course, but the addition of a time-bound target wouldn’t have helped greatly with what was mainly a forecasting/understanding problem by then.

I do think there is reason to amend the remit. At present it does not really deal with mistakes like the last few years at all, stating just

which tends to treat all deviations are much like those resulting from GST or indirect tax changes, and never really envisages the need to correct serious policy failures (of the sort we’ve seen in the last few years). A provision that read something like “when the inflation rate moves outside the target range, or persistently well away from the target midpoint, the MPC shall explain (a) the reasons for these actual/forecasts deviations, and (b) the timeframe over which they expect inflation to return to around the target midpoint, and the reasons for that timeframe.” would be a useful addition. If the government was unwise to go down the “specific set time targets” path it would then need to allow for resetting/renegotiating such time targets when, as is inevitable, sustained shocks/mistakes happen. It was a model used in the very first (low-trust) Policy Targets Agreement, and was sensibly dropped a few months later in favour of the emphasis on transparent accounting.

The case for moving to a Monetary Policy Committee has been pretty compelling for decades (at least since Lars Svensson first recommended the shift in his 2001 review commissioned by the then-new Labour government) and it is to the credit of the 2017 to 2020 government that they finally made a change to a committee system. Not only is there no other area of public life (or politics) in New Zealand in which we delegate so much power – without appeal or review scope – to a single individual (Luxon himself can be ousted by his caucus with no notice), but hardly any other central bank anywhere operates a single decisionmaker system (the Bank of Canada is an exception in law – a legacy of old legislation – but they are at pains to stress that their senior management Governing Council functions as a collective decisionmaking body for monetary policy).

The right path now is not to strengthen the hand of the Governor – perhaps especially the current one if they are stuck with him – but to strengthen the Committee around whoever is Governor. It was quite disquieting to see ACT pushing for a return to the pre-2019 system. The old arguments about “we can sack one person not a whole board or committee” not only aren’t right generally (look at council, hospital boards, boards of trustees who’ve been replaced) but aren’t right in the specific context of monetary policy, and not only because in the face of the biggest monetary policy failure in decades no one lost their job, not even the person who was clearly most responsible (for the outcomes and the spin and misrepresentations around them). In practical terms, even if Orr could be removed shortly, it would be quite a punt in the dark to return to a single decisionmaker model, the more so when there is no single ideal candidate around whom people have united as “the” person to replace Orr.

Much better to focus on (a) replacing Orr as and when you can, b) reopening urgently the application process for the appointment of external MPC members to ensure that really strong candidates are appointed early next year (not those who got through the Robertson/Orr/Quigley RB winnowing process, selecting for people who won’t rock the boat, and have not rocked the boat in the last 3-4 years when things went so badly wrong at the Reserve Bank), and (c) amend the MPC charter etc to (a) require individual MPC members to record votes at each meeting, b) to require those votes to be published, c) to encourage external MPC members to give speeches/interviews, and d) to require FEC hearings for all MPC members before they take up their appointments. None of that requires statutory changes. It could usefully be backed

(There is course no guarantee that a better more-open MPC would have produced a less-bad set of inflation and LSAP outcomes this time – many other countries with better central banks have done pretty much as badly – but that is not a reason to simply settle for an inadequate status quo, one in which we never hear from most of these powerful officials, there seems to be no effective accountability, all supported by little or no serious research, analysis or insight.)

UPDATE: I meant to include this (from Stuff this morning), and now include it mostly for the record. As I said in my earlier post, there is no great harm in the independent review (of monetary policy under Covid) that they are talking of, but it also isn’t clear what is to be gained (and much will depend on who is appointed to do it). The failings of the RB in recent years are pretty well-understood, and the institution commands little respect now. If change is to be made, just get on and start now.

Breathtaking

November 24, 2023November 25, 2023 Michael Reddell Fiscal policy, National Party

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.

“Windfall” taxes

November 22, 2023November 22, 2023 Michael Reddell Taxation

Opening The Post on Monday morning it was as if the 2026 election campaign had gotten underway already, even as we sit waiting for the new government to form.

Under the headline “An answer to National’s revenue gap” was a column by the CTU economist, and former Grant Robertson adviser, Craig Renney suggesting that National should scrap most everything it campaigned on and adopt instead a left-wing tax policy approach that was not acceptable even to the Hipkins Labour Party this year. But then we learned last week that Labour itself was putting all revenue options back on the table as it thinks about its own future. One media profile last year suggested that Renney is keen on getting into Parliament, and to be fair you’d have to acknowledge that he was a more high profile, perhaps even effective, campaigner this year than most Cabinet ministers.

Anyway, Renney’s idea is that we should look to the United Nations for guidance on tax policy (why?). Some United Nations report apparently mentions windfall profits taxes, and the number of them introduced in various European countries last year and this.

Renney quotes this UN report saying “several developed countries introduced taxes aimed at ensuring a fair distribution of profits in industries that have experienced significant gains because of the pandemic and financing recovery programmes, or subsidies for energy consumers”.

And then he leaps into claiming the relevance of this to New Zealand. Where does he start? With, of all companies, Air New Zealand (“Last year, Air New Zealand’s profit was up 180%.”)

We are seriously supposed to believe that Air New Zealand experienced significant gains because of the pandemic? The company that only survived on government handouts and recapitalisations after its business dropped away very very sharply, through the mix of closed borders and individual reluctance to travel? The company that lost $454 million in the year to June 2020, lost $289 million in the year to June 2021, and lost $591 million in the year to June 2022, before recovering to make $412 milllion in the year to June 2023. Shareholders – the largest of which is the government itself – simply lost truckloads of money from owning an airline through a pandemic. As you might expect. But Renney apparently thinks them a serious candidate for a windfall profits tax….

Another extraordinary feature of his article is that as he talks up European governments imposing windfall profits taxes he never once mentions that the overwhelming bulk of such taxes were imposed on fuel companies in the wake of the sanctions the EU (and a bunch of other countries) put on Russian gas and oil exports after the invasion of Ukraine, which had the effect of driving European gas prices, and thus marginal wholesale power prices sky high. There is perhaps a certain logic in governments that make a product artificially scarce (in pursuit of admirable geopolitical ends) also taxing what might be genuinely windfall gains. One might haggle over how such taxes were imposed etc (there is good reason to think many were ill-designed if they were really supposed to be windfall taxes), but the basic idea isn’t prima facie absurd.

(If you want an accessible summary of what the Europeans have been doing, try this recent report.)

But……New Zealand wasn’t directly affected by those sky-high gas prices (one reason why headline here never went as high as it did in many European countries, including the UK). It doesn’t stop Renney of course (writing of New Zealand, “the top four energy companies made $2.7 billion in operating profits, or $7.4 milllion profit per day”, without any sense of context or scale (return on equity eg) or any sense at all of there being anything ‘windfall’ at all about those profits).

How wide-ranging are those European taxes?

Renney tries to tell us that “globally, these taxes were aimed at……markets where there is little competition (such as supermarkets)”, but in fact that seems to be a sample of one country with a tax on supermarket-type entities (itself done in a distortionary manner to apply only to big companies), in one of Europe’s less-than-stellar economies. As that clip above says, Croatia introduced one (not really focused on true “windfalls” at all), imposed for a single year on all big companies (200 or so). Much of the focus of these measures was to pay for big consumer energy subsidies, in the face of that same energy price shock induced by the sanctions. None of which has any relevance to New Zealand, or to any sort of medium-term revenue strategy. And we know people think New Zealand supermarkets make “too much” money, but whatever the merits of that argument it has nothing to do with any serious analysis of a case for windfall profits taxes. (As it happens, I thought there might have been an arguable in-principle case in respect of the profits supermarkets were given by the government when it forced almost all other food retailers to close during lockdowns, channelling all business to the supermarkets………but I guess that rather arbitrary distortion was done on Renney’s own watch as adviser to the Minister of Finance.)

Ah, but then there are the banks, bete noire of the New Zealand left (whether they really dislike the banks or simply find them a convenient populist whipping boy is never quite clear). As that clip above noted, a handful of European countries had imposed “windfall” profits taxes on banks (whatever Italy was first proposing was substantially watered down). I didn’t look up all those cases, but I had a look at Hungary – a government that of course the left usually looks utterly askance at – where the so-called windfall profits tax isn’t even based on profits, or any credible sense of identifiable windfall – it is just a crude tax grab based on revenue (not profits) and this year was sharply modified through further financial repression – banks could avoid much of the tax if only they bought more government bonds.

But what of New Zealand and the banks operating here? We know Renney’s old boss the (still) Minister of Finance got tantalised a year ago by the idea, before being eventually talked out of it.

And as for the data

there is simply no evidence of a pandemic or post-pandemic windfall for banks. If anything, return on equity has been trending downwards (as you’d expect in the face of higher capital ratios), and if you really think there are important barriers to entry etc, tackle those directly. Your party was, after all, the government for the last six years.

As for those rapacious businesses more generally……well, workers have had an increased share of GDP over the last couple of years (as you might expect in an badly overheated labour market).

Renney goes on to claim “perhaps the most compelling case for their use comes from the fact that many of the countries that have launched windfall taxes now have lower levels of inflation than New Zealand”. That isn’t even a serious attempt at economic or policy analysis (let alone something warranting “the most compelling case”, unless Renney is conceding that the actual substantive case is threadbare). Of course, if you use big direct subsidies to consumers you can lower headline inflation – Renney’s Labour government did that for a year with the petrol excise tax cut, without even suggesting a way to pay for that largesse – and many of these European so-called windfall taxes have been mostly about financing such subsidies. What matters macroeconomically is much more about measures of core inflation.

We could check out some of those countries that did more than just energy taxes, except that almost all of them are in the euro, where monetary policy is set for the region as a whole (Germany by far the biggest economy). And of the two that aren’t, Hungary had core inflation in the year to September of 12.8 per cent and the Czech Republic had 7.1 per cent core inflation in the same period.

In his final paragraph, Renney comes back to the banks – the honeypot the left keeps eyeing up. There he writes that “I’m confident that the current chairs of the big four banks wouldn’t mind a phone call from the incoming prime minister asking for their cash.” Perhaps that is supposed to be a dig at the overly close relationship between the incoming PM and the chair of the New Zealand ANZ subsidiary, but I think it is pretty safe to say that all the chairs (and the CEs) would tell the PM that they’d pay what the law demands, not a penny more or a penny less (the approach most of us take), and if somehow they were personally inclined to be more generous, they’d no doubt find their parent boards in Sydney and Melbourne, let alone shareholders around the world, not exactly impressed at scheme to give away shareholders’ money. Such a chair might not, and probably should not, last long.

What is quite extraordinary in the whole column is that there is not even a hint (and sure there are word limits, but you can squeeze in hints about things that might really matter) that we already have one of the highest company tax rates in the advanced world, and have historically had low rates of business investment. Arbitrary extra business taxes – with not a even a hint of symmetry (windfall refunds/handouts in tough times) – are not exactly a standard feature of prescriptions for prosperity. But then in six years in government (in three of which Renney was the key adviser to the Minister of Finance), Labour showed little or no interest in lifting productivity or longer term economic performance, just in redistributing the pie differently and channelling a larger share of GDP through the government’s book, often not even funded by tax revenue. Renney’s prescription boils down to the new National-led government doing more of the same. Low as my expectations of that government are, at least on Renney’s specific schemes (lots more business taxes, lots more subsidies) I don’t worry too much.

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective