Policy costing

Michael Reddell Fiscal policy

Yesterday one of the Labour’s surrogates – Craig Renney, economist at the CTU, but also former adviser to the Minister of Finance (and reputed to be interested in being a Labour MP himself) – came out with a short document attempting to put a fiscal frame around National’s election promises. (One might have thought that if you’d been a part of enabling an $11bn hole in the government finances – the LSAP losses – you might have been a bit more modest in your rhetorical tone, but I guess he was only a (very senior) adviser).

It is explicitly partisan political in nature, and heavy on rhetoric. The flavour is perhaps conveyed by the front cover

As anything other than partisan spin though, it was a strange document. I’m as keen as anyone to see National’s programme (with numbers), but then in a week when the PM has been going round distinguishing between Labour Party policy and government policy, the same could be said of Labour’s (as yet largely unannounced) programme.

Renney’s document is built around an attempt to show that what National has announced so far does not fit within the operating allowances for the next three Budgets set down by the Minister of Finance in this year’s Budget. I have no reason to doubt that his numbers are approximately right. But (not only is it not clear that National has yet announced all its policies) there is no obvious reason why National would regard itself as bound by the operating allowances the Labour Minister of Finance had put in his pre-election budget. After all, Labour hasn’t in the past, and is highly unlikely to do so next year were it to be re-elected. (The operating allowance framework is in any case quite badly flawed as any sort of future signal, but especially when inflation is jumping around.)

I’m not championing what we know of either side’s fiscal policy. From both sides, there seems to be a disconcerting falling away from a commitment to budget surpluses, except in that vague distant future sense of the early St Augustine (“Lord, give me continence and chastity, but not yet”).

But Labour’s own (official government) numbers already have about them a considerable air of unrealism. In this year’s Budget, the only hard numbers – those planned for 23/24 – showed a slight increase in core Crown primary spending (ie excluding finance costs) as a share of GDP, but then the vapourware numbers – the ones relying on those operating allowances – show a fall from 31.2 per cent of GDP this year to 29.7 per cent in 2026/27. Another way of looking at those same numbers is to calculate – all from Budget numbers – real per capita core Crown primary spending over those three years Renney focuses on. On Labour government numbers, real per capita expenditure is projected/planned to show no growth at all in the next three years. Does that seem like a prospect that would align with what we’ve seen of this government’s approach to spending in recent years (in an era of ageing populations, public sector wage pressures etc)? Not to me. And the last three years have seen a single party government, and on all the polls if Labour were to get back in it would be dependent on the even less fiscally disciplined, less inclined to expenditure restraint, Green and Maori parties. With a Labour leader who has already ruled out the wealth taxes those two parties favour to help pay for their fiscal ambitions.

There is also the small matter of scale. Renney’s claims are that there is a gap of $3.3-$5.2 billion over the three fiscal years in questions. Since core Crown primary spending over those years is estimated at in excess of $400 billion any such gap is 1 per cent spending (or about 0.3 per cent of GDP). Seems a slim basis for such florid headlines.

But it will be good to see National’s numbers. In a better world, they would be credibly showing a commitment to a structural fiscal surplus next year. But given that Labour’s vapourware tiny surplus the following year was looking shaky from day 1 (once Eric Crampton pointed out the tobacco excise tax losses they and Treasury had accidentally left out) I don’t suppose it is likely.

But no doubt Renney’s report achieved its political end and put National and Willis on the back foot for a news cycle. National’s response didn’t seem much better. It seemed to consist first of suggesting that the economist of the CTU shouldn’t be commenting in public, which was a bit odd to say the least. And then we had the attempt to reclaim the news cycle by suggesting that it all (what?) was down to Grant Robertson not having followed through on the earlier plan to set up a budget-costing unit. National had (rightly in my view, see below) opposed the idea of such a unit when Labour and the Greens were championing it, but apparently when Willis had become finance spokesperson she had written to Robertson to express National now being in favour. Nothing had happened in the intervening year or so.

I wrote a lot about the idea of a policy costing unit here pre-Covid when the idea was being worked up by the government and The Treasury (there was a formal consultation process at one point). My most recent post on the issue was here. I ended that post with this thought

It won’t improve policymaking, it won’t change the character of elections, but it might –  at the margin –  create a few more jobs for economists.

I remain staunchly opposed. This was an extract from a submission to the Treasury consultation

Parties have adequate incentives already to make the case for their policies, in whatever level of detail the political (voter) market demands, and… already have access to the Parliamentary Library resources, parliamentary questions, and Official Information Act requests.  A policy costing office –  not found in any small OECD country –  would be, in effect, just a backdoor route to more state funding of parties (and not necessarily an efficient route – bulk funding would be preferable if state funded was to be more extensively adopted).  It also reflects a “inside the Beltway” conceit that specific costings are highly important, and that use of a single “model” or set of analysts somehow puts everyone on equal footing  (it doesn’t –  public service analysts having their own embedded assumptions about what is important, what behaviours are sensitive to what levers etc.)   With the possible exception of the Netherlands, I’m not aware of any country where a political costings office products plays any material or sustained role in election campaigns and outcomes.

Here was the list of other reasons from that 2019 post

I’ve listed most of my objections previously, but just quickly:

  • there isn’t an obvious gap in the market.   At present, political parties produce costings (sometimes reviewed by independent experts) to the extent they judge it to be in their own interests to do so.  Voters, in turn, can judge whether the presence or absence of any costings, or any debate around them, matters much.  Existing parliamentary parties have access to considerable taxpayer resources which they can draw on to develop and test policy proposals,
  • it isn’t obvious when, if ever, a New Zealand election in at least the last fifty years has turned on the presence, absence, quality (or otherwise) of election costings.  It is a technocratic conceit to suppose otherwise: people vote for parties for all sorts of reasons (values, mood affiliation, fear/hope, being sick of the incumbent, trust (or otherwise)) which have little or nothing to do with specific policy costings,
  • the relevance of specific policy costings (and indeed overall fiscal plans) is even less under MMP than it was in years gone by.  Party promises are now little more than opening bids, as coalitions of support are put together after the election to govern (and on almost every specific piece of legislation).  We simply aren’t in a world where a few dominant ministers dominate a Cabinet which in turn has a majority (or near so) in the government caucus, which in turn has an unchallenged majority in Parliament,
  • the “fiscal hole” argument (from the 2017 campaign) remains an utter straw man in this context.   First, when Steven Joyce made his claims in 2017 lots of people, including experienced ex-Treasury officials, weighed in voluntarily, and debate ensued about whether, and in what sense, Joyce was saying something important.  The system –  open scrutiny and debate –  worked.  And, secondly, a policy costings unit –  of the sort the government apparently envisages – would not have made any useful contribution to such a debate, which was about the overall implications of Labour’s fiscal plans, not about the costs of specific proposals Labour was putting forward.     Elections are messy things –  always were and probably always will be, and that isn’t even necessarily a bad thing.
  • some of the arguments made for a policy costings unit might have more traction if, somehow, every political party and candidate could be forced to use it (say, submit all campaign promises to the costings unit at least three months prior to an election, with the costings unit issuing a report on all of them say at least one month prior to an election).  But even if you thought that might be a good model, it isn’t going to happen (and there is no credible way that such a model could be enforced).  Instead, the proposed costings unit will be used when it suits parties, and not when it doesn’t, and will probably be most heavily used by parties that are (a) small, (b) cash-strapped, and (c) like to present themselves as policy-geeky.  The Greens, for example.  One might add that the unit would most likely be used by parties that believe their own mindset is most akin to that of those staffing the unit –  likely to be a bunch of active-government instinctively centre-left public servants.  Embedded assumptions can matter a lot –  The Treasury used to generate wildly over-optimistic revenue estimates for a capital gains tax, and it was probably no coincidence that as an agency they supported such a tax. 
  • the policy costings unit seems, in effect, to largely represent more state-funding for (established) political parties.  That might appeal to some, but even if you thought more state funding was a good idea (and I don’t) it isn’t obvious why this particular form of delivery is likely to be the best or the most efficient.  Money might be better spent on research and policy development (say) rather than “scoring” at the end of the process, for detailed plans that will almost inevitable change before they are ever legislated.  And if we want to spend more on policy scrutiny, I reckon a (much) stronger case could be made for better-resourcing parliamentary select committees.
  • the interim proposal for next year’s election would enable only parties already in Parliament to utilise the facility.  Again, this has the effect of further entrenching the advantage established parties have in our system (I hope it will be re-thought when the legislation itself is considered).
  • practicalities matter: there probably won’t be much demand on a policy costings unit in the year after an election, and could be quite a bit in the year prior to one.  How then will be unit be staffed and a critical mass of expertise maintained?  If people are seconded in from government agencies, would we really have an independence (including of mindset and model) at all?  And costings skills aren’t readily substitutable with bigger-picture fiscal policy (or macro policy) analysis skills.
  • the lack of transparency around the proposed institution should be deeply concerning.  As far as I’m aware there has not yet been any indication as to whether the policy costings unit would be subject to the OIA (as the Auditor-General and Ombudsman are not, and nor is Parliament more generally).   The Minister of Finance has indicated that any costings the unit did would only be released with the consent of the political party seeking the costings.  That should be a major red flag.  In my view, any new unit should be (a) explicitly under the OIA, and (b) the enabling legislation should require that any costings done for political parties should automatically be released 20 working days after being delivered to the relevant political party (or more quickly if the costing is delivered within 20 days of an election).  A policy costings unit should not be a research resource for political parties – the only possible basis for confidentiality – but a body that at the end of the process provides estimates based on the details the relevant party has submitted. (As I understand the system in Australia, costings provided during the immediate pre-election period are automatically released, but others are not.)

The fourth bullet there – re the 2017 “fiscal hole” debates – is germane to Willis’s claims in the last 24 hours. The sort of policy costings unit that has been proposed costs specific policy proposals, but does not provide reports on the coherence or otherwise of overall fiscal strategies. The presence of such a unit would have made no obvious difference to anything about the furore around the CTU report.

From a more narrowly political perspective, one might also note that if National is really championing this new source of employment opportunities for economists, and (which is what it is) additional state funding for political parties, it isn’t a great signal of the seriousness of their commitment to fiscal restraint. Renney might, after all, have the beginnings of a point.

Incidentally, in this rather silly political debate, Grant Robertson emerges no better than anyone else. He is reported as having said that National’s change of heart on a policy costings unit had meant it was too late to have done anything for the 2023 election. Except that he himself in 2019, announcing the new policy costings unit policy Cabinet had just agreed to about a year out from the 2020 election, explicitly announced a transitional non-statutory arrangement for the 2020 election, pending full establishment in 2021. If Willis’s change of heart was a year or more back, presumably the same could have been done this year. (I’m glad he didn’t of course.)

Finally, I have seen this morning at least one commentary suggesting that independent fiscal institutions are now the way of the world, the OECD champions them etc. A policy costing unit is not really what most countries – or international agencies – have in mind in advocating such institutions, which are typically more about independent monitoring and reporting on government fiscal strategy and policy (ie macro in focus). Very few countries have state-funded policy costings units, none of them small and (by advanced country standards) relatively poor.

Inflation and monetary policy: looking across countries

Michael Reddell inflation, Monetary policy

Time moves on. This post was going to be run late last week once the last OECD inflation data for the June quarter (that for Australia) came out, but a bad cold ran through the house and not much got done. Last night, July inflation numbers were released for the euro-area (remember that NZ only recently got mid-May’s numbers), but this post is going to focus just on the numbers to June.

This is annual CPI inflation ex food and energy (the only core measure available for a wide range of countries) as at the end of June. The sample of countries is the OECD countries/regions with their own monetary policies, excluding Turkey (with off the charts crazy monetary policy and inflation) and the OECD’s poorer Latin American diversity hire countries (but note that two of those latter countries’ central banks have already started cutting policy rates). Of two other advanced countries not in the OECD, Singapore’s (headline) inflation peaked at 7.5 per cent, and Taiwan’s at 3.6 per cent.

The diversity in outcomes across countries isn’t often recognised. Politicians and central bankers have both tended to go along with lines about “everyone is experiencing much the same thing” (which is a convenient line for avoiding specific and localised accountability). But they aren’t.

Pre-Covid, inflation rates across countries were very tightly bunched (in 2016q4 for example, the lowest core inflation rate for these countries was -0.4 and the highest was 2.9 per cent, at present the range is from 1.6 per cent to 16.2 per cent)

And here is how New Zealand has gone on this metric over the same period relative to the median of these 16 countries/regions.

Pre-Covid our core inflation rate was around the median (altho perhaps showing signs of beginning to pull away) but over recent years core inflation in New Zealand has been consistently higher than in other OECD countries (and of course now miles above target). That is on the Monetary Policy Committee. Note that at least on this measure there is no sign yet that the median country’s core inflation rate is yet falling.

There are other core inflation measures, and each country or central bank often has favoured or specific ones, sometimes ones best suited to particular idiosyncrasies at the time. But a fair number of countries or central banks have and publish either trimmed mean or weighted median measures (others have and use them – seen at times in speeches etc – but don’t seem to make the data series routinely available). It would be great if there was a consistent collection of these (generally superior to crude exclusion) measures across advanced countries, but there isn’t.

I did what I could and found trimmed mean and/or weighted median data for eight of the countries above (NZ, Australia, US, UK, Canada, Switzerland, Sweden, Norway). Even then it is complicated by things like having only a chart for one country, and inconsistencies in whether there is monthly/quarterly or just annual data available, and in whether or not seasonally adjusted data is used (NZ doesn’t). Oh, and the US has fuller data for PCE inflation – the Fed’s focus – than for CPI inflation.

Here is where the annual rates of core inflation stood for these countries at the end of June (there are no weighted medians for Switzerland and the UK)

And here is the time series for the five countries with both weighted median and trimmed mean annual rates

It is a mixed picture. Core inflation in Sweden and Canada has clearly fallen, and Australia seems to have as well, although to a lesser extent. Things are still getting worse in Norway, and in New Zealand things are probably best seen as going sideways. Of the other countries, the chart of trimmed mean inflation in the UK suggests they are still very near a very recent peak, and Swiss trimmed mean inflation is now down a little from peak.

What of the US, which gets most coverage? Focusing on the PCE measures, core inflation is clearly falling

Most countries don’t provide quarterly or monthly percentages changes, but we do have that data for New Zealand and Australia (in New Zealand’s case complicated because SNZ does not – for some inexplicable reason – use seasonally adjusted data to do the calculations. There isn’t much seasonality in the resulting series, but using raw data tends to skew downwards the quarterly changes – when, eg, there are things that reprice once a year.) Here is the NZ chart

and the Australian one

For Australia, the falling rate of quarterly core inflation is now pretty clear. Both measures now paint much the same picture. But for New Zealand while the trimmed mean suggests quarterly inflation has peaked (quite some time ago), a) there is no hint of that in the weighted median, and b) in the last couple of quarters there is no sign the trimmed mean is falling further. The fact that the two series have re-converged suggests not much grounds for comfort about New Zealand core inflation (especially when put together with the simple ex food and energy measure). On balance, perhaps we could say that the worst may have passed, but none of the series are yet suggesting anything like a quick convergence back to target (recall, the MPC is required to focus on the 2 per cent annual target midpoint).

Which brings us to monetary policy.

At their last review – incredibly, scheduled deliberately a week BEFORE New Zealand’s rare and infrequent CPI data came out – the MPC declared itself thus.

It isn’t clear to me how (a) any central bank can credibly claim to be legitimately “confident” about anything much at present (if your models got inflation so wrong over 2020-2022, why would you be confident things were working just fine now, and b) how the RBNZ MPC any particular had found any reason in the data (let alone the CPI data they chose not to avail themselves of) for their particular breed of “confidence”.

I checked the RBA and Bank of Canada statements last month: they didn’t seem confident (much more, as you might expect, data-driven). Nor did the Bank of England or the FOMC. And there was no apparent confidence that they had done what needed doing in the SNB, Norges Bank or Riksbank statements either. In fact, the Swedish Riksbank’s latest statement captured nicely what might have been expected here, on the data as it stands

This from a central bank with the same target as the RBNZ, similar current core inflation, but clearer evidence core inflation has already been falling.

It leaves a distinct sense that, as so often, the RB MPC was engaged in spin, lacking in substantive analysis.

There will some important further data out before the MPC again sets the OCR later this month (notably tomorrow’s labour market suite, and also the Bank’s Survey of Expectations – the one that so far this cycle has done a less bad job than the MPC of picking future inflation), so what they should do in August is still to some extent a question for another day (although they should, if they are at all intellectually honest, take that “confident” statement off the table). But how about where things stand now? And all bearing in mind that monetary policy works with a lag (although quite how long and variable those lags really are does seem to be up for debate).

There are central banks where you really have to wonder what is going on. For example, policy rates haven’t been raised in Hungary and Poland since September last year and both now have double-digit core inflation (still rising in Hungary). Less extreme, the Norwegian central bank has core inflation still rising, and although the central bank has raised the policy rate by 100 basis points this year, it is still only 3.75 per cent (and Norway’s latest monthly unemployment rate is still very low). Iceland also has core inflation steady at around 9 per cent.

On the other hand, when one looks at the Bank of Canada’s increase in the policy rate last month (to the highest level in more than 20 years), in conjunction with the already-falling and fairly moderate core inflation you get the sense that, if they are still too sensible to say it, that they might have good grounds for being increasingly confident of being back to target before long.

It would all be a lot easier if we had robust estimates of the neutral real and nominal rates for each country. But we don’t (neither the real rates nor the implicit inflation expectations that are actually shaping behaviour of firms and households).

And there is lots of differences across countries. For the period since 1999 (when the euro started, and the NZ OCR began) here is the median policy rate in each country (differences would be a bit smaller done in real terms, but still substantial).

All countries, except Australia, now have policy rates above those medians.

I took a look at how current policy rates compare to the peaks in each country in and around 2008. The median difference across those 16 countries is under half a percentage point (eg both the US and the euro-area now have policy rates almost exactly the same as that pre-crisis peak).

But four countries stand out, with policy rates now well below that previous cycle peak. There is Iceland. Now, the pre-2008 peak was in the context of one of the most staggering and destructive credit booms in modern times. Still core inflation is 9 per cent, and the policy rate even now is only 8.75 per cent. There is Norway: as above, core inflation is high and rising and (from a distance) it is hard to be confident things are in hand.

And then there are New Zealand and Australia, both with policy rates around 3 percentage points less than the 2007/08 peaks (and there is a pretty common view about 2008 that the RBA got lucky, not having had policy rates tight enough – in the face of a mining investment and terms of trade boom – but being “saved” by the international recession. The Australian story puzzles me: rates are well below previous cyclical peaks, the unemployment is still extremely low (including far lower than just pre Covid), but……the data (see above) show that core inflation has turned down (and while there is still a way to go, Australia’s target is a bit higher than some other countries’, including New Zealand). If I wanted to be “confident” I’d done enough, one can see a good case for higher rates (perhaps later today), but there are plausible counterarguments.

Much less so for New Zealand. We don’t have core inflation falling, we don’t have unemployment rising much (and last week’s employment indicators still looked quite strong), unlike most previous policy rate cycles there is no disinflationary support from a rising exchange rate, and the OCR is miles below the 2008 peak. (One could no doubt add in points Westpac in particular has been making about a bit of rebound in confidence, but I’m not trying to review all the data.)

Were I in the Fed’s shoes or those of the Bank of Canada I might by now be feeling somewhat more secure. Were I at the Norges Bank (as far I can see) I’d be very uncomfortable. The Australian data are perplexing but there seems nothing in the New Zealand data – considered a cross country or across time – to give any central bank decisionmakers any particular reason for comfort (let alone “confidence” at all). Macro forecasting is something of a mug’s game, and it is always possible the RB MPC may have done enough, such is the uncertainty, but it is very hard to see at this point (and the Committee has provided no analysis in support of their stated “confidence”, continuing a fundamental dereliction (no speeches, no serious research, no serious analysis) that dates back at least to the creation of the MPC). Things may be just about to break, and there are a great many uncertainties here and abroad, about how this cycle is unfolding, but the sort of “confidence” the MPC is asserting risks seeming more political (eg life seems like to be easier for Orr if Labour is re-elected) than grounded in secure economic analysis.

Tweaky tools

Michael Reddell inflation, Monetary policy

For the first 20 years or so of inflation targeting in New Zealand, there was a near-constant hankering for other instruments to “help out” monetary policy. In the early days of getting inflation under control, it was little more than ritual incantations (the team I ran included them every month in our papers to the Minister) that it would help, adjustment would be easier, if only there was labour market deregulation, reduced trade protection, and tougher fiscal policy. In the Brash years, his colleagues became very familiar with the Governor’s hankering for what we (or he) called “tweaky tools”, things that at the margin might make a difference, particularly perhaps in easing the exchange rate pressures that used to be such a feature of New Zealand monetary policy tightening cycles. There was even the pesky visiting US academic in the mid-90s who used his public lecture to suggest that discretionary fiscal policy should be handed over to the Reserve Bank (we winced). It wasn’t so different in the pre-2008/09 Bollard years. At the then Minister’s urging we and Treasury ran an entire Supplementary Stabilisation Instruments projects in 2005/06, culminating a year later in a scheme for a discretionary Mortgage Interest Levy, a scheme the then Minister was tantalised by, sufficient to consult the Opposition, but eventually shut down work on only when National walked away. At about the same time, yet another invited visiting academic was openly proposing a variable GST as a supplementary stabilisation instrument. In the same vein a few years later, Labour in 2014 campaigned on giving the Reserve Bank power to vary Kiwisaver contribution rates, to assist monetary policy in the cyclical (inflation) stabilisation role Parliament has assigned it.

Of course, between mid 2007 and mid 2021, there were hardly any OCR increases, and those there were were quite small and short-lived (unnecessary in the first place as it happens). And since around 2010 New Zealand real exchange rate fluctuations have been much more muted than we had become accustomed to (over the decades from 1985, they were not only highly salient in political debate but also inside the Reserve Bank).

And if big cyclical swings in the real exchange rate still haven’t resumed, big OCR increases have.

And with it talk of spreading burdens, easing loads, and finding supplementary tools seems to be back. There was an article in the Herald a couple of weeks ago sympathising with indebted households who, it was claimed, are bearing the brunt of the belated anti-inflation fight.

(I wouldn’t usually be very sympathetic with people who took big mortgages when house prices were rocketing on the back of pandemic-policy low interest rates and didn’t lock in, say, five or seven year fixed rates, except that……..the Reserve Bank itself by buying up $50+ bn on longish-term government debt at the same time did rather tend to suggest to the borrowing public that rates weren’t likely to go up much – after all, which responsible government agency would expose its stakeholders (taxpayers) to a meaningful risk of $10+bn of financial losses.)

And that prompted Don Brash to enter the conversation, reviving a call he had first made in 2008 and suggesting that the Reserve Bank be given the power to vary the petrol excise tax as an additional counter-cyclical tool to assist monetary policy and spread the burden. This is reported and discussed in this Herald piece today, which in turn draws from one of Don’s own blog posts. Don ends his post with this claim

But it would have the huge advantage of spreading the social effects of controlling the inflation rate.

I disagree, quite strongly, with Don’s proposal, for a variety of practical and principled reasons, and would do even on a best-case model (say, legislation limited the extent of the Bank’s discretion and revenues were properly and formally ring-fenced).

(In the Herald article, ANZ chief economist Sharon Zollner is also quite sceptical, adding this tantalisingly radical observation – topic for another post another day:

She said the more salient questions we should be asking were not what tools should we use to try to steer the economy, but rather, should we try to do it at all, given the limitations of economic forecasting? Might the costs outweigh the benefits?

Don is quite right that (as we saw last year), petrol excise taxes can be adjusted very quickly and the effects are also typically seen in retail prices very quickly. He suggests that as the price elasticity of demand for petrol is quite limited, any increase in petrol taxes will quite quickly dampen households’ other spending, in turn dampening inflation pressures. There are certainly plenty of households who are quite cash-flow constrained, but whether the effect exists to a material extent in aggregate would need rather more careful and formal review (reflecting on my own behaviour, I’m also a bit sceptical).

But even if we grant that the effect is real and, whatever the effect actually is, perhaps fast-working, there are lots of other problems. These include:

  • the temporary petrol excise tax cut of 2022/23 was 25 cents a litre.  As far I can see, the direct fiscal costs of that were about $1 billion over 15 months.  Even if it was $1 billion for a year, that is about 0.25 per cent of GDP.   And although many economists, including me, pointed out that the income effect of this cut (and the associated road user charge and public transport subsidies) was inflationary, I’ve not seen anyone suggest it was a decisive factor in explaining core inflation outcomes over the last year or so.  Quadruple the effect and one might be talking more serious macroeconomic impacts, but that would require giving the Reserve Bank discretion to make much larger changes in excise taxes than any Minister or Parliament has ever made before.   Sold as an explicitly temporary effect, a cyclical stabilisation adjustment of this sort would probably result in less demand effects than, say, an excise tax increase known to be permanent.
  • Don Brash argues that petrol excise taxes are easy to change. Much less so (as we saw last year in the rushed package) are road user changes for diesel-fuelled vehicles).  The Brash scheme doesn’t seem to envisage adjusting road user charges, but to do one and not the other –  as part of a new permanent stabilisation model –  would seem simply politically untenable.  He also recognises that electric vehicles are becoming more of an issue than they were when he first dreamed up the scheme, but says “Admittedly, with the growing use of electric vehicles there may come a time when varying the excise tax on petrol would have little effect on aggregate demand. But that time is still some way away.”  It seems likely that EVs will soon, as they should, face road user charges, but again the politically tone-deaf nature of the suggestion that the unelected central bank should be able to whack on huge tax imposts on one lot of drivers but not others (the “others” often stylised as being upper income anyway) is staggering.  And if you are tantalised by a thought “oh, but we can encourage people towards EVs”, remember that any such scheme would almost certainly have to be symmetrical…….
  • As Brash acknowledges, one downside of his scheme is that increasing fuel excise taxes to fight inflation will itself, at least initially, boost CPI inflation.   From a central bank accountability perspective this itself isn’t fatal (the target could be re-expressed as one for CPI inflation ex indirect taxes, and the fuel excise effect won’t show up directly in the better analytical core inflation measures), but…….one of the things we know about survey measures of inflation expectations is that they seem to be quite heavily influenced by headline CPI developments (and you can be sure media will keep highlighting headline effects).  We don’t have a very good sense of how those expectations are then reflected in behaviour (spending, borrowing, price and wage setting) but it is unlikely to be helpful –  and especially if we were talking of $1 a litre excise tax changes)
  • It is certainly true that there are plenty of cash-flow constrained households.  For better or worse, however, many of the most cash-flow constrained households also benefit from formal inflation adjustments (welfare benefit indexation), which directly undercut the cash-flow argument Brash is relying on.   The tendency of governments to at least inflation-index the minimum wage works in the same direction (and if neither adjustment is immediate, the central bank should be focused on medium-term inflation prospects, not one quarter possible effects).
  • People are rational.  The MPC meets seven times a year.   Given the prospect that seven times a year, on pre-announced dates, the fuel excise would be up for grabs, behaviour will change, with people either queuing for petrol the morning of the MPC meeting, or holding off as much as possible until just after.     Especially if the prospective excise adjustments are large enough to be economically meaningful (and the road user side is even more challenging if it were to be included).
  • It is a long-established principle of our system of government, dating back centuries, that taxes should only be imposed and adjusted by elected Parliaments (or at very least by formulae fixed by Parliament, as with indexation).   Back when the Mortgage Interest Levy (see above) was being devised (I was the key RB deviser), I recall telling Alan Bollard that I would join the marches in the streets against any notion of taxation without representation.   Same should go for petrol excise tax levies.  It is all rather redolent of Muldoon’s proposal from the 1970s (which was firmly rejected) for the minister to be able to do modest adjustments to tax rates for cyclical stabilisation purposes.  It is the sort of argument that has technocratic appeal, but no democratic appeal.  And before anyone suggests parallels, the rate at which a central bank pays interest to a bank that chooses to deposit with it is not a tax.
  • The Brash proposal seems to have no framework within which the MPC should decide whether to use a fuel excise tool, and to what extent it should use one tool rather than another.  Perhaps overall accountability for inflation – weak as that now seems to be –  would be unchanged, but we’d be opening the door to the whims of 7 unelected people, several with very little technical expertise either, to decide whether to whack up the fuel excise tax or whack up the OCR.   There are huge distributional implications from such choices, and no framework. opening the way (among other things) to extensive lobbying from vested interests preferring one rather than the other.   That seems, to put it politely, unappealing.
  • One of the elements of the Mortgage Interest Levy proposal that exercised our minds a lot was how to ring-fence the revenue.   There wasn’t much point in an additional tax, which might dampen some forms of demand, if the prospect of that money meant governments felt free to spend more.   One can devise all sorts of clever-clogs institutional arrangements, but in the end public revenue is public revenue, net public debt is net public debt, and cost of living pressures and elections are very real.   This might not be an insuperable obstacle, but money pots will tempt politicians (government and Opposition).
  • Brash justifies his proposal on the grounds of mitigating the “social effects” of controlling inflation.  That may well be a laudable goal, but it is one for governments.  This year, however, the government has chosen to run a much bigger fiscal stimulus than it had planned even at the end of last year, on a scale swamping the plausible extent of any fuel excise tax tool, at a time when inflation is still a severe issue.    Had they been at all concerned, there were options, within current legislative and governance frameworks.  The government chose not to take them (and to a detached observer there is little concrete sign National would really have done much different).

Some of the points above matter more than others, and some will matter more to some than to others. But overall, it seems an unappealing proposal. Actually, I’d be rather surprised if the Reserve Bank itself were at all keen, at least after half an hour’s thought.

In the original Herald article a couple of weeks ago, the author ended this way

Quite.

Inflation outlooks

Michael Reddell inflation, Monetary policy, MPC

I was filling in the latest Reserve Bank Survey of Expectations form the other day. If one ever needed to be reminded that macroeconomic forecasting is a mug’s game, or wanted a lesson in humility, all one needs do is keep a file of one’s successive entries to that survey. Coming on the back of the latest annual inflation rate of 6 per cent, it was sobering to look back at the two-year ahead expectations I’d written down in 2021 (as I happened, I missed the July 2021 survey so can’t give you my exact number, but suffice to say it would have borne no relation to 6 per cent).

I wasn’t alone. This is what two-year ahead expectations were each quarter from March 2019 (done around the end of January) to September 2021 (done around the end of July). With something of a scare in the June quarter of 2020, the average respondent generally saw medium-term inflation sticking pretty comfortably in the target range the government had set for the Reserve Bank MPC.

As the Reserve Bank often likes to point out, these expectations measures haven’t historically had a great record as forecasts. In fact, here are the outcomes for the dates at which these two year ahead expectations were sought (so the Sept 2021 quarter survey asked about inflation for the year to June 2023). I’ve shown both the headline CPI and the Bank’s sectoral factor model measure of core inflation. Although the question asks about CPI inflation, in some ways core outcomes are a better comparator since no one is going to forecast out-of-the-blue changes in government charges or taxes, or oil prices, two years hence.

The average private commentator/forecaster who completed the surveys has been pretty hopeless.

Unfortunately for us, since it is the Reserve Bank MPC that not only makes monetary policy but is, notionally at least, accountable for stewardship and outcomes, the Reserve Bank was a little worse still

The Reserve Bank’s projections were consistently lower than those of the average surveyed respondents over the period relevant to the inflation outcomes of the last couple of years, and by margins that (by the standards of surveys like this) are really quite large. But the underlying story is even worse, because the Reserve Bank runs the Survey of Expectations so as to have the data available when making their own projections. Thus, the Survey of Expectations is open to respondents from late last week until Wednesday, but the August MPS is not until 17 August, with forecasts finalised perhaps on the 12th. The Reserve Bank has consistently more information than the survey respondents, including both the survey responses themselves and the full quarterly suite of labour market data (and other bits and pieces of extra data from here and abroad). All else equal, the Reserve Bank projections should be at least a bit closer to outcomes than the average respondents’ expectations, even if both lots of people were making the same misjudgements about the underlying story. Time has value.

The picture would be more stark again if I could effectively illustrate respective OCR expectations over the period. Both the Bank and survey respondents are, in principle, providing endogenous policy forecasts (ie both allow the OCR, and any other policy levers at the MPC’s disposal, to change), but the survey respondents are only asked about the OCR out to a year ahead (and, more recently, 10 years ahead, but that is less relevant here). And during the worst of the Covid period, the Bank wasn’t publishing OCR projections, but rather an “unconstrained OCR” path, which went quite deeply negative, even though the actual OCR couldn’t go that low. But it looks as though not only were the Bank’s inflation outlooks more wrong than the private survey respondents (answering several weeks earlier), but they were probably based on looser monetary conditions than private respondents were assuming.

We don’t know where annual inflation is going from here, or when and how quickly it will get back to around the 2 per cent the MPC is supposed to have been focused on. But if we add a couple more surveys and sets of MPS projections to the chart (bringing us up to numbers done in early 2022) it seems pretty likely that the Reserve Bank MPC projections will still have been more wrong than the private survey respondents were (after all two of the four quarterly numbers that will make up December 2023’s annual inflation have already been published). All this in the period of the biggest inflation outbreak, and monetary policy error, in decades.

I was on record last year as opposing the reappointment of the Governor (and, for what it is worth, the external MPC members). In a post back in November I included a list of 20+ reasons why Orr should not have been reappointed. None of them were the actual inflation outcomes.

I’ve tended to emphasise that both central banks (here and abroad), and markets and private forecasters, to a greater or lesser extent really badly misjudged inflation. And that is true. But central banks, and specifically their monetary policy committees, were charged with the job of keeping inflation near target, and given a lot of resource to do the supporting analysis and research. If they had done only as badly as the average private sector person over that critical period, perhaps there might be reason to make allowance (but these people voluntarily put themselves forward as best placed to do the price stability job, and are amply rewarded for it (financially and in terms of prestige). And in New Zealand at least, they did worse.

What is more, and this gets me closer to my list of reasons why none of the decisionmakers should have been reappointed, not once have we had from them (individually or collectively) an apology – for the massive economic dislocations and redistributions their mistakes led to (unwittingly no doubt, but they purport to be experts) – or even a serious attempt at robust self-examination and review, with signs that they now understand why they got things so wrong. Not a serious speech, not a serious research paper (or whole series), really not much at all (yes, there was their five-year self review late last year, but as I noted at the time there really wasn’t much openness there either). Not even an acknowledgement that they – the experts who took on the job – did worse than the respondents to their own surveys through an utterly critical period.

Inflation, monetary policy, and central bank spin

Michael Reddell Fiscal policy, inflation, MPC

The CPI data out yesterday were not good news.

Annual headline inflation was, more or less as expected, down, but at around 6 per cent is miles from the 2 per cent target midpoint the Reserve Bank’s MPC has been required to focus on delivering. Much more importantly, core inflation measures show little or no sign of any reduction.

Six months ago I had been intrigued by this chart

It looked as though a reasonable case could then be made that core inflation had peaked a year earlier and was now falling (albeit still far too high).

But jump forward to today and the chart now looks like this

If it still suggests a peak at the start of last year (at least on one of the measures), it is no longer a picture of (core) inflation falling now. (NB: You cannot put much weight on the absolute level of the numbers shown here because for some, unknown, reason SNZ persists in doing the calculations on not seasonally adjusted data, which can materially affect the level of quarterly estimates.)

If you look at a range of exclusion measures (CPI ex this, that or the other), the quarterly picture for Q2 looks a little more promising (but analytical measures such as those above are increasingly used for a reason).

On an annual basis, a whole bunch of measures centre on core inflation of perhaps just over 6 per cent.

Focusing on just two big individual price movements, the CPI ex petrol is up 7.1 per cent for the year, and the CPI ex international airfares is up 5.7 per cent.

The contrast between New Zealand

and Canada (where the central bank has the same target as ours) is striking

Rightly or wrongly, the Canadian central bank last week still judged it appropriate and necessary to raise its policy interest rate.

Over the period since the OCR was introduced, the New Zealand policy rate has typically been a lot higher than Canada’s (for the same inflation target since 2002): the median difference has been 1.5 percentage points. At present, the difference is unusually small even though our inflation numbers look quite a bit worse than Canada’s

If you think Canada is an obscure comparator, the story is, if anything, a bit more stark relative to the US where core inflation measures have also been falling.

And yet having chosen – and it is pure discretionary choice by the MPC – to review the OCR last week, just a few days BEFORE the infrequent New Zealand inflation data was released, the MPC then declared itself “confident” things were on track to get inflation back to target with policy rates at current levels.

Given how wrong they (and most other central banks) have been over the last three years, it is difficult to know how any bunch of monetary policymakers, with any self-knowledge and introspection at all, can declare themselves “confident” of anything about inflation outlooks. But what could possibly have led our lot to such a conclusion a week BEFORE the (quarterly only) inflation data? Once again, it isn’t looking great for them……and I guess it will be fingers crossed at the RB that the quarterly labour market data out early next month are much weaker. But the best official monthly data we have don’t seem that promising.

(As a reminder, it is not too late to apply to become a member of the Monetary Policy Committee although it is unclear that genuinely able people would be that keen to join a body led by underqualified uninterested people and where any genuine insight or challenge is unlikely, on the evidence to date, to be welcomed.)

I’ve always been reluctant to suggest that the MPC, or even Orr, were partisan. Mostly, they just seem not very good, something shown up more starkly in challenging times, and prone to questionable self-serving spin (even in front of Parliament). But since the May MPS I have started to wonder, and the nagging doubt was reinforced last week.

The Minister of Finance brought down the government’s annual Budget on Thursday 18 May. The Reserve Bank’s Monetary Policy Statement was a few days later, on Wednesday 24 May. I was travelling so most of my scattered comments were on Twitter.

On a current affairs show on 20 May, the Minister of Finance claimed that the Budget would not add to pressures on inflation or monetary policy.

This was utterly at odds with the material published by The Treasury. Treasury estimates and publishes a series for the “fiscal impulse”. This measure was designed specifically for the Reserve Bank to give a sense of how, particularly over the forecast period, fiscal policy choices were going to be affecting demand and inflation pressures.

All else equal a falling deficit or rising surplus act as a bit of a drag on inflation, and vice versa for rising deficits or falling surpluses.

This chart was from the Treasury HYEFU published last December and incorporating the government’s then fiscal plans, as formally advised to the Treasury. As you can see, for each of the forecast years, the estimated impulse was negative (the overall accounts were still expected to be in deficit for most of the period, but the projected deficit was shrinking). At the time, most monetary policy interest would have been on the (highlighted) 23/24 year – showing a moderate negative impulse – since it was the period that monetary policy choices would most affect (and anything beyond 23/24 was little more than vapourware anyway, with an election in the middle).

This is how the same chart looked in the May Budget documents (Treasury’s BEFU)

For the key year – the one for which this Budget directly related – the estimated fiscal impulse had shifted from something moderately negative to something reasonably materially positive. The difference is exactly 2.5 percentage points of GDP. That is a big shift in an important influence on the inflation outlook – which in turn should influence the monetary policy outlook – concentrated right in the policy window.

My point is not to debate the merits of the Budget (political parties will differ on that) but to highlight the macro implications of aggregate fiscal choices as estimated by The Treasury, and how utterly at odds with the Treasury’s analysis the Minister’s spin was.

Ministers – and perhaps campaigning ones – will say whatever suits them, whatever relationship (or otherwise) what suits bears to hard analysis and advice.

But one of the key reasons why societies have chosen to delegate the operation of monetary policy to autonomous central bankers is that the central bankers are thought more likely to operate without fear or favour, calling the data and events as they calmly and professionally see it. So, you’d have thought, with a Monetary Policy Statement a few days after the Budget one might have expected some serious detached analysis of the updated Budget fiscal numbers, as they affected demand and inflation. Either citing the Treasury’s estimates or perhaps presenting analysis explaining why the Bank thought the fiscal influence might be different than the Treasury did (the latter using a framework designed specifically for monetary policy purposes). After all, in their previous MPS, MPC minutes had explicitly noted that “members viewed the risks to inflation pressure from fiscal policy as skewed to the upside”.

Central bankers, including particularly at our Reserve Bank, have long avoided taking a stance on government spending and revenue choices. Mostly, they also avoid taking a stance of deficits and surpluses. Those are political choices, and particularly in modestly-indebted countries (like New Zealand) it doesn’t greatly matter to monetary policy whether the budget is in deficit or surplus. It matters way less whether one has a high spending and high taxing government or a low spending or low taxing government, and so it is rare – and appropriately so – for the Reserve Bank to be commenting on either spending or revenue choices. What matters (about fiscal policy) in updating the inflation outlook is changes in the discretionary component of the fiscal deficit/surplus (basically, what the fiscal impulse is trying to capture). This snippet (from a Bollard-years MPS) captures the general approach.

But how did the MPC treat things in the May 2023 MPS, coming just a few days after that very big increase in the expected fiscal impulse for the immediately approaching year, at a time when inflation (core and headline) was way outside the target range and the OCR had had to be raised aggressively?

The only uses of the terms “fiscal” or “fiscal policy” (“fiscal impulse” doesn’t appear at all) are in this paragraph from the minutes. Even here – even that final sentence – it is consistent minimisation.

But these are the only references. In the one page policy statement, there is no link drawn from fiscal choices to the inflation outlook, and only this rather odd (for a central bank) detached observation: “Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.” So what, one was left wondering…..unless the Governor and his colleagues had taken to playing politics, perhaps to help out a Minister and his colleagues who seem more disposed to the Governor’s way of doing/saying things than, say, the Opposition parties (who openly opposed his reappointment) might be.

Perhaps it wouldn’t even be worth highlighting if this were the only such reference. But it isn’t, by any means. Recall, there are no references in the body of the document to fiscal policy, fiscal impulses, fiscal deficits, OBEGAL, or changes in any of these. But there is a whole section devoted specifically to government spending, on top of the couple of references I’ve already quoted. And the focus there is not on the horizon relevant to May’s monetary policy choices, or the inflation outlook over the next 12-18 months but over the “medium term”, when who knows which government will be in charge and what their spending preferences and priorities will be.

It is quite right that their projections – which simply use Treasury numbers as a base – have real government consumption and investment spending (the bits they publish numbers for) flat for the next several years.

That might raise some interesting issues, including for supporters of the current government who favour lots of government spending (is it really consistent with your values that per capita spending is going to fall quite sharply?, would it prove politically sustainable? and so on).

But it is of almost no relevance to monetary policy. And omits really major bits of the fiscal story (on the spending side, all of transfers and finance costs, and all of the revenue side). Central banks should be mostly interested in shocks to the deficit/surplus outlook. But not, this year, it appears the RBNZ.

The Bank and the MPC seemed to minimise any story about the fiscal contribution to the outlook for inflation and monetary policy (you know, things like inflation still being outside the target range, even with a high OCR, for protracted periods. Those fiscal impulse charts/numbers don’t get a mention. But neither do simple stats like the fact that in December’s HYEFU, on then government plans, Treasury thought the OBEGAL deficit for 2023/24 would be 0.1% of GDP. By May’s Budget, government plans meant a forecast deficit that year of 1.8% of GDP. These are really big changes, playing down to near-invisibility by our supposedly non-partisan independent MPC.

It was all brought back to the front of mind last week when, out of the blue, this observation appeared in the OCR statement

Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP. 

If you relied on Reserve Bank commentary, you’d just never know that, in the period current monetary policy choices are directly affecting, discretionary fiscal policy choices (overall balance and all that) had added, quite considerably, to inflation pressures in this year’s Budget. It doesn’t take much to guess which line the Minister of Finance will have preferred – and it isn’t the one that actually aligns with the Bank’s own responsibilities.

I am really reluctant to believe that partisan positioning is at work, even if (if it is happening) “just” for institutional self-protection reasons. But I find it difficult to see a compelling alternative explanation for the MPC’s approach to fiscal analysis and fiscal impulses in the last couple of months.

Perhaps the Opposition parties will view the Reserve Bank more charitably. But on what has been put before us, there is no reason for them to do so.

Project Cricket (and other nonsense)

Michael Reddell Australia, Banking, Taxation

I’ve been reading the papers released the other day by Treasury (in one case written jointly with IRD) on the Minister of Finance’s hankering to tax Australian banks more heavily, retrospectively.

There seem to be three such papers, a 10 February Treasury Report, a short 17 February Treasury aide-memoire, and a 10 March joint Treasury/IRD report. Nothing appears to have been withheld from the first two, but there are several, quite lengthy, bits withheld from the 10 March paper, in many cases apparently references to legal advice officials may have received.

The 10 February paper is titled “Windfall gains in the New Zealand banking sector, and responses”, apparently part of something called “Project Cricket”. Retrospective taxes targeted at companies the Minister of Finance doesn’t like and are just considered politically ripe for the plucking are…..really not cricket. But perhaps that irony escaped both the authors and the Minister. The paper is signed by Treasury’s Manager, Tax Strategy, and as tends to be the way with Treasury, when one looks him up he seemed to have no background at all in tax (or banking), and little in New Zealand either. It wasn’t a promising start.

It is a fairly long paper (24 pages)

The Minister already had his enemies in sight but wanted a fishing expedition as well.

The Treasury paper wasn’t a very compelling piece of work. Without any serious analytical framework at all, it (slightly grudgingly, or perhaps just diplomatically) concludes “there is no clear evidence that banks made windfall profits during the recovery from COVID-19”. And instead of concluding strongly that since there is not the slightest evidence of anything that could seriously be called “windfall profits” and thus there was no serious analytical case at all for anything like a “windfall profits tax”, we just get this lame conclusion

as if otherwise it would okay.

As for those other sectors

All based on this

Quite how the agricultural sector “may have derived windfall gains” is left to the reader (and us) to guess. It all seems very loose and incoherent stuff. (Had one been interested in regulatorily-induced windfall profits, surely one place to look might have been the supermarkets that were given a monopoly position during Covid lockdowns at the expense of other food retailers, but….lets not encourage them.)

So lacking in any serious analytical framework is the discussion around “windfall profits” that Treasury apparently never thinks to point out that an unexpected burst of inflation (perhaps a 10 per cent change in the price level, engineered – albeit inadvertently – by the government’s own central bank), came closest to a true set of windfall gains and losses. Who gained – entirely unexpectedly? Why, that would be people with long-term fixed rate debt. And which party has the most long-term fixed rate debt on issue? Why, that would be the government itself. On the other hand, holders of fixed rate financial instruments were subject to fairly marked, close to genuinely “windfall”, losses.

I mentioned there windfall losses. That is more than the Treasury (or Treasury/IRD) advice ever does. Over time, true windfalls, such as they are, are pretty randomly distributed – gains, losses, sectors, individuals. But of course there was no sense here of a coherent or comprehensive approach to the issue, some systematic search for windfalls across the economy that the government might tax (or compensate). No, the MInister had his four Australian banks in target. With not the slightest evidence – even with Treasury doing what it could to try to find it for him – that there was anything that anyone other than the Green Party could seriously consider “windfall profits”.

And in this first paper, officials didn’t even think to point out that retrospective legislation of any sort – but perhaps particular one targeted at four of the king’s (or his Minister of Finance’s) enemies is generally pretty abhorrent. If anything, they seemed to quite like the idea of a retrospective tax (check the table on p15 of the release). On whatever strange definition of “coherence” these officials were using a retrospective tax aimed by four companies, when the advice said there was no serious evidence of windfall profits, also apparently raised no concerns.

(In passing, I would note that the Treasury is quite open in calling the Reserve Bank’s Funding for Lending programme a direct “subsidy” to banks. That is, perhaps unsurprisingly, not language the Reserve Bank has used. But as Treasury notes, there does seem to have been reasonable evidence that the subsidy – put in place as a conscious matter of policy – had mostly been passed on the customers.)

Somewhat surprisingly, when providing the Minister with advice on a tax that would be targeted at four specific Australian-owned companies, there is no discussion at all of the likely reaction of the companies’ owner, or of their government, or of whether and how such an arbitrary tax might raise difficulties in the trans-Tasman halls of financial regulators. Oddly, in all three papers there was not a single mention of the fact that the parents of these four wholly-owned companies also had active operating branches in New Zealand, and what (if any) implications there might be for the future mix between branch and subsidiary business.

Despite Treasury’s recommendation in that 10 February paper, the Minister of Finance must have disagreed. The 17 February aide memoire ( 2 pages only) sets out briefly options that could be done for the Budget, then only three months away. They were retrospective and prospective levies. This was what they had to say about the former

There seems to be no sense that this would be something of a constitutional outrage. Sure, they say they were checking whether there were legal risks (perhaps anything in CER?), but as they and the Minister know Parliament in New Zealand is sovereign and the government easily has 61 votes for budget legislation.

This paper was for a meeting with the Minister on 20 February. The Minister was apparently undeterred.

The final paper in this suite is joint Treasury/IRD report of 10 March (also referring to “Project Cricket”). The introduction to that paper’s Executive Summary illustrates just how far off the rails the Minister was heading.

It was bad enough that the Minister was seriously considering a retrospective tax restricted to four foreign companies he didn’t like, in the face of official advice that there was no evidence of anything seriously akin to “windfall profits”, but now he was proposing such an arbitrary tax-grab specifically to help cover a cost pressure elsewhere in his budget which had nothing whatever to do with the four companies he wanted to tax or any of their activities. One hopes that privately officials were well and truly rolling their eyes by this point.

One might acknowledge that this advice – or perhaps another captain’s call from Hipkins – finally brought this work stream to a halt, but it simply wasn’t very good advice (at least based on what the government has chosen to release). Mightn’t one, for example, have expected some serious reference to a likely Australian reaction? Mightn’t one have expected some serious discussion of the precedent such an arbitrary tax might establish (actual or perceptions)? There is some reference to it – amid a weird sentence that talks about “the favourable position of New Zealand as an investment destination” – on what metric one might ask? – but it is all very muted. There is no discussion at all of the intellectual incoherence of picking on individual profitable firms ministers don’t like and not (say) responding symmetrically when unexpected sharp falls in profits happen (perhaps officials thought it not worth dignifying this nonsense on stilts?). There is no mention of the branches, or anything serious on the possible reduction in the availability of debt finance to New Zealand households and small and medium businesses (really big businesses can finance globally). We even find abstract comments, no doubt tantalising to the Minister, that “in theory, a one-off retrospective tax will not affect behaviour”. That sort of line might be fine from a traineee analyst fresh out of a basic university course, but this was serious budget advice from responsible Treasury and IRD officials

In what they published (perhaps it was in what was withheld, though there is no obvious reason to withhold_, there is also no reference at all to the New Zealand legislation guidelines, which state

Pretty sure the Minister not liking four particular foreign companies isn’t one of those “limited circumstances” in the final bullet.

What was proposed was an abomination, but – even though they didn’t favour what the Minister was hankering for – you get little sense of that in The Treasury/IRD advice. I’ve seen people responding “ah well, didn’t matter, as he didn’t go ahead”. Donald Trump didn’t go ahead with most of his mad, bad, or evil schemes either, but that is slim consolation. We should expect better from someone who has been New Zealand’s Minister of Finance for 5.5 years.

But at this point the advice gets a whole lot worse, losing all touch with reality and descending into some spirit world of officials’ imagining. I’m including the entire section

One wonders if officials are able to opt out of this nonsense on grounds that no one should be forced to practice someone else’s religion. Do other worldviews count? I guess not, at least if this advice is to be taken seriously.

Or which of “our Treaty partners” were consulted on this highly sensitive matter of tax policy, even in a not very material way?

Or look at that footnote 87: a retrospective tax grab from four named foreign companies for purposes unrelated to anything to do with the activities of those companies would apparently “strengthen” “the human domain” (whatever that means). I suppose it would indeed have played to the “concept of power” – power in an arbitrary retrospective way, much more akin to an abusive act of attainder than anything. People would then have known the Minister (and his ministerial colleagues with him) as an unconstitutional thug.

In the end, Robertson didn’t proceed with his egregious scheme and for that small mercy we should be grateful. But we now know that ideas of such egregious grabs do play in his mind – not just an idle fancy, but weeks of work – and who knows when they might return, or which other company or individuals might then be in his sights. It wasn’t exactly Treasury at its best either.

UPDATE:

Meant to include this tweet

An external MPC member speaks

Michael Reddell Central banks, MPC

This blog has been a bit quiet in recent weeks (if anyone has insights on what sections 15D and 98 of the Government Superannuation Fund Act do and don’t allow I’ll be happy to hear from you) but I hope to make up for it this week.

In the 4+ years the statutory Monetary Policy Committee has been in existence, there has been not a single public speech given by any of the three external members. There have been no serious interviews either, just one petulant and testy set of responses to some emailed questions late last year, responses that I characterised at the time this way:

At times, Harris displays all the grace and constructive open and engagement we might expect in a rebellious 15 year old told they have to make conversation with Grandma at the family Christmas celebrations. If the answers aren’t quite monosyllabic grunts. most of them might as well be.

There have never been any rules against external MPC members speaking, just some mix of the Governor’s wishes and their own predilections (shy, lacking confidence in their own views, reluctant to face scrutiny, or simply not believing in either openness or accountability?) that meant it never happened. It really was quite astonishing: not only was it a new regime, which one might have thought participants might have wanted to show off at the best it could be, but we then went into a period of turmoil and fairly extreme policy experimentation, quickly followed by……the biggest monetary policy failure in decades (that high and persistent core inflation), as well as $10 billion of financial losses, for which the taxpayer (you and me) were on the hook. Surely any decent person, charged with all the power and responsibility they personally took the taxpayer’s dime to assume, would want to explain their thinking, their mistakes, and the lessons they’d individually learned.

But not Harris, Buckle, and Saunders, all three now limping towards the end of ill-starred terms in office (each having been reappointed once, they can’t be appointed again – Harris and Saunders will be gone by this time next year, and Buckle by early the following year). And we know nothing at about their views, their contributions, their defences, the lessons they’ve learned, or even any contrition they might feel. Of that latter, presumably none or surely they’d have told us. Decent journalists are only an email or phone call away. Meanwhile, we live with the inflation, the looming recession…..oh, and as taxpayers are $10 billion poorer as a result of their choices.

You’ll remember that the external members were selected in a process whereby (in the words of a Treasury paper to the Minister of Finance)

Which did tend to select against people who might either think hard or make serious and self-critical attempts to learn from their mistakes.

You may also remember a strange article a few weeks ago in which the Minister of Finance and The Treasury (but not the Bank or the Bank’s Board) tried to pretend that there had never been any such restriction. A couple of us are still waiting for responses to OIA to better make sense of quite what game Treasury and the Minister were playing there, but my post a few weeks back makes clear – from their own contemporaneous words at several points through the process- that there had in fact been such a restriction. It appears to have been removed for the next round of MPC appointments (vacancies being advertised at present), and if so that is a welcome step forward.

And somehow, one of the external members, (emeritus professor) Bob Buckle, emerged from his monetary policy purdah to deliver a keynote lecture at the recent conference of the New Zealand Association of Economists (invited, he tells us, by the council of the NZAE no less). His topic? “Monetary policy and the benefits and limits of central bank independence”.

There is 25 pages of text and more than 150 references at the end. But here’s the thing. I’m pretty sure I learned nothing from the lecture and wasn’t prompted to think harder or differently about anything.

In a way, perhaps that isn’t surprising. Buckle’s focus has tended to be on empirical macro (VAR models and all that) and some public finance and tax issues. He doesn’t have a publication record in areas around central bank independence, and has not (that I’m aware of) offered any speeches, presentation, papers or anything with interesting or challenging angles on the issue over the course of his academic career. He is, in many respects, a pleasant establishment figure (and there is a place for them) not one who will make you think about things freshly or differently.

Perhaps the council of the Association of Economists was thinking, “well, after four turbulent years as a foundation member of a Monetary Policy Committee perhaps he will offering some perspectives informed by his experience as a policymaker. After all, he done no speeches, but this will be a more academic audience, which might be in his comfort zone. And, after all, a lot hasn’t gone well for monetary policy in the last few years”. If so, they must have been disappointed.

Someone who was there sent me a message later that day

I’m no expert so cannot speak about the literature he described, but the lack of NZ content was so noticeable it was weird. Cliches about “elephant in the room” and all that. He did mention “we need to wait for full assessment” when someone asked a question about the covid monetary interventions, but he was obviously uncomfortable saying even that.

It seemed impossible to distinguish from a paper he might have written had he never been appointed to the MPC. Was there nothing he thought differently about, or understand more (or less) from having been inside the tent? If so, he clearly wasn’t inclined to tell us. And, in fact, as my correspondent pointed out there was hardly anything about New Zealand at all (I checked and there are no mentions of “New Zealand” outside footnotes and references that are more recent than about 1990).

It can’t have been just that he didn’t want to offer any thoughts relevant to the immediate monetary policy situation (where will the OCR peak and when and why?). It must instead have been that he had nothing insightful or challenging to say on his own topic (just possibly, the Governor had persuaded him to deliver something so grey and un-insightful, but (a) that would hardly be in the Governor’s interest (he is usually keen to talk up his committee), and (b) real insight shines through anyway. There was none in Buckle’s paper.

There might, for example, have been thoughts on accountability. The literature is replete with references to the importance of accountability if a central bank is to have operational autonomy. But how does Buckle think about that specifically, having been one of those who were to be (in principle) held to account, in tough times. What sort of accountability does he think really matters and why? What, if anything, made a difference to his own conduct/advice. He offers us nothing.

Or, say, on communications. What is it that convinced Buckle, now as a policymaker, that never hearing from (ostensibly) powerful key policymakers (and it isn’t just no speeches or no interviews but no select committee appearances) is the best way to run an operationally independent central bank? Again, no insight.

And if operational independence for central banks tends to reduce inflation (there is some suggestion in the literature that it may), is that always and everywhere a good thing. After all, in the aftermath of 2008/09, a whole bunch of countries went through a protracted period of inflation undershooting the target. Perhaps an inflation-happy Minister of Finance might then have been better than an independent central bank? Perhaps not, but the issue isn’t addressed (not even, more extremely, in the Japanese context). And on the other side, there is no serious engagement – even slightly speculative – on what the experiences of the last few years tell us about the case for central bank independence? The implied promise 30 years ago was that if we handed over day to day control to central bankers, we wouldn’t see core inflation of 5-7 per cent again. And yet we did. Buckle never engages much with Tucker’s criteria for delegation to expert agencies (either for central banks, or by comparison with other government activities), but it isn’t controversial that the case for delegation is stronger, all else equal, when the delegatee knows what it is doing.

There is nothing at all about whether, and if not why not, it might be important to buttressing central bank monetary policy operational independence to do something about fixing the effective lower bound on nominal interest rates.

There isn’t even any sense of an intuitive familiarity with the experiences of other countries. What, if anything, do we learn from the cases of the (very small handful) of advanced countries that hadn’t given independence to their central banks (low inflation Singapore being a prime example). These aren’t just issues for New Zealand, but he is a (retired) New Zealand academic and a New Zealand policymaker.

And so on.

There were various small things I took exception to. There were hints of Orr (misleading Parliament) in a couple of attempts to shed some of the blame for inflation onto the Russians, as if core inflation had not already reached its peak (and unemployment its trough) before that invasion

There was the somewhat surprising claim

That footnote 50 took you, among other places for other countries, to the Reserve Bank’s report marking its own homework late last year. Sure enough, when you check it the word “mistake” doesn’t appear at all (or “error”) and there is no expression of “regret” at all (you’ll recall Orr’s standard line is the non-regret regret “I regret that NZ has had to deal with a pandemic, the war etc”).

And if this paper might not have been the place to go into all that in detail, wasn’t it an obvious place to think aloud about the place for contrition (people being human, mistakes being inevitably, and some of those mistakes are very costly indeed to people who are not themselves policymakers, while often appearing to have no consequences at all for those who made the mistake) in the independence/accountability context.

One interesting line that popped up in several places during the speech was a concern about anything that might tie the hands of the MPC.

This paper suggests there are intersections between legislated objectives and operational independence that could have implications for central bank independence and the political acceptability of CBI. These intersections involve expanding central bank mandates, conditions attached to the pursuit of primary objectives of monetary policy, and funding arrangements that could influence central bank independence over the choice and scope of alternative monetary policy instruments.

That is fairly wordy, but what it means is that Buckle thinks they need to be free to lose $10 billion again on fresh highly risky financial interventions (having neither here nor in the 2022 self-review either expressed contrition for the actual losses, shown how they would do better in future, or explored whether there might be reasonable limits to the financial losses taxpayers might be willing to let unelected officials incur (almost all government spending has to be appropriated by Parliament first, but not when the MPC takes the public balance sheet for a spin)).

Which brings me nicely to the last substantive section of Buckle’s paper, on fiscal policy connections. It is fairly unenlightening (and reminded me of the ambitious play by the Secretary to the Treasury for a greater role for fiscal policy just before everything went to pot on inflation). But Buckle repeats, unreflectively, suggestions that central bank independence might have led to lower fiscal deficits (and seems to think this is automatically a good thing). He then suggests that times are changing and fiscal policy might be more of a threat, illustrated with this chart

Perhaps, but here is another way of looking at things. Here is net government debt for half a dozen small to middling inflation targeters with independent central banks, including New Zealand

All these countries have pretty moderate levels of net debt, and all except Australia (barely) have had a falling ratio of net government liabilities to GDP over the last 30 years.

On the other hand, here are some other (larger) countries with independent central banks (in the euro area by far the most independent of any of the central banks)

All four lines slope upwards, and in all four cases debt is a lot higher than it was in 1995, early in the new era of central bank independence.

Perhaps it is fair to suggest there may be some future issues in some of these countries for central banks, but you’d have thought that a New Zealand policymaker might recognise the very wide range of country experiences (which might also make one a little sceptical that whether or not the central bank is independent explains much if anything of advanced country fiscal choices and outcomes).

No doubt there will have been some readers who got something from something like the Buckle lecture (I passed it on to my economics student son eg, and there is always a use for introductory material), but from a serving policy maker, to a premier New Zealand economics audience, it really is pretty disappointing.

Buckle is probably the least unqualified of the external MPC members, but efforts like this are a reminder of how far from the frontier of best practice New Zealand’s new MPC – creature of Orr, Quigley, and Robertson – is. One can only hope that if there is a new government that they will care enough to insist on much better (in the RB, and in so many of New Zealand’s degraded public sector institutions)>

The $10bn amendment

Michael Reddell LSAP, Monetary Policy Remit, MPC

Late yesterday afternoon the Minister of Finance issued a new Remit to the Reserve Bank Monetary Policy Committee (his statement is here, the new Remit itself is here). The Minister’s statement tends to minimise the entire thing (and nothing really about the inflation target changes), but – no doubt consciously and deliberately – gives not a mention to the most material addition to the Remit.

The lead-in to the more-specific targets section of the Remit is now as follows:

This was the backdrop to the additional words I’ve highlighted

$10 billion of so of losses of taxpayers’ money as a result of Reserve Bank MPC choices around the LSAP programme, choices that had the imprimatur of the Minister of Finance (and apparently no objection from the Treasury). As the bonds are being sold back to The Treasury, the realised component of the losses is mounting significantly each month ($317m in indemnity payments were made to the Bank last month), but total estimated losses hang fairly steadily around $10 billion.

The addition to the Remit is welcome. Formally, it doesn’t bind the MPC to anything much (note that “where appropriate” at the start of the second sentence, which appears to conditions things in the third sentence too) but will add put pressure to a) do some advance analysis and b) disclose their thinking and analysis when next the MPC is tempted to throw caution to the wind and take huge risky punts in the financial markets (conventional monetary policy, by contrast, poses very little financial risk to the taxpayer). In 2020 there is no sign they ever did the risk analysis, they certainly never shared anything substantive with the public, they just took the plunge, and over the following months got the Minister to agree to up their gambling limit, still with no serious risk analysis, and no disclosure.

But think what it cost the taxpayer – you and me – to get here: it really is the $10 billion amendment.

MPC members have never made a serious attempt to defend either the alarmingly poor process or the wildy costly financial outcomes. The Governor has waved his hands and blustered about the (wider economic) gains being “multiples” of the losses, but has produced no serious analysis to support such claims (and in the unlikely event there was such a boost to aggregate demand, that would mean the LSAP programme had directly contributed to the high inflation looming recession mess we are in now), while the external MPC members have never said anything about anything they’ve been responsible for. And yet, having simply thrown away $10bn, on no good process or analysis, each of Orr and the three externals have been reappointed by…….Robertson, the man who signed off on the indemnity, not having himself demanded serious supporting analysis from the MPC or The Treasury.

There was an article in the Herald the other day about the Auditor-General having reviewed aspects of that great Labour/New Zealand First boondoggle, the Provincial Growth Fund. This was the headline

The LSAP involved multiples of the amounts involved in the PGF, clear and documented losses, and no serious attempt to show whether there were any benefits at all. $10 billion is a lot of money. It would seem an obvious case for the Auditor-General to look into, given that none of those we should rely on as first line of defence (RB Board, Treasury, Minister of Finance, FEC) seem at all interested. Much easier to file it under experience, avoid even any serious expression of contrition (whether for these losses or the inflation debacle), reappoint all those involved, and just throw out bone with a slight (if welcome) amendment to the Remit.

Mendacity

Michael Reddell MPC, Treasury

On Monday the Reserve Bank Board put out a release indicating that it was opening applications to fill two external MPC vacancies (which will arise next year when the second and final terms of Peter Harris and Caroline Saunders expire). By law, the Minister of Finance can appoint to the MPC only people the Board has recommended (the Minister can reject nominees, but cannot simply impose his/her own people). There are all sorts of problems with this process and with the people involved in it, but that is for another day and another post.

When I opened Monday’s emailed release, my eye lit immediately on this

This appeared to be quite a change from the stance adopted by the Board (which includes the Governor) and the Minister of Finance since the MPC was set up under which (to quote from a January 2019 Treasury report to the Minister released to me by the Minister of Finance (page 14) in June 2019 in a response to an OIA request which had asked, inter alia, about policies designed to exclude persons or types of persons)

Anyway, it seemed like good news. I exchanged notes with a few people idly speculating on what might have changed their mind. Perhaps they (Bank, Minister) had just got sick of being mocked for being the only central bank in the world where expertise was an active disqualifying factor? Perhaps The Treasury, with a newly-strengthened oversight role in respect of the Bank, had played a part? Perhaps the new Board, deeply underqualified bunch of government mates as it was, had as fresh faces thought the old ban looked odd. Perhaps Orr and Quigley were conscious that the government might well change later in the year and that the Opposition parties already seem to look askance at various of their choices, structures, and individuals? Getting rid of the absurd ban might neutralise one more obvious irritation. We don’t know (although I have lodged an OIA request, which might – months down the track – shed a little light). It is fair to note that the very next sentence in that extract above read as follows

On Twitter, the Herald’s Jenée Tibshraeny mentioned that she was approaching Grant Robertson’s office to ask about the apparent change of stance.

Late yesterday, her story appeared. The key bits relevant to this post were a direct quote from the Minister

and a direct quote from The Treasury

(to be clear, the Bank’s sticky fingers do not appear in this story at all).

There are all manner of problems with these lines given – by powerful people and institutions – to the journalist.

For a start, why did news of the blackball emerge at all? Well, that was because an academic – who could have been well-suited to the MPC role – got in touch with me in late 2018 or early 2019 and told me that he had reached out (possibly to the Board chair himself, but I can’t now be sure of that) and been explicitly told that there was no point in applying because the Board would not be considering anyone who was an active, or likely future, researcher on macro or monetary policy matters. Since the person concerned (understandably) did not want me directly quoting him, I lodged OIA requests with the Board and the Minister of Finance to see what I could smoke out (responses written up in a post here). The Minister’s response, linked to above, revealed the policy which had apparently been agreed between the Minister and the Board. The description tallied more or less exactly with what the academic had independently told me.

The revelation of that policy agreement didn’t just die in a blog post here. Jenée Tibshraeny, then at interest.co.nz, picked it up, talked to various central bank watchers etc and wrote a story. She even talked to the Minister of Finance and to the Bank.

Her story is here. My post following it is here. Here were the lines from the Minister and the Bank

There is not the slightest suggestion there that Treasury had used ‘over-zealous language” or that the critics had got the wrong end of the stick. Rather, they are defending their stance. In fairness, you would have to say that the Minister seemed fairly half-hearted (and I have heard suggestions over the years that Quigley, the Board chair, had been the driving force behind the blackball, and that Robertson had just gone along), but he doesn’t disavow the policy or Treasury’s description of the policy.

And there, the odd jeer aside, the matter rested for a while. The new MPC was what it was, there were going to be no external vacancies for a while, and of course there was Covid.

But by late 2021 I was focused on the fact that the end of the first terms for two MPC members was approaching and started highlighting the question as to whether the blackball on expertise was still in place. Others were talking about it too, including to Tibshraeny. She had the access the rest of us didn’t and asked the Minister or his office about the policy.

As it happens, documents show they were always just planning to reappoint Buckle and Harris, so there was never a fresh search programme (or even a serious evaluation process). So they could have avoided Tibshraeny’s questioning, but instead they seem to have been quite clear (her story is here) with these two extracts

Most central bank commentators and watchers lamented (even former MoF adviser Craig Renney, quoted in the article, seemed less than convinced by the policy) but it all seemed pretty clear. The policy was what it was (recorded by Treasury) and the authors were standing by it. Had there even been any lack of clarity or misunderstanding, either the Bank or the Minister could have had their comms people make that clear. But of course, there was no misunderstanding, just a pretty clear (bad) policy.

All of which brings us back to those lines, from the Minister himself and from The Treasury, in yesterday’s Herald article. They seem utterly detached from reality, oblivious to the past paper trail. It is hard to avoid concluding that they are, and are intended as, mendacious spin. One might now have low expectations of a member of the current Cabinet, but what explains lines from The Treasury – a government department, not a political agency? I’ve lodged an OIA with Treasury to see if any useful light can be shed.

In the Herald article Robertson is also reported playing distraction with the observation that “the MPC’s three existing external members had done research”. Caroline Saunders publishes a lot of research, but she isn’t (and doesn’t pretend to be) a macroeconomist, so what she does or doesn’t publish is simply irrelevant to the blackball Robertson and the Bank had put in place. I’m not aware Peter Harris has ever published any research, and certainly not in his term on MPC, which isn’t surprising as he has never really been a research economist. Bob Buckle, a former Treasury official and retired VUW academic macroeconomist, has published papers in recent years (and perhaps MoF hoped the journalist would look up his VUW page). Papers on non-macro topics (of which there are several) are no more relevant to the blackball than they are for Saunders. There are two (largely descriptive) papers on macro topics that have been published while Buckle was on the MPC, but both were written before he took up the MPC role (one is a chapter in a book in which I also had a chapter, so I know well the painstakingly slow publication process). All of which made sense: for Buckle, the MPC role was largely a retirement job, and the quid pro quo seems to have been that he got the role and had to agree not to do future macro research, which probably wasn’t an inconvenience for him as he was retiring anyway. And in his MPC role, Buckle has not once given a speech, a paper, even an interview on New Zealand macro or monetary policy matters.

I can understand why Grant Robertson might now be embarrassed about having adopted a restriction (on expertise in central bank decisionmaking) that made him, on that score, worse than Donald Trump.

But what is staggering is Robertson descending to Trumpian standards of utter disregard for truth or the public record. And that The Treasury seems to have been aiding and abetting that descent.

Revisiting a couple of old charts

Michael Reddell New Zealand economic performance, Productivity

The recent quarterly national accounts data prompted me to update a couple of charts that I used to run here regularly, one of which I hadn’t bothered updating since the start of Covid.

The first is for labour productivity. In New Zealand, we don’t have an official series (level or index) of economywide labour productivity (real GDP per hour worked) but it is easy enough to construct one (or several) using the two quarterly measures of real GDP (production and expenditure) and one or both of the HLFS hours worked and QES hours paid data. I used to simply turn all the series into indexes and divide the average of the two GDP series by the average of the two hours series.

Covid messed up those estimates. For example, under the wage subsidy scheme a lot of people were being paid (as a matter of policy) for hours they were forbidden to, or were otherwise unable to, work. And on a more enduring basis, we now have a higher baseline level of sickness, which comes and goes with waves of Covid, and so for the time being I’m just using the HLFS measure of hours (since it is measuring the hours people tell SNZ they were actually working for). It also then allows for a more-direct comparison with the official ABS real GDP per hour worked series for Australia.

With series for both countries indexed to 100 in 2019Q4, the last pre-Covid quarter, this is how the productivity indicators have done over the last few years.

There is quite a lot of “noise” in the New Zealand numbers, and I still have very little confidence in the any of the numbers for lockdown quarters themselves (in early 2020 and late 2021), but taken over the entire 13 quarters (from before Covid was on any horizons in either country, to now where there are few/no regulatory disruptions) both countries end up with – on current estimates – next to no productivity growh at all over the full Covid period.

I don’t find that particularly surprising (although who knows what the numbers will eventually be revised to) – Covid was a really big disruption and costly dislocation in all sorts of ways – and was much more puzzled by the earlier indications that a reasonable level of productivity growth had been maintained (even allowing for compositional points – eg low productivity motel cleaners and cafe waiters were some of the disproportionately most likely to have lost their jobs in 2020). Perhaps too there is now some cyclical and compositional effects at work: both labour markets have recently been substantially overheated and almost anyone who wanted a job could get one, probably averaged labour productivity a bit downwards.

But they are hardly numbers to be complacent about. For what it is worth, UK official numbers on growth in economywide real GDP per hour worked are (a bit) less bad than these Australian and New Zealand numbers, and US non-farm labour productivity (thus not strictly comparable) while weak in recent quarters still looks to be not far from a pre-Covid trend line.

My second chart has, over time, raised more hackles. Almost 20 years ago a visiting IMF mission team were looking at how the (then newly) rising exchange rate was affecting the economy, and one of their people put together a chart crudely illustrating the relative performance of the tradables and non-tradables sectors of the economy. Tradables here was represented by the production GDP components for the primary and manufacturing sectors, to which was added (in a way that makes statisticians wince, but which isn’t without meaning) exports of services from the expenditure GDP accounts. They were, loosely, the bits of the economy either producing for exports or facing direct international competition. The non-tradables component was the rest. I think I later hit on the idea of expressing the series in per capita terms, to cope with longer runs of time.

This is roughly what the chart looked like around the time it was devised.

If anything, the tradables sector had been growing faster than the non-tradables sector in the 1990s and early 00s, which was sort of what the opening-up narratives had led people to expect. But after about 2002, activity in (this proxy for) the tradables sector seemed to be going sideways. All else equal that might not have been too surprising for a cyclical rise in the exchange rate (back then, the New Zealand real exchange rate experienced really big cyclical swings).

This is what the chart looked like the last time I bothered updating it, just prior to Covid

The non-tradables sector had continued to grow quite strongly (in per capita terms), while this proxy for per capita tradables sector output had had its ups and downs but was by the end of 2019 no higher than it had been in 2002. A common narrative on this blog through its first few years was that the economy had become increasingly inward-focused, even though sustainably successful economies tend to be ones with rapidly growing tradables sectors (not, to repeat myself for the umpteenth time, because exports are special, but because there is a big global market out there and successful competitive firms will tend to find global customers).

I stopped looking at the data for several years because when the government says people can’t travel then of course services exports (notably tourism, but also export education) were going to dip quite sharply, and all it was doing was reflecting the priority placed on Covid control, nothing about underlying competitiveness issues.

But now things are returning to normal. We don’t have restrictions on people coming, and nor do most countries, and even China is opening up (for outbound travel) again. So it seemed worth coming back to my indicator chart.

I was quite surprised by what I found.

Non-tradables real per capita output has still been running well above trend, consistent with an overheated economy (high inflation, large current account deficit), as we’d seen on a smaller scale in the mid 00s. But the proxy for the real per capita output of the tradables sector hasn’t yet recovered much at all, and is only about 10 per cent higher than it was 32 years ago.

Something didn’t seem right. After all, there were a lot more tourists around.

And sure enough the data (seasonally adjusted but not per capita here) show that services exports have recovered a lot as the Covid restrictions were lifted. But notice the blue line, the GDP components of the primary and manufacturing sectors. It has its ups and downs but the level of the latest observation was first reached in 2004Q1 (when the population has only just passed four million).

It is an increasingly inward-focused economy, where policy (such as it is) is only tending to reinforce such developments. It doesn’t have the feel of the foundations for a prosperous and highly productive economy for New Zealanders – this generations, or our children and grandchildren.

But while the big political parties fight over the keys to the Beehive offices and cars, it would be most surprising if one sees any serious or sustained engagement with data like these (or the policy choices that have given them rise) in the election campaign over the next few months.